Rajesh Jain

Mystery of the Missing Profits (Part 6)

Breakthroughs

Throughout history, human advancement has been punctuated by breakthroughs — moments when innovative ideas, inventions, and technologies have burst through barriers, paving the way for exponential progress. These breakthroughs, more than just solutions to existing problems, acted as catalysts that helped entire industries leapfrog into new eras of growth and prosperity.

James Watt’s refinement of the steam engine in the late 18th century did more than make a machine more efficient. It became a primary driver of the First Industrial Revolution, turning manual crafts into mechanized industries. This not only revolutionised manufacturing but also laid the foundation for modern urbanisation and changed the socio-economic and cultural conditions of the time.

While the concept of an electric light was not new, Thomas Edison’s invention of a practical and durable light bulb made lighting cheaper, better, and safer. Cities no longer slept, factories could operate longer, and the invention electrified other sectors, leading to developments in electrical engineering and the eventual birth of household electrical appliances.

Marconi’s development of the radio gave birth to an era of wireless communication. This pioneering innovation served as the backbone for a myriad of other technologies — from television to mobile phones — transforming how we communicate, entertain, and inform.

Tim Berners-Lee’s HTML and WWW architecture did more than create a system to view web pages. It democratised information, broke down geographical barriers, and became the bedrock for the digital age. This leapfrog moment saw businesses, services, and social networks connect the globe in an unprecedented manner.

Tesla, alongside other players, recognised that for electric vehicles (EVs) to become a viable alternative to gasoline-powered cars, the battery was the key. Innovations in lithium-ion batteries, in both efficiency and cost, have started to make EVs popular.

Our understanding of DNA was a significant leap in itself, but the discovery of techniques like CRISPR-Cas9 has allowed for precise editing of genomes. This could revolutionise medicine, allowing for tailored treatments or even the eradication of certain genetic diseases.

Google’s “Transformers” revolutionised AI, especially in Natural Language Processing. By introducing attention mechanisms, Transformers could better understand context in sequences, leading to advanced models like GPT. This breakthrough transformed Generative AI capabilities, enabling more human-like text generation and broader AI interactions in daily tech.

What these breakthroughs underscore is the idea that innovation is more than iterative progress. At times, it shatters the ceiling of what’s deemed possible, propelling industries and societies into new paradigms. Each leap builds upon the work of countless individuals and often paves the way for further leaps, creating a cascade of progress that defines human history. We stand at a similar moment in eCommerce – one which will transform the P&Ls of industry players and give them the booster shot to power exponential forever profitable growth, thus creating profipolies.

Thinks 1041

NYTimes: “Change can, and often does, hurt; but with the right mind-set, it can also be a force for growth. It’s not as if we have any choice in the matter. Like it or not, life is change. We’d be wise to shift our default position from futile resistance to being in conversation with change instead. A concept called allostasis can help. Developed in the late 1980s by a neuroscientist, Peter Sterling, and a biologist, Joseph Eyer, allostasis is based on the idea that rather than being rigid, our healthy baseline is a moving target. I see it as parallel to the concept conceived by Richard Rohr of order, disorder and reorder. Allostasis runs counter to a more widespread but older and outdated model for change, homeostasis. Essentially, homeostasis says healthy systems return to the same starting point following a change: X to Y to X. By contrast, in allostasis, healthy systems also crave stability after a change, but the baseline of that stability can be somewhere new: X to Y to Z. Allostasis is defined as “stability through change,” elegantly capturing the concept’s double meaning: The way to stay stable through the process of change is by changing, at least to some extent. If you want to hold your footing, you’ve got to keep moving.”

WSJ: “One of the most crucial factors in maximizing mental processing is keeping blood sugar on an even keel. “If you’re not well-nourished, your brain is going to work a lot harder to focus,” said Federica Amati, who holds a Ph.D in clinical medicine research from Imperial College London and works as the head of nutritional science for WellFounded Health, a performance-medicine clinic in the U.K. (Fun fact: Our brains consume a full 20% of the body’s total energy). Amati tells clients to stick with “glucose-steady” meals of protein, complex carbohydrates, fiber and fat, which keep glucose steady while also providing a variety of brain-boosting nutrients. Breakfast might be full-fat yogurt with berries and seeds, or eggs with spinach and feta; for lunch, a large salad that includes whole grains and lean protein. Skip refined carbohydrates from foods like pastries, pasta and white rice, which send blood sugar spiking and crashing.”

FT: “Amara’s law states that we tend to overestimate the impact of technologies in the short run and underestimate them in the long run. In the case of AI it may be the other way around. In the long run, the journey through to the new “super disrupter” phase, with its unknown challenges and unintended consequences, will present many opportunities to generate both huge wins and huge losses. Providers of capital will need to stay the course. Those who stood ready and able to invest in the field back at the beginning of the internet age believed it would be transformative and yet they still found it difficult to pick winners. Never have so many genuinely transformational and investable technology breakthroughs been within reach. But the days of almost unlimited capital are behind us. Fortunes will be made, but also, inevitably, lost. We need to stand ready for a bumpy ride ahead.”

NYTimes: “The tactic of subtraction goes against the grain of the so-called mind-set revolution, in which it seems everyone is adding this or that quality to their mental approach. The growth mind-set. The abundance mind-set. The gratitude mind-set. But in this genre of self-optimization, if it can be called that, we are adding more and more duct tape to something that isn’t broken — our mind — until it is so covered we lose sight of the beautifully designed machine underneath it all and it thus becomes, in fact, broken. This idea — that performing acts with as little interference as possible — is not only applicable in sports. Yes, it can help us hit a bull’s-eye, but it can also help us elegantly play a piano sonata or be more present with our children. As the sports psychologist Ken Ravizza has said, “Perform one moment at a time.” My experience in the years since that climb has taught me, unequivocally, that the body has no sense of concepts like success or failure. Concepts originate in the mind, and it is so with life as it is with sport.”

Mystery of the Missing Profits (Part 5)

Digital Follies

In the rush to harness the seemingly boundless opportunities of the digital age, many industries inadvertently handed over significant profit streams to emerging players – many of them outsiders to the industry. Some chased scale, while others sought to be early adopters, often without a clear strategy. Here’s a deep dive into these follies.

Media and Publishing: Perhaps one of the most significant missteps in the digital transition was committed by media houses and publishers. Lured by the promise of expansive online audiences, many began offering content freely. This pursuit of ad revenues led to two considerable pitfalls. Firstly, the perceived value of quality content eroded. When audiences are accustomed to free access, convincing them to pay becomes a Herculean task. Secondly, the ad dollars didn’t flow to the publishers but instead to platforms like Google and Facebook, which aggregated content and drew audiences, thereby commanding the lion’s share of ad revenue.

Music Industry: Before the dominance of streaming platforms like Spotify or Apple Music, the music industry was grappling with rampant piracy. Instead of swiftly evolving with user-friendly, digital purchasing options, the industry clung to physical sales and litigious actions. This delay in adapting allowed tech players to step in, fundamentally altering the industry’s profit models forever.

Banking: Traditional banks with legacy systems were slow to recognise the allure of digital banking. Fintech startups, without the baggage of brick-and-mortar operations, rapidly developed and offered user-friendly apps, instant loans, or fee-free transactions, drawing away a segment of the customers seeking convenience.

Digital/B2C/D2C/eCommerce companies have also committed a mistake of similar scale – what I call “eFolly”. The allure of digital brought forth the promise of infinite scale. In this brave new world, every company sought to grow big rapidly, with a strategy heavily skewed towards acquiring new customers. The eFolly: ignoring existing customers. This blunder has many sub-elements, each of which has been devastating for profitability.

Obsession with Acquisition: The business narrative became about growth figures, often centred on user acquisition. Massive budgets were allocated to digital ads, luring new users with heavy discounts. Ironically, the cost of acquiring a new customer often outstripped the lifetime value of that customer, especially when considering the discounted rates.
Neglect of Retention: With eyes set on the horizon, many businesses forgot the goldmine in their backyard. Existing customers, if nurtured and engaged, can be sources of consistent revenue and organic growth through referrals. Yet, surprisingly, retention strategies took a backseat.
Underestimating Word-of-Mouth: In the digital age, the power of word-of-mouth is amplified. Most brands have not leveraged the power of referrals, especially from their Best customers.
Unsustainable Discounting: Many eCommerce businesses banked on discounts to lure and retain customers. However, this strategy eroded the perceived value of products and services, making profitability a mirage.

Here is what I wrote in a previous essay: “Countless eCommerce companies grapple with slim or non-existent profit margins. On the surface, the hefty price tag of customer acquisition (CAC) seems to be the primary culprit. But a deeper analysis reveals an industry-wide problem lurking beneath the surface. This is what I term as the “eFolly” – the decision to ignore existing customers and almost exclusively focusing on new customers. This eFolly of disregarding current customers pervades digital companies across the board. It is a costly misstep that eCommerce leaders perpetrate, inadvertently (and inevitably) gnawing away at their profitability. In the absence of external capital to absorb losses, this blunder can even lead to startup failures.”

In their pursuit of scale, many businesses overlooked foundational principles, with profitability being the primary casualty. They have lost many battles through the years – strengthening the ads, arms, and access sellers with their eFolly of ignoring existing customers and almost exclusive focus on new acquisition for growth. But there is light at the end of the tunnel. An array of new technologies can help them pivot, reverse their losses, and win the future profits war.

Thinks 1040

Morgan Housel: “Here’s an important distinction to make in life. Some people are intelligent but don’t have a lick of smarts. Their ability to succeed in the world might surprise you on the downside. Others lack intelligence but gush smarts. Their potential will surprise you on the upside. On rare occasions you meet people who are both intelligent and smart. They run laps around everyone. I’d define intelligence vs. smart like this: Intelligent people understand technical details, smart people understand emotional details.”

NYTimes: “Cosmology is not like other sciences. It’s not like studying mice in a maze or watching chemicals boil in a beaker in a lab. The universe is everything there is; there’s only one and we can’t look at it from the outside. You can’t put it in a box on a table and run controlled experiments on it. Because it is all-encompassing, cosmology forces scientists to tackle questions about the very environment in which science operates: the nature of time, the nature of space, the nature of lawlike regularity, the role of the observers doing the observations.”

FT: “Antimicrobial resistance (AMR) — which encompasses all microbes and not just bacteria, which are targeted by antibiotics — is sometimes referred to as a “silent pandemic”. Resistant pathogens killed 1.26mn people in 2019, according to an analysis published in the medical journal The Lancet. “All of modern medicine is upheld by our ability to control infectious disease. If we can’t control infection, we can’t administer chemotherapy, do invasive surgery, and preterm birth becomes really, really challenging and risky,” Stokes says.”

Business Standard: “Zudio followed Noel Tata’s playbook: When it launched in 2016, it initially set up four to five stores, with a menswear range, aimed at the young demographic. It patiently fine-tuned the business design, focused on getting its product-market fit, and perfecting the model. It expanded the portfolio to include menswear, womenswear, kidswear, accessories, and footwear. Eventually, it built a model it felt confident in scaling up. Led by two expats, Trevor Perren and Marjolein Van Brandwijk, Trent is now straining every sinew to gain the first-mover advantage. Their rapid scale-up and their clear-headed business model have forced both rivals and retail experts to do a detailed teardown of Zudio’s model. One notable aspect is that it has ensured that its products are affordable for its core audience — young couples in the 28-35 age group. Its pricing is nearly half that of Westside, yet the quality of the fabric is good. It is able to offer good quality by focusing on fast-moving items, instead of stocking a wide range. At the back end, it is able to significantly reduce its fabric sourcing costs by promising huge volumes to its vendors. It keeps minimum inventory at the store and is able to quickly replenish based on accurate offtake data. As a result, the key is high stock turnover, of at least 15-18 times, far higher than a typical department store. The gross margin is around 45 per cent, far lower than the specialised lifestyle retailer like Levi’s at 75 per cent. The high volumes compensate. Its conversion rate (at 60 per cent or more) among the people who enter the store is almost double that of a typical department store. The earnings before interest and tax (EBIT) is around 8 per cent.”

Mystery of the Missing Profits (Part 4)

Follies

The term “folly” typically signifies a lack of sound judgment, leading to unwise actions or decisions. It can denote either a foolish act or an object representing such behaviour. It traces its origins to the French word “folie,” which means “madness” or “foolishness”.

History is rife with examples of follies that have had significant impacts on societies, nations, and individuals. As Alan Axelroad writes in his book “Profiles in Folly: History’s Worst Decisions and Why They Went Wrong”: “Most of what you’ll find here are decisions by smart, savvy people that nevertheless went miserably, abominably, and often irreversibly wrong. Why pick at history’s scabs? The easy answer is another question: Inching along the freeway, who can turn away from a flaming car crash? The more meaningful answer is that probing our vulnerability is a project poignant and compelling precisely for what it reveals about the ways in which high-stakes decisions—decisions that must be made and that cannot be evaded—may produce disastrous results. There but for the grace—the grace of what, precisely?—lie us, in flames.”

Here are some noteworthy examples of follies, listed by ChatGPT:

The Trojan Horse (Ancient Greece): The city of Troy accepted the wooden horse, thinking it was a gift, but it was filled with Greek soldiers, leading to the city’s downfall. This is where the term “Trojan Horse” in modern cybersecurity comes from.
The Sinking of the Titanic (1912): Deemed “unsinkable”, the Titanic tragically collided with an iceberg on its maiden voyage due to several errors in judgment, including ignoring iceberg warnings and not having enough lifeboats.
The Sale of Alaska (1867): Russia sold Alaska to the United States for $7.2 million, considering it a useless territory. Today, Alaska is known for its vast resources, including oil.
Maginot Line (1930s): France built this line of concrete fortifications, obstacles, and weapons installations along its borders to deter German invasion. However, the Germans simply went around it, through Belgium, making the expensive line largely ineffective.
Bay of Pigs Invasion (1961): The U.S.-backed attempt to overthrow Fidel Castro in Cuba ended in failure, serving only to strengthen Castro’s position and embarrass the Kennedy administration.
Chernobyl Nuclear Disaster (1986): Due to a combination of flawed reactor technology and inadequately trained personnel, a routine safety test went wrong, resulting in the world’s worst nuclear disaster.
The South Sea Bubble (1720): A speculative bubble in Great Britain involving the shares of the South Sea Company. Many people invested and lost vast amounts of money when the bubble burst.
The Decision to Invade Russia (Napoleon in 1812 and Hitler in 1941): Both leaders attempted to invade Russia and failed miserably, with their armies decimated by the harsh Russian winter and determined resistance.
Dot-com Bubble (Late 1990s – 2000): A period of extreme speculation that occurred in the late 1990s, where stock prices surged based on internet-related companies. Many of these companies were often not profitable, and when the bubble burst, many investors faced substantial losses.

These examples highlight the spectrum of human decision-making, from strategic blunders to overconfidence, and the sometimes catastrophic consequences that can ensue. The digital world of the past quarter century has been no stranger to follies – what I term as “eFollies”.

Thinks 1039

NYTimes: “There are three justifications for industrial policy, each based on correcting a failure of the free market. One is that companies left to their own devices invest less than is socially optimal because they capture only some of the benefits; targeted measures to increase their investment can benefit all. Another justification is that private companies don’t manage to coordinate their efforts in a way that is good for all; the government can be the coordinator. Third, private companies require certain inputs that only government can reasonably supply, such as a highway to a port. Up against these three positives are the two negatives, namely the risks of government incompetence and regulatory capture.”

David Brooks: “China’s industrial policy illustrates the classic downsides of excessive state interference. Even the vaunted German model, one of the great success stories of the 20th century, is showing its age. German manufacturing output and gross domestic product have been stagnant since 2018. American politics is dysfunctional, and our social fabric is in tatters, but somehow our economy is among the strongest in the world. Our economic competitors stumble and fall; we stumble, and somehow bounce back.”

Business Standard: “In 2008, the World Bank published a study on the post-World War II growth experience. The study was conducted by a team led by Nobel Laureate Michael Spence. Three points made in the study are worth highlighting. Growth of over 7 per cent, sustained over 25 years, was unheard of until the latter half of the 20th century. Only 13 economies managed this feat after WWII. (Of these, about half were small economies whose experiences are not particularly relevant to India). Growth of 7 per cent became possible because the world economy was open and integrated and offered a large market for exports. Clearly, sustaining high growth over a long period is a tall order, and this happens only when global conditions are favourable. The problem for India is that world economic conditions have turned distinctly unfavourable.”

Venkat Atluri on the ecosystem economy: “An ecosystem is a community of interconnected digital and physical businesses that come together, sometimes across traditional sectors of the economy, in the interest of providing customers what they want, when they want it, and in the form they want to consume it. This is typically enabled by businesses sharing assets, information, and resources, as a result of which they create value beyond what they could have achieved individually...Ecosystem-oriented businesses typically start with customers—how do we create more value for customers?—while conglomerates tend to focus on diversifying their portfolios, bringing together sometimes loosely related or unrelated businesses. Secondly, ecosystem-oriented businesses usually anchor on a digital or physical platform and develop relationships with other companies around that platform. You see less of that in conglomerates. Thirdly, ecosystem-centric businesses tend to expand the pie and share it with their ecosystem partners. It’s also worth noting that ecosystem-oriented businesses are usually more profitable than conglomerates and a few players tend to capture much of that value.”

Mystery of the Missing Profits (Part 3)

Where are the Profits?

Even as digital/B2C/D2C/ecommerce companies are growing rapidly, their profits are not keeping pace. Every B2C/D2C CEO must be thinking: “I’ve integrated every digital facet—from an optimised website and app to a seamless omnichannel experience and prompt delivery. What’s missing in this equation? Why aren’t the profits pouring in?” Even traditional retailers who have invested in digital transformation initiatives would be asking themselves the same question: “Where are the returns on my investment?”

The short answer: Elsewhere. The profits are on the balance sheets of the ads sellers, arms sellers, and access sellers. They are just not with the actual sellers!

Ads sellers: In the world dominated by algorithms and screen scrolls, visibility is everything. Ad sellers, like Google and Meta, have capitalised on this need. They’ve transformed the digital ad space into a highly competitive auction arena where brands pay escalating amounts to be seen. Even with large ad budgets, there’s no guarantee of conversion, meaning companies often spend exorbitant amounts on customer acquisition (and in many cases, reacquisition) with no assured return on investment. The result is that while ad revenues for these tech giants soar, the actual businesses striving for customer attention find their profit margins squeezed.

Arms sellers: Cloud services have undeniably transformed the way businesses operate, offering scalability, flexibility, and efficiency. However, they come at a price. As businesses scale, so does their reliance on these services, leading to escalating costs. Data needs to be captured, stored, and analysed. AI algorithms need to search for patterns. All this comes at a cost. Companies like Amazon, Microsoft, and Google, which dominate the cloud services sector, continue to grow, fuelled by the profits that, in another reality, might have remained with the eCommerce and digital enterprises using their platforms.

Access sellers: Then come the marketplaces – platforms that promise brands unparalleled access to customers. Yet, these gateways come at a steep price. Brands often find themselves paying hefty commissions, adhering to strict platform-specific guidelines, and competing in a red ocean of endless vendors. In this scramble, while the marketplace platform ensures its cut from every transaction, the individual sellers find their profit margins thinning. The scenario is exacerbated when marketplaces roll out their own in-house brands, vying for a slice of the lucrative segments.

In essence, while digital and eCommerce platforms were once hailed as the democratising force for businesses, the evolving landscape paints a more complex picture. The mystery of the missing profits isn’t really a mystery at all when one understands the intricate web of costs and dependencies in the current digital ecosystem. For businesses to truly thrive and regain their profitability, there needs to be a fundamental shift in strategy, one that prioritises sustainable growth over sheer volume and seeks to balance out the power held by the digital giants. So, what is it that brands can do? The answer lies in understanding the eFolly of every digital business.

Thinks 1038

FT: “[IEA’s report] shows the world is on the cusp of a historic turning point. Based only on today’s policy settings by governments worldwide — even without any new climate policies — demand for each of the three fossil fuels is set to hit a peak in the coming years. This is the first time that a peak in demand is visible for each fuel this decade — earlier than many people anticipated. These remarkable shifts will bring forward the peak in global greenhouse gas emissions. They are primarily driven by the spectacular growth of clean energy technologies such as solar panels and electric vehicles, the structural shifts in China’s economy and the ramifications of the global energy crisis.”

NYTimes: “Your body has two forms of fascia: dense and loose. Each type is key to facilitating movement. Dense fascia, made of sturdy collagen fibers, helps give your body its shape. It holds muscles, organs, blood vessels and nerve fibers in place. It helps your muscles contract and stretch, and stabilizes your joints. The more slippery loose fascia allows your muscles, joints and organs to slide and glide against one anther like a well-oiled machine…Until the early 2000s, doctors believed fascia was just packaging for more important body parts. Since then, researchers have discovered that the connective tissue plays a vital role in how we function and is key to flexibility and range of motion. Emerging research suggests that caring for your fascia may help treat chronic pain and improve exercise performance and overall well-being.”

Hunter Walk: “My bold statement is that there has never been a better time for Creators by that objective function. I absolutely concur that if you want to maximize around other objectives, or examine particular types of creative industries, you might disagree with me. For sure there were periods where smaller groups of participants had better lifestyles, more stable employment, increased societal influence, or a less demanding fandom. But all of these moments were based on artificial scarcity and cultural gatekeeping. It might be harder than ever to earn $1 million/year as a creative but it’s never been easier to make $50,000. Software and technology in general has driven down the cost of most creativity and powerful tools are in the hands of more than 1 billion human beings. Creativity is happening within communities and platforms which bring together distribution and collaboration. And you can directly and indirectly monetize your creativity in a myriad of ways.”

Walter Isaacson: “There have been three people who have deeply affected our age that I’ve written about. One is Steve Jobs, who brings us into the digital age with human-friendly computers and a thousand songs in our pocket and smartphones. Another is Jennifer Doudna, who helped discover the tool called CRISPR that allows us to edit our own genes. And now Musk. I think he will have a lasting impact by, having more than anybody else, moved us into an era of electric vehicles, when the major car companies had given up on that, and into space.”

NYTimes: “Apple has expanded its smartphone empire as the broader industry has faltered. Over the past two years, sales of Android smartphones have plummeted, but the iPhone has suffered only modest declines because it’s been winning new customers. It has done so despite being the industry’s priciest device. Apple has overcome price sensitivity by creating a business that is reminiscent of U.S. car sales. Like a car, iPhones last for years and can be resold to offset the purchase of a new one. Wireless providers, much like auto dealers, offer discounts and monthly payment plans that make it more affordable to buy the latest model. And customers, like brand-loyal car buyers, are more likely to buy another iPhone than switch to Google’s Android operating system.”

Mystery of the Missing Profits (Part 2)

Digital’s Promise and Reality – 2

McKinsey wrote in a recent story about the “retail reset”:

Consumers are increasingly shopping across channels, showing little loyalty, and expecting fast shipping and sustainable products. Meet today’s “zero consumers.”

Zero boundaries. Browsing in stores used to be one of the primary ways that shoppers came across new products. But the purchase journey is now more fragmented. Nearly half of consumers—and approximately 70 percent of millennials and Gen Zers—say they rely on social media, celebrities, and articles or blogs for purchase inspiration. And they’re shopping fluidly across channels.

Zero in the middle. Consumers are moving away from the middle of the market—they’re either scrimping or splurging. Total consumer share of wallet spent on mid-priced goods and services has declined almost 10 percent in the past five years.

Zero loyalty. About half of consumers reported switching brands in 2022, compared with only one-third in 2020. What’s more, about 90 percent said they’ll keep switching. Absent truly differentiated, exclusive offerings, the retailer will soon become a utility—just a means of distribution.

Zero patience. Consumers are much less willing to wait. Free standard shipping, once offered by only a few retailers, is fast becoming table stakes. Amazon’s delivery speed and the rise of “buy online, pick up in store” have raised consumers’ expectations: a plurality of customers today report that three-day shipping is the slowest they’ll tolerate before looking to other retailers.

The vision of an unbridled digital utopia has thus evolved. While the promises of global reach and direct customer interaction remain, they now come with the wisdom of experience. Brands must navigate a landscape that demands adaptability, strategic innovation, and an understanding that while the digital realm offers unparalleled opportunities, it also presents unique challenges. The dream of supernormal growth is still attainable, but it requires a more nuanced, multifaceted approach than initially envisioned.

The biggest challenge though has been the elusive nature of profits. Even as brands see revenue growth, true bottom-line sustainability is in question in not just native digital businesses but also in traditional brick-and-mortar brands venturing into the digital realm.

I asked ChatGPT to list out the top challenges faced by retail and ecommerce businesses which hurt profitability:

High Customer Acquisition Cost (CAC): With increasing competition, the cost to acquire new customers, especially via online advertising platforms like Google and Facebook, has skyrocketed.
Cart Abandonment: Many customers add products to their shopping carts but do not complete the purchase, leading to potential revenue loss.
Thin Margins: Heavy discounts and promotions, often needed to attract customers, can erode profit margins.
Inventory Management: Overstocking can lead to increased holding costs and potential obsolescence, while understocking can result in lost sales.
Returns and Refunds: High return rates, especially in categories like fashion, can lead to logistical challenges and added costs.
Shipping and Fulfilment Costs: As customers increasingly expect fast and free shipping, managing shipping costs while ensuring timely deliveries becomes challenging.
Fraud: E-commerce businesses are susceptible to various types of fraud, including chargeback fraud and fake transactions.
Platform Fees: Selling on third-party platforms or using certain payment gateways often comes with associated fees that can reduce profitability.
Technology Investments: Continual investments in technology to improve user experience, backend operations, and cybersecurity can strain finances.
Regulatory and Compliance Costs: Adhering to ever-evolving e-commerce regulations, data protection laws, and trade policies can add to operational costs.
Competition: The ease of setting up e-commerce businesses means that niches can quickly become crowded, driving up costs and driving down prices.
Customer Loyalty and Retention: With so many options available, retaining customers and fostering loyalty becomes difficult. Acquiring a new customer is often more expensive than retaining an existing one.
Global Supply Chain Issues: Factors such as trade wars, pandemics, and geopolitical tensions can disrupt the supply chain, leading to delays and increased costs.
Changing Consumer Behaviour: With trends evolving rapidly, staying relevant and catering to the changing needs of the consumer is a constant challenge.
Physical Store Overheads: For omnichannel retailers, the overheads associated with maintaining physical stores, including rent, utilities, and staff salaries, can be significant.

Against this backdrop, how does a brand bridge the gap between the promise of the digital goldmine and the sobering reality of no or low profitability? In this series, we will discuss the mystery of the missing profits for digital consumer-facing businesses. More importantly, we’ll chart out a comprehensive roadmap for brands to harness the genuine potential of digital and eCommerce and build profipolies (profit monopolies) by driving exponential forever profitable growth.

Thinks 1037

FT in a review of “Eighteen Days in October: The Yom Kippur War and How it Created the Modern Middle East”: “It is also always poignant to be reminded how, in closely fought conflicts, so much can depend on moments when a battle could go either way but one side sees through the fog of war with greater clarity, and how comradeship and patriotism shape the responses of those doing the fighting. Kaufman cites a moment on the Syrian front when Avigdor Ben-Gal, commanding the 7th Israeli armoured brigade, asked an old friend, Meshualem Retes, in charge of an already battered unit, to reinforce a crucial position. Both knew this was a suicide mission. Having acknowledged that he would have refused the order from anyone else, Retes said, “I’ll do it for you”, closed his tank hatch, went into battle, and was killed by a direct hit.”

Akash Prakash: “I had the privilege of attending a presentation by my good friend Raamdeo Agrawal at his conference recently. He shared some interesting statistics and thoughts on the retail equity revolution in India. It was a fascinating presentation, leading me to ponder the implications of the impending tidal wave of savings. Raamdeo highlighted that over the past 25 years, India had built up gross domestic savings of approximately $12 trillion. Over the coming 25 years, this number is expected to surge to over $100 trillion. While still relatively modest, an increasing portion of these savings will find its way into financial assets, particularly equities. The presentation highlighted the surge in retail equity flows. It took 10 years for demat accounts to grow from 20 million to 40 million (2010-20), and they have now tripled in three years to 120 million. We have more than 2 million accounts being added per month. The average retail daily turnover of the equity markets has soared nine-fold in the last three years, from Rs 7 trillion to more than Rs 60 trillion. Systematic investment plan inflows are also rising consistently, moving from Rs 3,000 crore per month in 2016 to over Rs 15,000 crore per month today.”

Paul Mueller: “As Hayek notes, the oldest and fullest sense of liberty means freedom from coercion – that is, freedom to act according to your own plans and goals rather than according to someone else’s. That’s it. Liberty does not equal happiness. Nor does it guarantee it. Liberty, defined as freedom from the arbitrary wills of others, also does not mean unconstrained choice.”

Cato: “The key to understanding comparative advantage is opportunity costs: Determining whether to produce something yourself or to purchase it from another producer requires comparing the cost of producing that good yourself to the cost that you’d incur to purchase it. Because of comparative advantage, another producer who is less technically proficient at producing the good might nevertheless be able to profitably sell you that good at a price lower than your cost of making the good yourself. That other producer can do so if it has a comparative advantage at producing that good. When one person or productive unit, such as a firm, improves its comparative advantage at some task, it thereby improves its trading partners’ comparative advantages at other tasks. While government export subsidies harm citizens of the countries that use them, they benefit citizens of countries that purchase the subsidized exports. The use by foreign governments of export subsidies does not justify the home government doing the same or otherwise interfering with trade.”

Howard Marks: “One way to better understand [risk] is by looking at tennis, which offers many apt comparisons to investing. As seen in this summer’s Grand Slam tournaments, tennis players have to take some risk if they hope to succeed. If none of your serves fall outside the service box, you’re probably playing too cautiously to win. But if you try for shots you can’t make consistently, you can beat yourself. The key is to have a favourable relationship between winners and losers. Neither maximising winners nor minimising losers is necessarily enough. It’s all in the balance. The same is true of investing. When you aspire to returns well above those available on investment-grade bonds, it’s not enough to avoid losers; you actually have to find (or create) winners from time to time. But as you take more risk, not only will your expected return increase, but the range of possible outcomes will become wider and the bad possibilities will become worse. The widening of probability distributions as you move up the risk curve means that even the most successful investors are bound to have some losers along the way. The question is how many and how bad relative to their winners.”