Welcome to Curious Business

Every Friday, I post a small insight into running Curio City and/or Blue Hills Editorial Services. My most recent posts are directly below. You can also start with the first post, or use the subject labels to the right to home in on particular topics. Feel free to comment on anything that interests you.
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Friday, May 25, 2007

Curio Metropolis Online Redux

Or, Back to the Old Drawing Board

The sales decline that began in “Unhappy Mother’s Day” got so bad this week that I thought there must be something seriously wrong. I had only two sales in seven days, plus a return that nearly canceled them out. Before two very welcome sales appeared yesterday morning, my gross income for this week stood at $12.04. That puts my paycheck at something below $2.00. Last week was my fifth worst ever, and this week is making a strong play for the second-worst of all time.

People are simply not buying. These long sales droughts happened a few times last summer. They weren’t supposed to happen at all this year, and certainly not in May.

My pay-per-click advertising is still delivering the usual 75-100 visits per day. My test transactions go through normally. The USPS raised shipping rates on May 14, and broke my international shipping module when they reconfigured their overseas services. But exports are too small a fraction of my business for this to explain anything.

Until now, my conversion rate has hovered reliably a little over 1% – one visitor in 100 buys something. Last week it fell to more like 1:500. Why? Why? Why? Maybe poor buying decisions took my store in the wrong direction. These kitchen towels went nowhere. I haven’t sold a single rain gauge or grill thermometer yet. My new cigarette cases have the features that a couple of customers asked for, but they might be too expensive (and two weeks after I ordered them, the vendor announced a 15% off sale! Grrr….). Those items alone tied up April’s entire inventory budget. I still think they're good products, and hope they'll find their market.

If I knew that bad merchandise is to blame, I could just invest some startup cash into more new gadgets and clocks – my best categories before sales collapsed. But I can’t waste seed money on a hunch.

Since I don’t know how to end this slump, I’m using my downtime for medium- and long-range planning. Despite some stubborn structural cost problems, my business borders on solvency. There’s nothing wrong that a big infusion of sales wouldn’t cure. So, how big an infusion are we talking about?

Let’s do a flight of fantasy. My bootstrap approach – building this business up slowly from my own resources, without taking on debt – is failing; only an impossibly stellar Father’s Day season can resurrect it. Suppose I abandon bootstrapping, and go instead for a quantum leap? What expenses would that entail? How much business would it take to cover those expenses?

This thought experiment explores the Curio Metropolis Online path.

Payroll & Consulting. First, I need at least $50,000 per year to live. That’s what I used to earn as a wage slave. Curio City would have to gross $325,000 annually (about 10 times last year’s sales) just to generate that salary. (BTW, as the only shareholder, I would pocket any profits at the end of the year, so I do have the potential to make substantially more than $50k.)

Second, I’d need a contract developer to tune up and improve the website on a regular basis. My own lack of technical education is my biggest handicap; I am always off-balance when something goes wrong. Right now my budget for routine web services is $500 per year. Let’s raise that to $20,000 per year. For perspective, that’s at least double what I’ve spent on technology to date, and twice what I intended to invest this year to reach version 2.0. I expect that outlay to compensate for my own ignorance.

Third, I’d contract with a professional marketing firm to design and manage a coherent ad campaign and media blitz. Currently, my marketing budget is a percentage of gross sales – which, as we’ve seen, are in the crapper. My budget pays for my pay-per-click ads, without much left over. Let’s allot $25,000 annually for marketing talent, above and beyond the existing sales-driven ad budget.

Fourth, to cover this new sales volume, I’d need a fulltime shipper/receiver; let’s say $10 per hour for 35 hours per week, or about $20,000. Toss in $5,000 for a rudimentary benefits package for myself and my shipper, and we’re at $120,000. I’d need to gross $750,000 to cover that.

Rent. I can’t run a $750,000 operation with a fulltime employee out of my cellar. I need commercial space. Let’s say I can cram all of my inventory, a cramped office, and a shipping area into 750 sq ft. Since there is no storefront to consider in this scenario, it can be industrial space in a poor location. Let’s budget $17.50 per sq ft., which works out to about $1,100 per month.

Other. I’ve always been nervous about having no insurance on my inventory; a cellar flood (which is not at all unlikely) would be a serious setback. Let’s say that rudimentary casualty & theft insurance would cost me $200 a month. My facility will need electricity, water, a telephone line, internet access. Call it another $200 a month for “utilities”. I’d probably have to come up with taxes, association fees, janitorial service, etc. Let’s budget $100 a month for that.

Debt Service. Here’s a huge expense item. I need to prime the pump for this new sales volume. Something a little better than a wild guess says that I’d need $150,000 for:

  • Additional merchandise -- $125,000;
  • Shipping materials -- $2,000;
  • Office supplies -- $1,000;
  • Shelving, furniture, etc. -- $2,000;
  • Rent down-payment -- $5,000;
  • Web developer -- $5,000 up front;
  • Marketer -- $10,000 up front.

In this scenario I put in my last $15,000 of personal savings. I pretend that a banker would loan me $135,000 unsecured. Assume a 5-year loan at 8%, as I saw advertised today. Simplifying the compounding, $135,000 will cost about $189,000. Divide that by 60 months and you get $3,150 per month in debt payments.

OK, the assumptions are done. Whew. To the spreadsheet!

Wonderful things happen when sales increase by orders of magnitude. The percentage needed for payroll falls considerably, for example. Eventually I arrived at a magic number: $800,000 delivers everything that I detailed above, with a tiny profit left over. Curio City becomes very profitable after the debt is retired in five years.

$800,000. Wow. It’s a big stretch, but I’ve managed stores that approached that level of sales. It's not astronomical. My average ticket last month was about $30. I’d need 26,666 sales like that to reach $800,000. 73 sales per day. Yoinks. 32% of LY's annual business came in December, so I’d need 8,533 sales that month alone (284 per day!!!) November accounted for another 17%; that’s 151 per day. Which leaves about 45 sales per day during the slow part of the year.

I’m not sure I can envision that. Those numbers are mind-boggling from my perspective of 3 sales so far this entire week.

Next week I’ll give this same treatment to opening a store (Curio City Offline). I have a hunch the bottom line will be comparable.

Friday, May 18, 2007

Turning Points

As we saw last week, my last chunk of investment money became available in the midst of the Mother’s Day Bloodbath. My 2007 goals are in ruins, and sales are still lagging way behind last year.

So what?

The benchmarks that I explained last week were all self-imposed. They were supposed to give me the confidence to borrow big bucks and expand my business in 2008. Being financially cautious, I won’t bury myself in debt unless I’m pretty sure of success. Missing my milestones shakes my confidence…but there are no other, objective consequences (except, of course, for prolonging the personal poverty to which I’m well accustomed).

In a way, I’m glad that Turnkey fell so far behind in releasing Sunshop 4.0. My entire plan for progress begins with that free, major upgrade to my basic software. Had it come out on time, I’d already be financially invested in developing Curio City version 2.0 – a more feature-rich website that finally begins to resemble my 2005 design. Maybe I’ve made no progress this year, but at least I’ve spent no money on it, either.

What are my options? I can:

(1) Stick to Plan A. Invest mainly in website upgrades, with smaller spends on marketing and new merchandise acquisition.

(2) Invest a smaller fraction of my startup cash in the web, and put the rest into marketing instead.

(3) Invest little to nothing in the web or in marketing, and apply most of the money toward a new direction instead (click the “Planning” label to the right and read the five “possible future” columns if you want the full background on that).

(4) Go back to the drawing board, and re-imagine Curio City entirely.

(5) Reduce Curio City to a hobby, get a job, and give up the dream.

Stick to Plan A. If the forecast is for failure, investing the last of my cash to prolong the long downhill slide that I’m on right now is not a very smart move. On the other hand, we are not talking about a huge sum of money here. Where would $10,000 make a bigger difference than in upgrading my website? It would buy a couple of new features, some search engine optimization, and a minor facelift…all very appealing, but would that make $10,000 worth of difference to the bottom line?

Invest in Marketing. Good idea! How? This question has plagued me right from the start. I still have some unspent Phase 2 marketing money lying around, simply because I don’t know how to spend it. Nothing I’ve tried so far has worked. Suppose I take $7,500 out of my $10,000 and call it marketing money? What do I do then? Write a check to “marketing” and mail it to the Marketing Fairy?

Take a Different Direction. Being an online business brings some handicaps I might never overcome. With no expertise in technology or in marketing, I’m dependent on other people – people whom I’ve not yet met. How could I hire these hypothetical experts when I can barely pay myself a fraction of minimum wage? I am leaning strongly toward Possible Future 1 (opening a bricks-and-mortar store). Not because I want to, but because I know how to do that. Opening a store will probably cost at least $50,000. Should I apply my last $10k toward that effort, rather than throwing more money at the web?

Go Back to the Drawing Board. This is more difficult than you’d think. I work in a complete vacuum; I have nobody with whom to brainstorm (except my wife, who is hardly objective). It’s hard to even recognize and articulate my core assumptions, much less challenge them. But the more thought I put into it, the stronger grow my doubts about such fundamentals as bootstrapping this business without acquiring debt. Perhaps I need to play for much higher stakes than I’m doing now -- reach for dramatic success while risking catastrophic failure.

Give Up. That’s Possible Future 4, and I am not at that point yet. I would always wonder if that last $10,000 might have made the difference. I would always regret not seeing it through to the bitter end. As Anne keeps saying, we’re so close. I have all the ingredients for success. Curio City Online is poised between failure and success...it just needs a spark that I can never quite seem to supply.

Two things are certain.

First: Being 50 years old and impoverished is getting tiresome. I am sick of having no money, and especially of making no progress toward our life goals. The calendar pages flip by faster and faster while I scrape along with no progress and waning hope. I need to change something, and deciding where to deploy the last of my money is critical.

Second: I’m not going to make these hard decisions until I see how Father’s Day goes. It was a big holiday for Curio City last year. If it's going to materialize again this year, it should be starting again right about now. I can't possibly recover the financial ground that I lost over Mother’s Day. But a strong showing will restore some of my confidence. Maybe there is nothing wrong with my business model, or even my execution – maybe I just have the wrong merchandise. I mentioned a few weeks ago that my 2006 mainstays aren’t doing it for me this year, and I’ve found nothing to replace them. If that’s all that's behind this crisis of confidence, I can easily fix it by spending my cash on new items, rather than on the store itself.

Turnkey will probably release Sunshop version 4 next month. That’s when I need to make my decisions. In the meantime, I’m going back to Excel to see if I can quantify some of my options. Next week I’ll if the numbers are pointing me anywhere.

Friday, May 11, 2007

Is It Time to Reassess?

In the beginning, I poured my modest startup cash into three buckets. The first was for immediate needs – creating the company, buying merchandise, and building the website to version 1.0 (core functionality). That bucket emptied quickly. The second was to subsidize operating costs, expand my inventory, and enhance the website to version 1.1 (some simple customizations). That money dribbled away more slowly; in fact, because I’m a financially timid individual, some of it is still left.

I put the third and last bucket into a bank CD. Last week, the CD matured, freeing up my last planned cash infusion. Disastrous Mother’s Day sales results, however, are giving me pause. Should I still go ahead? Or should I cut my losses while I still have some money in the bank? Does the bloodbath mean anything at all? Today’s business news says that April retail sales were poor across the board. Maybe I’m just seeing the leading edge of recession.

Now that 2007 is nearly half over, let’s step back and look at what the Mother’s Day Bloodbath means for the rest of the year. My goals for 2007 were to:

  • Double last year’s sales volume;
  • Earn in salary the same amount that I will reinvest; and
  • Turn a profit of $1

Double last year’s sales volume. Curio City was barely operational in early 2006, so it was easy to make my sales plan during the first couple of months of this year. Then the 2007 sales graph remained stubbornly flat while last year’s line gradually rose up to meet it. In the three weeks leading up to Mother’s Day, sales fell dramatically short of expectations. Far from doubling last year’s sales, I’m suddenly failing to equal them.

Doubling LY was an arbitrary goal. So last week I hit my spreadsheet to figure the smallest year-over-year increase that will still support my other two goals. I'd still need to beat LY by 75%. Without a marketing miracle, that is not going to happen. In fact, because I’m up against strong Fall benchmarks, it’s unlikely to happen even with a marketing miracle. This goal is an unambiguous failure.

Earn back as much as I will reinvest. Ignoring a lot of accounting details, this is pretty straightforward. In 2006, Curio City generated $5,000 in payroll. In 2007, I intended to invest an additional $10,000, and expected my salary to double to $10,000. Now that sales have dried up, I’ll be lucky if I earn $5,000 again this year. The only way to attain this goal, then, would be to reverse the equation. Instead of doubling salary, I could halve investment. That’s self-defeating, because a smaller cash infusion will yield lesser results. So this goal is almost surely another clear failure.

Turn a profit of $1. Believe it or not, this isn’t out of reach. Many of my costs are scalable. As sales fall, so do expenses. My YTD loss so far is less than half of what it was at this time LY. If I can keep the operating loss from growing too badly as the summer drags by, I might still be able to make it up in December. It will be a pyrrhic victory if my token profit comes amid declining sales and shrinking paychecks. But at least it is something.

Next week, I’ll ponder what -- if anything -- all of this means.

Friday, May 04, 2007

Unhappy Mother's Day

After coming out of the chute strong, Mother’s Day flopped. April was the first month that I didn’t beat last year’s benchmark. The first week of May should be among the busiest of the non-Christmas year. It wasn’t. I’m spending $15-20 per day on PPC ads to buy 140-180 visitors per day (vs. 60-80 visitors at my normal ad spend). But they must be looking for traditional “mom” stuff, because they aren’t buying very much at all. A newsletter announcing the new Earthsong jewelry line didn’t give me the boost that I was hoping for.

Let’s focus on the positive. Due to lucky timing of some expenses, April was paradoxically one of the first months to show a profit. Sales are still comfortably ahead of last year, although that lead is gradually eroding. The balance sheet is only slightly in the red – which is fine; retailers don’t expect to see black ink until November at the earliest. And Mother’s Day isn’t quite over; maybe these last few days will deliver an unexpected rally.

Maybe Father’s Day can turn things around. My merchandise is stronger for men than for women – I’ve always been weak on girlie stuff. Whose dad wouldn’t want a talking barbecue thermometer? Father’s Day is the last big sales opportunity on the calendar until back-to-school begins the countdown to Christmas. It was a big event for Curio City last year. I hope it comes through again this year.

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