The number of digital consumers nearly tripled between 2015 and 2018, with double-digit growth expected in many ASEAN countries. Now, the pandemic has greatly accelerated the shift towards digitalization and e-commerce. Consumers are becoming more comfortable ordering goods and services online due to lockdowns and social distancing rules, which means SMEs have no choice but to offer services online.

For many SMEs, if not all, this transition has taken on existential proportions: those that do not move online are facing a real threat to survival.

Even though it has become indispensable, e-commerce will not be a profitable venture for all SMEs. While it provides access to new consumers in online marketplaces, it also brings new competition. In a traditional model, SMEs make use of locational advantage, build long-term personal relationships with their suppliers and customers, and have some control over pricing strategy. These advantages are less relevant in e-commerce – a world of algorithms and optimization.

The most important consequence of competition is that pricing decisions are out of SMEs hands. In the online marketplace, SMEs are not free to charge the price that is required to cover their costs since there will be numerous other businesses offering a very similar product at a cheaper price. Rather, they will have to sell at the prevailing “market price” if they are to capture any market share.

However, the prevailing market price may not be enough to cover the costs for all SMEs. Consequently, those whose costs of production are lower than the market price can be profitable and survive online, but those who do not have low enough costs will be forced to operate at a loss. Such competition will affect SMEs whether or not they choose to embrace e-commerce as their customers will eventually move online, so it is best for SMEs to embrace e-commerce.

SMEs that decide to enter the online marketplace not only face the regular costs of running a business but also need to face new types of costs, such as: online advertising and customer acquisition (achieving visibility online is very difficult and SMEs need to know how to make themselves stand out); maintaining high ratings (e-commerce is a ratings driven business, rather than personal relationships that were important in the traditional model); managing higher volume trade and inventory, which may need specialized software; handling returns and exchanges, which is very important in online business; dealing with logistics companies; and many more. In order to succeed,

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