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  1. #1
    Join Date
    January 17th, 2005
    If you are a merchant, you need to read a new book called 'The Strategy Game.'

    Basically, the premise is that the Net is doing something of major importance to all businesses - it's breaking down the old guard sales channels and sales chains.

    Because of this fact, merchants will NOT be able to maintain a variety of different pricing structures, channels etc.

    Everything will be a commodity with one exception - information. What this new paradigm does is make the "information supply chain" the only value added way to make money.

    The object for all businesses then is to develop information supply chaind - i.e communities, affiliates, membership groups, etc.

    Here's an example:

    If you look at say Walmart, they have about 3,000 stores and operate off a 25% profit margin using sophisticated inventory control and payment systems to make a profit. It's the Walmart "Information Supply Chain" that gives them competitive advantage not their low prices. They can only sell at lower prices because they have this system in place.

    Everything Walmart sells is basically treated as a commoditiy.

    Online merchants should look at things in the same way. Build an affiliate network where YOUR products and services are treated as commodities and use the affiliates as information providers.

    Ad networks like CJ, Snare and BeScrewed are eventually going to go away because the 30% juice they charge on sales is a transaction cost that limits merchants and affiliate profits.

    Here's how it all will work:

    As a merchant you set up an in house affiliate program - if can be a free program or you can charge a small fee for affiliates to join.

    You treat all your products as commodities and sell them at the lowest price you can with the shipping and profit built in.

    For example: your cost for widget A is X.
    Shipping is $5. You factor in the profit at say $10. So your price is X+$15.

    You pay your affiliate network say $5 per sale on ALL sales for this product.

    Now here's the kicker: Say you have 1,000 affiliates - each one sells 1 unit per month
    on average.

    You make a $5,000 gross profit. If the affiliates increase sales to 2 units per month on average, you increase profits 100% to $10,000.

    The point is that the larger your network, the lower the profit margin you need per sale to profit. Therefore you can and should pay at least 50% of your profit to affiliates.

    The end result you always sell at the lowest price and affiliates make money.

    You work backwards from the price, instead of forward from the costs. You object is to eliminate as many transaction costs in time and money as you possibly can.

    Take a CD for example: Cost to produce $1.50 each. Cost to creator of content $1 each.
    Cost for shipping $1.50. Payment to affiliates $1. Gross profit $1. Total cost of product to customer $6.

    You have covered all the transaction costs.
    So you sell this product at a price competitiors can't match unless they do the same thing you do.

    Our CD is then plugged into our 'information supply chain' of affiliates who tell the world we have this product at this price.

    If you sell 1,000 you make $1,000 profit. If you sell 10,000 you make $10,000 etc.

    And your affiliates make the same percentage profit on the deal as you do. You maximize profits by the size of your 'information supply chain' not by your profit margin.

    Everyone is a partgner in the deal - customers, affiliates and merchant.

  2. #2
    ABW Ambassador
    Join Date
    January 18th, 2005
    I have one small independent merchant selling an ebook who takes this line of thought seriously. After his costs are covered, I actually make *more* from each sale than he does. Now that's motivating!

    If anyone wants his info, PM me. I owe him some favors!

    Elisabeth Archambault

  3. #3
    2005 Linkshare Golden Link Award Winner  ecomcity's Avatar
    Join Date
    January 18th, 2005
    St Clair Shores MI.
    Fred your certainly the ebiz guy at ABW. Problem is finding merchants who are willing to showcase their best sellers at these reduced prices. Most want to clutter their e-catalogs with the loosers and push those loosers through the information channel.

    Walmart buried their competition bby being the only Mass retailer who didn't negotiate TERMs for inventories. They demanded and got lower prices from all suppliers cause the paid upfront. All the K-Marts Walgreens -Sears said they'd fold in a few years. My distributors for computer products sold through me to SAMs Club and got paid by DEF/EDI direct deposit 25 seconds after posting the shipping bill of ladening info.

    Walmart is a paperless organization with no accounts payable for inventory. K-Mart went under owing inventory creditors 12 Billion. Word of caution when choosing a merchant partner who will fulfill your orders ...never ever allow them to assign a commissioned salesman to your account. In 35 years, even with customer accounts like Walmart, every single one stole the business and cut my percentage out of the mix. Same applies to outside deals at my CyberMalls. Peaches and cream til payment time and they'll lie through their teeth even if you prove with duplicates of shopping cart orders totally over 500,000 that no sales were made or shipped!!

    [ 07-10-2002: Message edited by: ]

  4. #4
    Join Date
    January 18th, 2005

    I absolutely believe what you say is true to a point. You have echoed what I have been saying for 5 years.

    However, companies like CJ can survive if they charge comensurate with their services. If they charge less than it costs me to write 6,000 checks a month and less than it costs me to aggregate a network of affiliates than it can be a profitable association.

    Also, in some instances it will cause pain for affiliates. For instance Overture keywords will end up having an absolute value and the company that converts at a higher rate will be the company that can afford to pay the most for a keyword and they will profit the most. So intermediaries will not be a value add in that area and may suffer.

    The frictionless nature of ecommerce is going to absolutely change the rules of commerce world wide.

    Wall St. Journal has an article on today...and it shows how European companies are being more competitive than US companies purely through the Web.

    Excellent post...I'll get the book right away.

  5. #5
    Join Date
    January 17th, 2005

    Writing checks is no longer a get your own debitcard facility and deposit the payments to the debitcards, the affiliates can withdrawn the funds at any ATM.

  6. #6
    ABW Ambassador
    Join Date
    January 18th, 2005
    "As a merchant you set up an in house affiliate program - if can be a free program or you can charge a small fee for affiliates to join. "

    WHile this does bypass network style costs I think the math is more complex then what you make it.

    Fraud Control (External and Internal)
    Analysis of Force
    Merchandising and Creatives
    Manager and Auditing
    Servers to handle tracking (and load)

    All of these things incur costs and need experienced people (read labor) behind them. This is especially true when you get into high volume situations.

    Note- Nor do I believe everything, with the exception of info, will be a commodity.


    Wayne Porter
    V.P. Product Development
    AffTrack LLC.
    Advanced & Automated Data Analysis for Performance Marketers.

  7. #7
    Join Date
    January 18th, 2005
    very thought provoking Professor. this board is filled with intelligent 'systems' information. abw is going to me my new hangout.

    Thousands of happy users

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