Starting an Online Business

August 15, 2013 Leave a comment

The hardest part of any business is starting it.  You have to identify an unmet need of some sufficiently large group of people.  You have to find a way to fill that need that’s better than whatever is available today.  You have to identify a way to have your target audience find your site once it’s ready.  Then you have to actually execute your plans.

That last part, executing on your plans, is arguably the easiest part.  Most likely that’s what you’ll end up spending most of your time doing, but it’s mostly mechanical things: getting software and installing it; writing articles or product descriptions; filling orders.  If you don’t do the earlier steps well, all of your work on the mechanical aspects of your business is likely to be futile.  It’s easy to spend a lot of time and money on a new business venture, but if you don’t have a pretty good idea of a path to success before you start, there’s a good chance you won’t find such a path when most of your time is consumed by the mechanical aspects of running the business.

Unfortunately, many people don’t do those earlier steps before starting their business.  Instead, they come up with an idea and start the business right away, without considering things like what they’re going to provide that’s better than what’s available today, or how they’re going to stand out from the crowd.

That doesn’t mean you have to have a detailed plan before you start out.  More likely is you have a vague idea, and need time to experiment, explore, and learn.  After a while you’ll understand the market you’ve been experimenting with, and at that point you can ramp it up.

I ran across this article on someone who started an online retail business selling children’s books.  It’s a huge market, but there’s a lot of very stiff competition (e.g., Amazon).

The article leaves a bad impression that the person who started this business made it successful quickly.  It says something to the effect that he toyed with it for six years, then got serious and made it a success within a couple of years.  That may well be how the owner thinks of it, but I see it a little differently.  He spent six years learning his target market.  When he started out he probably had little understanding of what opportunities were available, but after six years he had a good idea of some unmet needs that existed.  At that point he started putting a lot of time and money into it, and within a couple of years (with the knowledge he gained from the previous six years and a lot of hard work) his business is starting to show significant success.

If you’re just starting out and don’t have a solid idea of what to sell or how to sell it, my suggestion is start small and experiment.  Over time you’ll learn about your target market, and at that point you can focus on making it a big success.  Until then just focus on learning.  Make a point of looking for unmet needs every week, rather than just grinding through the mechanical aspects of your business.  There’s no way to know how long this will take – hopefully less than six years.  But one of the good things about online retail is that you can make money at it while you learn.  Until you ramp up the volume it won’t be a lot of money, but making any money while learning about your market is better than spending money to learn about it.

 

How Much to Charge for Shipping

July 26, 2013 Leave a comment

A big part of your expenses as an online retailer are shipping costs.  For items that are large, heavy, or not very expensive, the shipping cost can easily be a large fraction of the product cost.  You need to recoup these costs, but buyers are very sensitive to shipping cost and any appearance that an online retailer is gouging them.

My favorite way to deal with this is to add the cost of shipping to the price of the item, and don’t charge the customer any shipping fee.  This will make your price appear high relative to other online retailers that split out shipping separately as an add-on item, and will cost you some sales.  But you can minimize this by emphasizing your free shipping policy on your product pages.  Buyers like the comfort of knowing the price they’re shown is the price they’re actually going to pay, and avoiding check-out time fee surprises will make them feel better about your company.

There are other to deal with shipping charges, of course, but they haven’t worked out as well for me as free shipping.

One alternative is to get real-time quotes on shipping, and just charge the customer whatever you’re being charged by the carrier.  While this will get you past the appearance of gouging, the shipping fee will still look large to a customer.  I don’t like leaving my customers with a bad feeling about buying from me, and whenever people see a large shipping fee relative to the price of what they’re buying they’re not going to feel good about it.

Another option is to charge a flat fee for shipping.  If you know what your average order size is, you should have a good idea of what the average shipping cost to you is, and you can just apply that to every order.  If you use this tactic, I would recommend emphasizing your flat rate shipping policy on your website or product pages.  It isn’t as good as free shipping, but again customers will feel better about knowing there won’t be any surprises at check out time.  It will also encourage them to buy more things from you, since the shipping fee they’re paying will be the same.

You can also use a combination of the above tactics.  For example, you can add half the shipping cost to the price of each item and charge a flat shipping fee of half your average shipping cost to each order.  I still think advertising free shipping is more valuable, but a fixed shipping fee that’s clearly less than the customer’s expectation of shipping cost will give them a good impression, too.

Sales Slow in the Summer

July 12, 2013 2 comments

My online retail sales slow down every summer.  Summer is a big vacation time, so it isn’t surprising there are fewer people surfing Amazon or Etsy looking for things to buy.  It’s a bit unnerving, since I worry that the slower sales are caused by something else rather than just the season, like competition.  And to be sure, sometimes there are other causes as well.  But for the most part things pick up again after mid-summer.  So if you’re new to retail and worrying about why your sales have slowed, do check on external factors, but most likely it’s just the season.

The week heading into July 4th was particularly slow for me this year, though now that the weekend has passed sales have rebounded quite a bit to a more normal ‘summer time’ level.  Of course your mileage will vary.

I’ve written about how to mitigate a summer sales slump before, and I came across this article which has some good suggestions on how to use the extra time.

So how should you use this time?  I have two suggestions.  First, Fall is the busiest sales time of the year, so if your inventory is light this is a good time to stock up.  It will seem counter-intuitive to commit to a big inventory spend now, since revenue is at its lowest for the year.  But to capture the full potential of the Christmas season you have to be stocked up before Fall buying kicks into gear.

I’ll take a moment here to mention, as I have many times, that that doesn’t mean you should borrow money to buy inventory. Especially if you’re relatively new to selling online and don’t have enough experience to know how well your products will sell, borrowing money to buy inventory can leave you with a lot of unsold merchandise, a big debt load, and no way to pay for it.

My other suggestion on how to use this slow sales time is to spend more time looking for new products to sell.  You need to be doing this all the time, but do take any opportunity to spend more time on it whenever you can.

Profit Margin Analysis

June 21, 2013 Leave a comment

In this post I discussed how to calculate how much money you can make selling online.  An important part of the equation is your profit margin.

There are many different versions of profit margin.  E.g., gross profit margin is simply (sales price of an item – what you paid the manufacturer of that item).  A useful measure to be sure, but for online sales there are other per-item costs that are so high they should be accounted for in your margin calculation, or you’ll make very poor decisions about what to sell, and how much you need to charge for an item to make carrying it worth your while.

The version of profit margin I use includes these per-item expenses:

– price paid to the manufacturer

– shipping cost from the manufacturer to me

– shipping cost from me to the fulfillment center

– cost of any boxes I have to use in shipping to the fulfillment center, in case shipments I receive from the manufacturer must be broken up

– processing fees charged by the fulfillment center whenever they receive a shipment (e.g., the Amazon FBA fee to apply stickers to inventory)

– the pick / pack / ship fees charged by the fulfillment center when an order comes in (including postage)

– average fulfillment center storage fees for this item (based on quantity and length of time at the fulfillment center on average)

– the marketplace selling fees (usually a percentage of the selling price)

Some of these numbers won’t be exact.  E.g., the postage depends on how many items are shipped.  If the postage for item A alone is $3, and the postage for item B alone is $3, the postage when someone buys both A and B is likely to be much less than $6.  You can use historical data to try to estimate this sort of thing, but I just use the worst-case, which is the postage of an item shipping by itself.

Once you have all of the per-item expenses, you can calculate a meaningful value of profit margin.  If you sell a lot of SKUs doing all of these calculations by hand will be impractical.  At a minimum you need to use a spreadsheet to calculate it.  Being familiar with a simple scripting language like Perl would be better, since you probably need the same data in several places for different purposes, and putting everything in one huge spreadsheet will become a nightmare.  But for a small number of SKUs a spreadsheet is fine.

==========

I’ve updated my list of potentially good products for you to sell on Amazon for June 2013.

 

 

Amazon FBA Fees

June 7, 2013 Leave a comment

The Fulfillment By Amazon (FBA) program allows third party sellers on Amazon to ship their inventory to Amazon, and Amazon performs the pick, pack, and ship when you receive an order on Amazon.  They also handle returns, and all customer service functions.  It’s about as hands-off as you can get, and with Amazon capturing a large part of online sales it’s a great opportunity for anyone who wants to grow their online sales into their main income.

Amazon recently announced changes to their pricing for FBA services, and I wanted to talk about them here because they definitely affect your business.

Amazon would like to receive FBA merchandise in condition to be ready to ship to a customer.  However, it doesn’t always arrive that way and Amazon performs the necessary preparations when they receive the merchandise.  For example, since the merchandise will be stored in a warehouse, which can be rather dirty, they require anything that’s particularly harmed by some dirt to be in polybags.  Clothes would be a good example of this.  Until now, Amazon has done this preparation free of charge, but that has now changed.

If your merchandise reaches the Amazon warehouse, and it isn’t prepared the way Amazon specifies, they’ll still do the preparation for you, but they’ll now charge you for it.  As examples, at the time of this writing, putting a label on a product is $0.20, and putting a product in a polybag is $0.50.

These aren’t unreasonable prices for these services, but the fees will definitely add up.  E.g., if you ship 10,000 items to Amazon per year that need to be polybagged and labeled, it will cost you $7,000 per year.  Ouch!  These fees may also make it no longer worth it to carry some products.  If you’re making $1 per item, and your fees go up $0.70 per item, it’s probably not worth it to carry anymore (or at least, you’ll need to start doing the preparations yourself).

This is a new and rather large change, and it will take time for Amazon to get all of this right.  E.g., when I was creating a shipment recently they indicated the products needed to be polybagged.  However, the product comes from the manufacturer in a sealed box, clearly no polybag was actually needed.  So be prepared to file help requests letting them know when they flag a product as needing preparation when in reality it doesn’t.  No one shipment will cost you that much, but over time it will add up.

One more note before leaving this topic, you can also use the FBA program to fulfill orders on other channels, like eBay or Sears Marketplace.  You’ll need to enter the orders on your Amazon account yourself, or pay a service to do this for you, but it’s still a good deal because of the shipping rates they get, compared to what a small retailer can get from UPS / FedEx / USPS.

 

Liquidation Companies

May 25, 2013 Leave a comment

If you’re looking for things to sell online, and you should always be doing this, a good source can be liquidation companies.  These are companies that buy excess inventory from retailers and manufacturers, and re-sell it.

Of course, the success of this strategy depends on knowing that you can actually sell what it is you’re buying, so you need to know how the product does on your sales channels.  Success also depends on knowing the price you’re paying will allow you to get a good profit margin, so don’t buy anything unless you know what you can sell it for, and what your fulfillment costs will be.

There are liquidation companies that do this online.  E.g., www.liquidation.com is a marketplace where sellers can list their excess inventory, and buyers can bid on it.  This can make your job a lot easier, because you can simultaneously check out what’s available online, and what you can get for it.  As a side note, I’m not endorsing liquidation.com here, I’m just pointing them out as an example.  You need to do your homework and find a liquidation company that works well for you.

Of course, the downside to this strategy, which is the same as the downside to any strategy involving one-off products, is that it’s time consuming.  In addition to the time spent searching for things to sell, which will only be amortized over a fairly small number of items, you also have to spend time creating a listing.  But, if you’re just starting out, or don’t have much capital to buy inventory, this could be a good way for you to get your online sales started.

==========

I’ve updated my list of potentially good things for you to sell, this is the May 2013 list.

Selling Clothes Online

May 10, 2013 1 comment

I wanted to talk today about selling clothes online.  There are a lot of good things about choosing clothes:

  • They’re always in demand, even in a weak economy
  • There’s a huge variety, so people are willing to buy clothes even if none of their existing clothes have worn out
  • There’s a large number of manufacturers, so even if one manufacturer won’t sell to you (as an online retailer), there will be others that will
  • They’re relatively high-priced, so you can earn a good income per hour of your time invested

Unfortunately, there are also a number of drawbacks:

  • The return rate on clothing tends to be much higher than for other products
  • It can be hard to judge demand for a specific style / size / color of clothing (e.g., you know there’s good demand for a particular jacket, so you buy it in ‘large red’, but the demand is heavily concentrated in ‘medium blue’)

To touch on the return rate problem a little more, unlike a store where people can try on different sizes to see which fits best, there’s no way to do this when shopping online.  So buyers will try it and just return it if it doesn’t fit right.  One of the most frustrating things as a clothing retailer is to see someone order a particular item in two or three sizes, you know with near certainty that all but one of those will be returned.

Amazon is a good marketplace to sell clothing.  One specific downside to selling clothing on Amazon, though, is that Amazon sells a lot in this category themselves.  If you see Amazon selling a particular item, it’s going to be hard to compete.  They’re getting lower wholesale prices than you will, and they price very aggressively.  That’s great if you’re a buyer, not so great if you’re a seller.  They sell most of the well-known brands, and are particularly aggressive about selling women’s clothing.

If you’re just starting out and don’t have a lot of capital for inventory, one strategy you could try is to buy clothing in outlet stores and re-sell it online.  You’ll need to do your homework to make this pay off, of course.  You need to check what’s available in the store, then go see how it’s selling online (eBay, Amazon, Sears Marketplace, etc.), then go back to the store and buy it if it’s a good match.  If you focus on a small number of brands and go to the outlet stores every day, after a while you’ll know what sells online without having to double check, so it will get more efficient.  But when you’re just starting it will take a lot of your time.

You could even create a listing for clothes you haven’t bought yet, knowing they’re available in the outlet stores.  Then when someone buys from you online, you go to the outlet store and buy it.  You’ll get some extra negative reviews from people if you’re not able to fill the order because the store sold out before you get there, though.  You’d want to at least check the store every day and remove listings for items no longer available.