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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.

2 comments:

  1. Matrix12:53 AM

    Well it looks like i am giving up on me making it in big boys on my own, and will be getting some investors on board this upcoming spring. Angel investors that is. Dont want to take a loan, and rather give away 10% or so of the business for the infusion of cash. Oh yah remembered why i made the post, i would suggest putting more money into marketing and less into inventory, then vice versa as you have it right now.

    PS: I need an outsiders opinion on my book site, visualy it cant be changed much, but can you take a look at it and see if anything doesn't fit in (how does the last part about audio book sounds?)
    www.parkbenchdating.com


    The sales have been alright, but it seems most of them are local aka someone heard of me from a friend, and outside sales barely covering PPC expenses. Btw, did you take a look at kanoodle?

    ReplyDelete
  2. I'll take a look at your site and leave a comment there.

    I decided against seeking angel investments after taking a one-day class on business financing. In return for taking on high risk, angels generally demand a phenomenal return on their investment, like 50-100% within a short time horizon. As much as I want (and need) to pump up my base level of business, I'm much more concerned with modest long-term growth than the quick buck. And I don't want to give away ownership. I can accomplish my near-term goals with a five-year bank loan at 8%.

    The Kanoodle site is not very informative. It says nothing about costs and next-to-nothing about expected results. Since I already pour a lot of money into Google Adwords and Yahoo Search Marketing, and since my MSN trial bombed, I'm not inclined to put any more money into paid search marketing. Rather, I'm planning to invest in professional SEO next year (assuming that I don't put all of my resources into opening a physical store instead).

    ReplyDelete

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