Internet retail still growing
Apparently the National Retail Association is forecasting 17% growth in the internet retail sector for 2008 to $204B in sales. We’ll see how this plays out, but it seems to be one of the few industries with a bright outlook right now.
Social features for internet retailers
At Sewell (an internet retailer of computer hardware, for those of you who don’t know), we have experimented with a few things over the past few years. We have tried showing in-stock quantities, 360 degree views (see the Phoebus, next to enlarge image), a support blog, a tech forum and more.
Like all most companies we just want to find the most ways to make our customers happy without losing money in the process. Recently we rolled out some features that I think really raise the bar for us and internet retailers - specifically, customer reviews (pretty common) and a product-specific Q&A’s for each individual product. (To see an example of the new features check out the USB to DVI - you will see a few extra tabs under the product image).
Most pure-play internet retailers claim to understand the value of social features - specifically in the context of leveraging 3′rd party sites, such as Facebook and Digg. What confuses me is why more don’t try to incorporate social features on their own site - giving shoppers the ability to communicate questions, answers and thoughts to other shoppers provides SEO benefits, lowers support costs, boost conversion rates, etc.
The only conclusion that I can draw is that most retailers don’t have the technical ability to customize their sites. My prediction is that a shopping cart provider will bridge that gap soon - having tried quite a few shopping carts out I can tell you with a pretty high degree of confidence that there is nothing available for a small business right now that is easy to use and will provide these benefits.
The expenses of incorporating social features on a website are the kind of expenses retailers should be looking for - fixed costs that provide residual benefits. If the marginal costs of maintaining the features (moderation, etc.) exceeds the marginal benefit, it obviously makes no sense to maintain - my guess would be that this would be rare for a retailer.
Customer Service vs. Being Accommodating
We had a conversation here at Sewell the other day about the differences between an internet retailer offering good customer service and being accommodating.
Basically, some companies (B&H, Crutchfield, etc.) really go out of their way to make sure that people are always treated well - this obviously involves huge payroll expenses and training. Other companies have extremely liberal return policies (sometimes even shipping you a return label with your order) - some examples include Buy.com and Zappo’s.
To be honest, I’m not sure whether most customers prefer good customer service, or easy-to-use self-serve tools. My hunch is that a frequent online buyer would value an accommodating company above a company with top-tier customer service, but there are obviously room for both online (and some companies probably do both well).
Sewell 13′th fastest growing company in Utah
Last year we were the 4′th fastest growing company in Utah, this year we were 13′th. A couple of our employees were discouraged by the results (since they weren’t as good as last year), but basically the way they calculate growth (percentage growth) does not make sustaining a high rank very easy.
I was impressed to see some big companies, however, making the list - the one I remember being surprised with was SkyWest. I mean, they are comparing their percentage growth to companies doing a few million a year. They went from almost $2B in 2005 to over $3B in 2006 - that’s impressive.
Congratulations to all the companies recognized in the Utah 100 and a special congratulations to Doba, the fastest growing company in Utah for 2006.
Internet retail: stock or drop ship?
Dealing with distributors can be a pain - but it’s important to find more SKU’s if you’re serious about making it in the internet retail world.
Over the past 6 years or so I have met several internet retailers and have been surprised by how many retailers actually carry no inventory - they are basically more like marketing companies who drop ship their entire inventory as opposed to dealing with the overhead associated with stocking inventory.
So when should you consider drop-shipping and which products should you consider stocking? Here is a quick look at the factors you should consider when considering a drop-shipping approach.
The Good
The cost of carrying an inventory is not limited to the amount you invest in the inventory itself - you need to have space to house the inventory, a staff to order and reorder, a staff to ship the inventory out and a myriad of other fulfillment-related expenses.
Basically, if you are going to survive by carrying an inventory you need to make sure that you have extremely padded margins if you want to break even - remember, scale is your best friend. If you can just squeeze out a couple of percentage points of profits then as your business grows you will be more and more profitable.
But while you are small you are probably not going to be profitable so if you decide to carry a physical inventory you need to have a good game plan to take your business to the level you need to be at to be profitable.
Drop-shippers, on the other hand, can be profitable with one sale per week. They general have extremely low fulfillment costs (sending the order to their drop-shipper) so they can focus on marketing their products.
The Bad
So if drop-shipping is such a great deal everybody should do it, right? Not necessarily - for the convenience of having somebody else ship out your products you will pay a price in the form of the margin. You will have lower margins - that’s a fact. But if your choice is between having a lower margin and losing money the choice seems pretty obvious.
The only other major concern associated with drop-shipping is control over fulfillment - you lose that. If you pick a drop-shipping supplier that doesn’t get shipments out on time or constantly sends out the wrong products that reflects poorly on you - remember, the end-user doesn’t care where products ship from, but they will always the company that processed their credit card with that order.
A Sound Strategy
So what do I recommend the vast majority of internet retailers do? In general blend these two strategies together for an optimal mix - if you can get extremely high margins importing products from China you should probably import those. If you have good domestic suppliers willing to drop-ship high-ticket products that you can’t afford to carry, drop ship those.
Also, if you want to test the waters of a new product line without committing yourself consider drop-shipping those products until they prove their value, then stock according to a realistic ROI - this allows you to offer an unlimited number of products with a limited budget and really invest your money where you get the best bang for the buck.
The power of internet marketing
My sister has a 5-year old kid who likes playing games on nick.com (of course only when he can’t play games on my “video game phone” - yeah, all those features packed in a Treo and all it looks like to them is a video game phone - nice one).
Apparently when games are loading a commercial plays - my nephew saw a commercial for Charmin Ultra. Since that time he has become a brand marketer’s dream come true - he told his mom that Charmin is the best because it’s softer and you can use less.
I’m pretty impressed with the power of this marketing tactic. This ad had his attention like no TV ad would because he was intently watching the screen waiting for his game to load. If you are involved with brand marketing consider contextual video advertising - it might just make a few mini fanboys.
On an unrelated note this same sister has a new website about string teaching - she’s taught orchestra and is a super awesome viola player or something.
The Margin Manifesto - A great read for internet retailers
Every internet retailer should read The Margin Manifesto - in this day and age of “oh, just give stuff away” and companies openly admitting that they are “pre-revenue” The Margin Manifesto is something that actually makes sense from an internet retail perspective.
The advice actually seems pretty intuitive and obvious, but as a friend remarked yesterday several business people want to “have the wedding, but not the marriage.” They want the business cards, email address, website, etc., but not true fiscal responsibility.
Profits continue to drive valuations even when hype is punished by the market.
Framingo
I just got around to going through some pictures that I took while visiting some factories in China last October. Yes, this cup actually says “Framingo” on it with a picture of a Pink Flamingo. That’s why we hire awesome copywriters and editors for all of the products we import - any retailer involved with importing should consider doing the same.
Inventory Factoring for Internet Retailers
Depending on the size of your internet retail company you may or may not have access to large amounts of capital. Surprisingly even some large retailers deal with occassional cash flow issues.
In general solving cash flow problems isn’t too hard - most retailers will lighten up on inventory and push their customers to drop-shipped products. If you can negotiate net 30 terms with your drop-ship suppliers and the majority of the orders you process use credit cards then you have approximately a 25 day float - you just need to ensure that your drop ship margins (which are typically much lower than stocked margins) can support your day-to-day expenses.
If you sell products to large corporations or the government, however, a cash flow crisis may mean turning down a lucrative order. If you are sourcing products internationally (read: China) terms probably are not an option. Most large corporations or government entities, however, will demand terms. Suddenly you find yourself on the bad side of the float.
Enter inventory factoring - a popular finance tool offered by most banks. Basically they will look at your accounts receivable (in this case the purchase order from your large customer) and cover the material cost for the order for 30-60 days. The financial cost is quite high (typically about 1.5%/month or 18% APR compounded monthly), but it could mean the difference between closing the sale and having to turn down a large order. Also, when you prove that you are capable of filling these large orders you are much more likely to be a supplier of choice to these coveted customers.
By offering your customer net 30 (typically the minimum they will demand) and securing a 60 day term on the factoring, you are incurring an additional expense of 3% in order to fill the order without tying up any of your existing capital. Work with your manufacturer on getting the lead-time down to within a few weeks and your customer should receive their shipment (by boat) within 30 days guaranteeing that you will never have to tie up existing capital filling the order.
As far as the 3% finance fee goes - get into the habit of building it in to your quote and charge a 2% late fee. This will cover an additional month of financing in the even that the customer is slow on payment.
Internet Retail Sourcing: The Chicken and the Egg
When sourcing products for internet retail most people are faced with a chicken and egg problem: initially they don’t do enough volume to get good pricing, but they are competing with retailers who do have better pricing and hence can’t compete on price.
What’s a retailer to do? One creative way I have found around this is to call your supplier directly - distributors, by the way, are much less likely to work with you on pricing than the manufacturer’s themselves, but most large manufacturers go through distributors. It still doesn’t hurt to ask.
Explain your problem and your strategy for growth over the next year. If you have impressive historical growth patterns share these with the supplier.
Here is the trick - ask them for volume pricing and a reasonable time-frame to hit the required volume. For instance, you can say “I know I will get a significant discount if I buy 1K pieces of this product, but I can only purchase 100 today. If you give me the volume 1K pricing, however, and give me six months I will meet your volume requirements.”
Not everybody will respond to this request, but you will be pleasantly surprised to find that a few suppliers actually will. In most cases the supplier wants to find a way to sell to you at a lower price point - they are constrained by distribution agreements with larger customers, however, and have a hard time around these. Limited-time discounts are a great way for them to work within their distribution agreements without risking a large account.