Case Study 1: Ecomum fails to control its revenue mode

Ecomom was a small start-up Internet retail company selling earth-friendly mum and maternity

products, including food, toys, apparel, and other baby-related items. With headquarters in Las

Vegas and San Francisco and a third-?party fulfilment in Los Angeles, any volume could be shipped

within 24 hours. Founded in 2007, by 2011, it had a turnover of just over $1 million, but a further

round of investment of $12 million was required further growth, but at what cost?

Business Insider (2013) describes the story of the eventual failure of the company in 2013. With

hindsight, its difficult to understand investment in the company, but perhaps this was buoyed by

the success story of Tony Hsieh building Las Vegas-?based Zappos into an online shoe and retail

business that Amazon acquired for $1.2 billion. Of course, investors require growth and Ecomum

did achieve revenues of nearly $4 million in 2013. But investors also require a return on their

investment and, as youll read, the way growth was achieved was far from profitable.

Philip Prentiss, who joined the company in 2011 as the financial controller, was the first dedicated

finance person. As with many start-?ups, payroll, tax and accounts are outsourced to third-?party

bookkeepers. Many company failures are not written up because employees dont want to share the

story of failure. But in a candid summary of his time at the failed company, Prentiss (2013)

describes the reasons, starting with the lack of financial prudence. Describing Ecomom CEO Jody

Sherman, he says:

He was not a numbers guy. I would bring the financial statements to Jody who would glance at

them so cursorily and wave me away with no one can understand this without extensive analysis.

Critically, he did not understand margin. At the end of December when things were getting truly

desperate, he said to me Phil, just bring me a forecast that shows how much we need to sell to

break even. He did not understand, after three years of negative margin, that increased sales

resulted in increased losses.

2

In this open letter describing the failure of the company Prentiss shows how the financial presenta

tion format hid a contribution margin of -48% which he identified when he joined the company. In

other words, for every additional $60 average order shipped the variable cost was $89 and the

company lost $29. This situation was caused by heavy discounting, with common use of 50%

discounts on daily deal sites like Groupon. To make matters worse, although discounts were meant

to be one time only, the company couldnt limit them by customer, so every discounted order had a

50% reduction regardless of whether they were from a new company or an existing company. The

company sales manager was paid based on sales achieved before discounting. At the same time,

there were no premium lines or own-?label items where mar gin could have been better. In addition,

this is a fiercely competitive growing sector with established retail brands such as Whole Foods or

general retailers such as Amazon selling similar goods.

By mid-?Autumn 2012, a $860K loss for the previous quarter was the result of the discounting

strategy. Prentiss notes that no substantive changes were made to the business strategy and, starting

from $4.8 mil lion capital raised in August for the five months through 31 December, the company

lost $1.1 million after variable cost, spent $1.7 million more on overhead and locked up another

$1.2 million in inventory, leaving less than $1 million in the bank.

Sadly, the company closed early in 2013 and shortly afterwards, the CEO, Jody Sherman, took his

own life. In the unsentimental way of business, Ecomoms domain and customer list were

purchased by a com petitor and the website was planned for reopening later in 2013 with this more

than unfortunate legacy. But the lasting legacy of the company and its founder may be how it has

highlighted the pressure of run ning a startup. Business Insider quotes Dave McClure, an investor

in Ecomom and the entrepreneur behind investment firm 500 Startups, who says:

Oh Jesus, [founding a company] can suck. I can remember facing extremely dark days as an

entrepre neur. I went through layoffs, cofounder battles, and wife battles, and not for much gain. It

was a hell of a lot of work for not a hell of a lot of return. Then there are days when you sit in a

corner and cry. You cant really do anything else. You dont have a social life. You dont really

want to interact with family and friends because theres just not much context for them. Your world

revolves around your startup and its all about trying to survive and not look like an idiot in front

of employees.

Required:

3

(a) Explain the micro and macro environmental elements of the digital business environment

for Ecomum.

(06 Marks)

(b) Discuss the buy-side, sell-side and marketplace-based e-commerce of Ecomum.

(06 Marks)

(c) Evaluate Ecomums digital business strategy.

(06 Marks)

(d) Discuss how disintermediation and reintermediation could be used for Ecomum.

(06 Marks)

(e) Define what corporate governance is and explain the benefits that could be derived from

proper corporate governance for Ecomum.

(08 Marks)

(f) Recommend the steps you could have taken to stop the fall of the company if you were the

CEO.

(08 Marks)

(Total 40 Marks)