Growth without profit: explaining the internet transaction profitability paradox

It has been frequently reported that a major problem of Internet business models is that they lack transaction profitability. The difficulty does not appear to be with the number of transactions (i.e. growth) but the problem of transaction profitability with low returns to online retailers. This paper explores the root causes of weak profitability on two levels. The first suggests an explanation derived from strategic level analysis. Within this analysis two models are used. The first is an explanation of how Internet businesses in general can lose bargaining power to other industry stakeholders. How this relative loss of bargaining power translates into reduced returns for Internet business models is discussed. The second strategic model is unique to this paper and seeks to explore a basis for mapping strategic positions that may yield superior returns for various generic Internet business models. In this way the strategic section of the paper provides both an analysis of the causes of the transaction profitability problem and then goes on to propose a generic strategic solution. The second level of theoretical analysis is operational. Here the paper develops two further models. The first links the unique attributes of the Internet to service outcomes and customer loyalty through a framework of “order winning” and “order qualifying” criteria. This theoretical framework provides a dynamic explanation of transaction profitability. The second operational model (called “the leaky bucket theory”) analyses transaction cycles to seek out both opportunities and risks to Internet based customer value creation. The theoretical section is illustrated by case data including EasyJet, Sainsbury's and Mercedes Benz amongst others. The paper concludes with specific suggestions for Internet business managers that are designed to help them address the problem of low transaction profitability. This article draws on the early results of doctoral research being conducted at Templeton College and Said Business School, University of Oxford. This implies that the use of the case study examples is for illustrative purposes and this paper does not make claims of generalisability based on this early qualitative field data.