One can observe a recurring pattern when chatting to aspirational yet-to-be business owners that set their mind on venturing into the world of entrepreneurship. It appears that they are often drawn to developing an online business or otherwise focus heavily on an online presence. The reason for this is simple - entering the digital appears to only incur a small financial burden at first glance. New entrepreneurs generally have limited access to finance (that often turns out to be a good thing) and the digital space often seems like the correct way to go. However, developing a successful online business and digital marketing is a fairly tough game.
The main point of attraction to running a business with a heavy digital focus is the appeal of getting away upfront minimal investments and low fixed costs. A potential business owner may ask themselves, "Why would one spend money on a physical presence, traditional marketing, sales staff?" A straightforward solution would appear to be to invest some capital into a sophisticated website that will function as a lead generation tool. With all the horror stories about retail collapses, a general vibe that everything and everyone is going digital, and stories of successful start-ups that make billions every year with just 7 employees, the online business model seems like the way to go. All you would have to do is spend a bit of money to develop a decent website, sit back and wait for those online requests to feed through… Correct?
Absolutely Brutal Competition
The Internet offers a low barrier of entry for all participants. Anyone can get in. For businesses, this can be both a great opportunity and a fatal flaw.
The low barrier of entry means that the digital space is now completely flooded with a plethora of content. The relative ease of getting your offerings online with mass availability of DYI tools, content management systems, low-cost offshore web development services, social media and blogging platforms means that the digital market is pretty much completely saturated across all industries. There is now a solution to every problem available online.
There was a time when a business having its own website was viewed upon as something of a leader in the business community. There was a window of great opportunity and there were big pay-offs for early entrants. The reason was simple - it was a difficult and expensive exercise to develop a website and keep it running. Back then if you had an online presence, you were the exception and stood out. Your competitors were behind in the dark ages. Unfortunately, this time was fifteen years ago and the situation has changed quite a bit since.
If you want to start an online business that offers services to the wide market in highly saturated competitive industries (example: residential real estate, commercial printing, mortgage broking, web hosting), be prepared - there is a very steep and expensive road ahead. However, you may find that if your business offers niche services within a certain geographical area with few competitors, there may be plenty of opportunities. For example, your competitors may have inferior and out of date websites, and with some good web development and SEO (Search Engine Optimisation) work you can get ahead.
Some businesses can still get lucky and squeeze good results out of a small investment into digital marketing. Do your due diligence and see where you stand.
Digital Platforms are Expensive
If you want to go above and beyond and really stand out in the digital space today, be prepared to pay big.
It has never been easier to get a basic business website up and running. However, custom web and software development is still as expensive as it has ever been – experienced professionals that can develop true custom solutions are rare and command high hourly rates. Further to this, the over-saturated digital space means that SEO services are getting quite complex and require extraordinary effort to achieve any sort of results. The SEM (Search Engine Marketing) space is extremely competitive with popular keywords in competitive industries bid to such high numbers that costs of customer of acquisitions through these channels sometimes no longer make sense. It will often be large companies doing heavy bidding for top keywords – keep in mind they may be doing so to maintain market share at all cost.
Your online venture may have to compete against a myriad of large companies with dedicated IT staff that improve and upgrade their online platforms on daily basis. Your access to tools is quite limited - there isn't many ways to market your online beyond SEO, SEM and eDM (Electronic Direct Marketing – i.e. email newsletters).
The truth is that you will have to compete against companies with deeper pockets and access to much better IT professionals than you will be able to afford as a new business.
SERP is Outside Your Control
For online ventures that rely on search engines to draw traffic, there is a constant worry that search engines (there is really only one name here today that is important) may change their ranking algorithms at any time. It is a critical issue and has in fact negatively affected our own online platforms a few times.
After your website finds its place in search engine rankings, it won't be there forever. Hopefully with a careful strategy you will rise to the top of the SERP (Search Engine Results Pages). However, you may find that one day, your hard work has been undone and you have lost your rankings and leads are no longer coming through. What gives?
Developers behind search engines are well aware that there are armies of SEO specialists working out the best ways to cheat the system and get their clients to the top of the SERP. Every now and then, search engines release an “update” that alters some of the algorithms that determined website rankings. These updates can easily rejig search engine results for your industry overnight. You may find your competitors on the top and yourself at the bottom. Or, if lucky, the other way around.
You can't predict what will occur when these changes are implemented. However, these can wipe out your revenue overnight if your business is heavily reliant on search engine traffic.
Digital start-ups are often duds
Digital start-up success stories can be jaw-dropping. A completely new business that started with nothing is worth billions on the stock market. The owners are now travelling around the world speaking about their success. Who wouldn't want to be a part of that?
These digital start-up businesses often operate on a complete different business model than the rest of the world. While a traditional business operates on fundamentals and cashflow – I.e. where day-to-day expenses are covered by day-to-day cash flow, the start-up model usually involves acquiring funding and using it to grow the user base – and sometimes, revenue. As the growth reaches a certain point, it seeks more funding to continue the next stage of operations. This is a well planned and timed process, and there are actually technical terms that describe funding requirements at different phases (see graph for reference). The end game is an offering on the share market, and a few days later a web or mobile app is officially worth billions.
The key is that start-ups run on funding – not on cash flow. Their offerings are also generally geared to the mass consumer market and often offered free of charge to generate a huge user base. Sometimes there is no revenue in these start-ups at all – the potential of the large user base is what actually justifies the huge valuations.
If you do not have access to investors that deal with this type of business model, there is no opportunity here. It simply has nothing in common with a regular business, be it offline or online.
Doing business in the digital space has its own set of challenges. It still requires upfront monetary investment, a degree of risk and a lot of hard work. It is not a shortcut to riches. As an experiment, I challenge you to find a successful business owner that has built a real, profitable, stand-alone online business with good fundamentals. Trust me, there are not that many of those around.
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