Amazon and Overstock's New Headache:

Includes: AMZN, OSTK
by: David Jackson

Another Internet retailing competitor has arisen: is offering about 4-6 million products as of today with plans to add 1 million a week for the next 7-8 weeks, rising to a total of 20 million by the end of the year. More important, has a remarkably aggressive pricing strategy which is causing enough traffic to its web site to cause outages.

Buycause says it will offer its products for as low or lower than any of the other e- commerce sites plus give 5-30% of every purchase to a charity of the purchaser's choice (with he or she getting the tax deduction) or 5-30% as cashback to the purchaser, able to be cashed out quarterly just like a cashback credit card, or 5-30% towards a 529 Education Fund.

The key question for Amazon (NASDAQ:AMZN), Overstock (NASDAQ:OSTK) and other e-tailers is whether can make money with these prices. If it can, that's bad news for the competition.

Here's what Buycause VP Grant Landis emailed me when I asked him that question:

The question many analysts have asked us is how we are able to sell every conceivable product for an effective price of 4-25% below any other e-commerce companies and still turn a profit, especially in an environment of sinking e-commerce profit margins. However, it is important to remember that the typical markup by e-commerce companies on each product over their cost is about 24%.

Now, brick & mortar doesn't have 24% markups over cost, but the present e-commerce companies do, despite the fact that e-commerce has far, far less inherent operating costs. So, where is that 24% and up markup per product going? Surely, the answer to that question differs for each e-commerce company and that is a question for each e-commerce company to answer separately. All we can say is that we get our product for the same cost as the other e-commerce players and can sell the product for as low a price as they across the board and then take an additional 4-25% off every product for charity or cashback and still turn a profit.

Yes, we end up giving away up to 80% of our profit, but we still sit at 7% profit margins overall. Now, other e-commerce companies are at 5%. We are giving a lower cost to consumer and have the capacity to generate billions of dollars for charity, all while sitting at a higher profit margin overall than other e-commerce players.

I suppose it just comes down to the fact that other e-commerce players have operating expenses that are far beyond the realm of strictly selling product to consumer, forcing them to charge prices in that core business for higher than they could be. And there's nothing wrong with that. We aren't being critical of it. Certainly, e-commerce can be a springboard to many other business ventures that will pay off for those companies in the long run. However, we have decided to stick strictly to selling product to consumers. So, while other e-commerce companies might be trying to use their core business as leverage into other revenue streams, we feel that the core business is the only business for us.

So it looks as though it isn't only analysts who view Amazon's technology spending and resulting low profitability as a threat to the company. Overstock also has its own profitability problems. Now competitors are smelling blood...

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