E-Commerce for Dummies Part 3 Q&A (Plus June Numbers)

I get to milk my online lecture one more time. The post in question is here.

But first, let’s celebrate June. An otherwise strong month faded this week, but it still turned out OK.

June:

Total income: +18.1%
Total COGS: +16.6%
Payroll: +50.4%
Marketing: -6.3%
Net Income (Profit): -162.8%

 

Year to Date:

Total income: +4.1%
Total COGS: +5.3%
Payroll: +8.4%
Marketing: +13.8%
Net Income (Profit): -81.2%

Spinning the month: Income is up; that’s good. COGS rose by less than income; that’s good. Payroll – WTF? Marketing is down; that’s good. And the $149 drop in net income can be explained by that wacky payroll jump, which just means more money in my pocket now and less at the end of the year. Predictably, bird kites and lighted caps made the month.

Spinning the year: In January I threatened to give myself a raise if I made plan (+7.5%) as of June 30. Fortunately for my balance sheet, I didn’t. COGS is up more that income, which is bad; payroll is up more than income, which is good for me but bad for Curio City; marketing is way over budget, but I’m gradually whittling down my disastrous Facebook experiment. Net income is down thanks to all of the above items…but the $621 that it represents is recoverable.

Worries: Several of June’s larger sales compelled me to special order new merchandise or replace inventory ($600 for a six-month supply of mini briefcases especially stings). After breaking down and buying some long-delayed new products as well, I spent $800 more on product than I could afford. Payroll taxes are due again in July…during which Curio City is “closed” for a week. It is so easy to throw cash flow into crisis.

Now here’s that last Q&A session.

Q: You describe about the positives and negatives of starting your own business. I read in "The World is Flat" that our world is in Globalization 3.0, which is the ventures of being your own boss, and starting your own company. The fact is though, I understand the positive of being your own boss, but the negative of that nothing gets done unless you do it, but based on business, in your opinion what are your top 5 things that one must research and learn and becoming familiar with in knowledge and execution before or while starting their beginner stages of an online business?

A: Before you even get into the nuts and bolts of starting a company, answer some fundamental questions.

1. What is your objective? Are you trying to earn a modest living while working from your home during your own hours, or are you trying to build a big company and get rich? How much time and money are you willing and able to invest in that goal? Is a home business a stepping stone to a large business, an end in itself, or something you should avoid entirely?

2. What are you good at? What do you enjoy doing? Conversely, what are you bad at and what do you hate doing? What type of venture plays to your strengths and interests? Can you outsource or avoid your weaknesses, or achieve competence in them? Are you selling goods or service? What kind?

3. How much will it cost to do what you defined above? Include everything that you can think of, from software to packing supplies, and, when you have to guess, overestimate costs rather than underestimating them. Can you finance this yourself, or will you take out a loan? Is that going to be a bank loan or are you going to solicit investors? This is where you begin writing a business plan. You might need to join a trade association to get reliable numbers for your industry, or you might get lucky and find enough free information online. If you’re going to need outside money, you’ll need a formal business plan. Even if you’re going to self-finance, an informal business plan will eliminate surprises.

4. How much revenue does your business need to generate to cover these costs? How much can you reasonably expect? This is the other half of a business plan.

5. Is implementing your plan physically feasible? Do you have the space to set up a home office and store products? Do you have adequate transportation to haul boxes and supplies? Do you have a convenient shipping/receiving facility (like the UPS Store that I use)?

When you’ve addressed all the above, implementing them is just a matter of following a script.

Q: A lot of what you describe in your blog sounds great - being your own boss, not having to dress up, being responsible for your own time, etc. But you also write about the near constant work and lack of time off. How do you cope with that part? How do you draw the line and know when to quit for the night? I think that, if I owned my own business, I would work like a maniac, because if I don't work, I may go under. I'm truly not sure I'd be able to handle this kind of stress. I'm already the type who has a pretty high baseline stress level.

Also, what insights has running your own business led you to, with regard to business management and the economy? I'm just curious about things you learned that you didn't expect to learn, mistakes you made, and what you would do differently (or what you did right and wouldn't change!).

A: I hope I didn’t give you the impression that I’m a workaholic. My customers determine my workload. From Halloween through MLK Day I work 40+ hours a week. During the two weeks after Thanksgiving I’ll exceed 60 hours. During the summer doldrums, though, I might work as little as two hours a day. There’s just not much to do when you don’t have any orders to pack or money to spend. You can only spend so much time fiddling with your pay-per-click campaigns and looking for new products (that you can’t afford to buy anyway).
When it’s slow, it’s slow. Flogging yourself will not change that very much. I felt driven to work all the time when my business was new and I was flailing around, before I understood that disconnect between effort and results. Now I have more of a Zen attitude. Slow summer sales give me time for vegetable gardening.

I suspend my advertising and post “warehouse closed” notices on my News page and my front page for 10 days every July. That’s my vacation. I still check email every day during that week. I email anyone who places an order to make sure they know about the shipping delay. If a product sells out, I remove it from display. That might take as little as 15 minutes a day…but I do at least check in 365 days a year, and I can’t imagine that ever changing.

Insights? Sorry, but that bears more thought than I can give it right now. It’s a good idea for a future blog post. If you should happen to become a reader, you’ll probably see that topic come up in the next few weeks.

 
Q: As you stated in your lecture, you have a strong aversion towards marketing. I found this interesting because as your own boss/employee it is up to you and you alone to market your business. With such a high level of competition in the online market with more and more people starting their own online businesses, do you believe marketing is going to become an increasingly more imperative part of your business strategy? If so how do you plan to "get over the hump" so to speak between finding a balance between your own ability to market your business and having to outsource marketing efforts to others?

A: I wish I knew the answer to that. Last year I invested some money in two Facebook ad campaigns with poor results. In case my amateurism was at fault, I paid a marketing company to manage a FB campaign this spring with disastrous results ($350 spent did not yield one single sale). I spent $750 on these efforts that proved beyond any doubt that FB advertising is a complete waste of money…which I already suspected before conducting the experiments. 

I haven’t figured out how to monetize my free FB page. Being an asocial person by nature probably doesn’t help; I only post when I actually have substantial information – new product announcements, coupon codes, etc. It seems to be a complete waste of time, but at least it doesn’t take very much time.

Twitter baffles me completely.

Two areas that I might be able to affect are Random Acts of Media and B2B sales. I had another Random Act of Media just last night: After selling exactly one Doomed Crystal Skull shotglass (no link because it’s sold out) last Christmas, I sold the remaining 11 pieces within an hour. Somebody somewhere must have blogged about it. The demand will be history by the time I can restock that item. Random Acts of Media strike without warning and blow over very quickly. Trying to get products reviewed and linked in blogs and gift guides is something I’ve tried, haltingly and unsuccessfully, but haven’t given up on.

I get several B2B sales each year, too. It’s not unheard-of for someone to drop $1,000 on Panther Vision caps or $800 on bird kites or $600 on golf balls for a tournament. Being approached by a company or a tournament organizer is another random event that I might be able to encourage. The drawback is that large customers expect discounts. Given my cost structure, I would be in trouble if a major share of my business was discounted by 20%. But it’s something else that I can explore.

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Speaking of marketing…I have a new reason to hate Google! I’ve been uploading a monthly product feed to Google Base for years. A year or so ago they renamed it Google Product Search and required UPC codes for all of my products. Entering those was tedious and pointless work, and at least a third of my products don’t use UPCs at all. Last December Google threatened to suspend me over this. I appealed and won. Since then, I’ve been slowly adding UPCs wherever I can.

Well, now Google Product Search is going to become Google Shopping. Google wants me to create ads, managed through my AdWords account, for all the products in my feed. Worst of all: “bid is one factor in how products will be ranked on Google Shopping.” Yup, it’s going to be another pay-per-click medium, with the transition beginning in July. I’ve been avoiding looking into details. So far I only know that it will be complicated, expensive, and lucrative…for Google.

Google Base/Product Search only ever brought a few clicks a day, and I don’t know if any of those ever converted to sales. I probably wouldn’t notice a difference if I just dropped it completely. Should I consider this a new advertising opportunity or an expensive new chore? Google’s bribing people with a $100 Adwords credit and a 10% discount on clicks through the end of the year. I’ll probably try advertising a few products (ones that have UPCs!)…but I won’t be happy about it.

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Speaking even more of marketing…based on this Internet Retailer article, I logged onto Pinterest to see if anybody had ever pinned any of my products to their boards – and discovered, much to my surprise, 23 pins and re-pins! I had no idea. Now I need to figure out if I can capitalize on this. Pinterest users seem to be my demographic (older women, mainly) and the focus is on products and shopping. I got my invitation to join Pinterest yesterday.

E-Commerce for Dummies Part 2 Q&A

…In which I just “phone it in” for another week. During the high summer I'm just too busy with real life to do more than caretaker work for Curio City.

These questions refer to this post.

Q: Based on how the dollar is broken up within an e-business. What is the most vital mistake one can make, in regards to finances when starting an e-business? What were the obstacles that you encountered when you first started up Curio City? How did you dissect the issues and find solutions?

A: The biggest danger is to overextend yourself based on optimistic projections. It’s tempting to spend as much as you can afford on as many products as possible in the belief that you’ll turn them over before the bills come due. But it takes time for a new business to attain its expected turn rate. (Turn rate = the number of times in a year that your inventory turns over: If $20,000 worth of stock produces $60,000 in sales, your turn rate is three…which, btw, is at the low end of acceptable.) If you don’t attain the turns that you expect, you’ll tie up inventory dollars in merchandise that’s just trickling out. I’ve said before that cash flow is the lifeblood of a business. Think of your inventory as a pile of frozen cash. Eighty percent of your sales are going to come from 20% of your merchandise, and only experience will teach you which products are in that magic 20%. Until you learn, don’t push your budget to the edge. Keep a cash cushion.

On a closely related note, don’t think that if you build it, they will come. Have a marketing plan in place before you turn your cash into inventory and infrastructure. Marketing is one area where you do want to max out your budget, and your budget needs to be bigger than you would probably like it to be (I initially planned to spend 5% on advertising). Undervaluing marketing was my single biggest mistake.

Finally, don’t count on drawing a reliable paycheck from your new business right away. You might have to skip a check now and then to pay the bills. Start your payroll budget as low as you can get away with and raise it as you gain experience and confidence. (Obviously, that’s hard to do if you have employees.) Have some personal savings or a spouse’s income that you can fall back upon.

Obstacles? Getting noticed! Having awesome products at great prices gets you nowhere if nobody knows about them. Yup, marketing again. The solution, inasmuch as I ever found one, was to read up on basic principles of pay-per-click advertising and search engine optimization. Today, social media marketing might play an equal role.

Q: How do you manage to sustain your profit margin? Which are the strategies to increase profit margin in spite of increasing operating and other costs?

A: Buy low and sell high. :) Seriously, you want to mark your products up to the highest price the marketplace will accept, and reduce your controllable costs as much as possible.

Look for products with better markups than keystone, because you’re going to end up taking a loss on some portion of your inventory. My overall margin is 50.5%. Most of my bestsellers deliver higher margins. The Mini-Briefcase is marked up 53% and the optional gift bag that you can get with it carries a 64% markup. Panther Vision cap margins range from 49-55%, and the optional batteries that one can add are marked up 66% (wholesale batteries are ridiculously cheap, btw; profits are high in the battery business). The 80% of my stock that sells slowly (or not at all) brings the average down as I discount it to clear it out. Keeping that average markup above keystone is mostly about wise product selection and appealing presentation. You can sometimes gain a couple of extra margin points by taking advantage of special offers from vendors, buying closeout merchandise, etc.

Many of my costs are scalable – they rise and fall with sales. Payment processing is a percentage of sales. So is payroll (as long as you’re the only employee, that is; hired help won’t regard their paychecks as flexible). Advertising doesn’t scale, but it’s at least partially controllable. I try not to spend more than 50% of net sales on merchandise each month, which is a very crude and simple way of calculating an open-to-buy budget. Finally, almost everything that I spend goes on two credit cards – an Amex for operating expenses and a Mastercard for inventory. I am fanatical about paying them both off in full every month, but in a cash flow emergency I would be able to carry a balance, effectively writing myself a high-interest loan. Of course, credit card interest would quickly eat into my already thin profit margin, so that’s a last resort.

Q: I've got a few questions on this lecture, one of which is just a point of clarification: You write that $0.23 goes to you and to taxes, and that $0.04 goes to profit. Does that mean that the $0.23 is your salary (in a sense), and that that is the money you earn to pay yourself for your labor, and then the profit is gravy?

The other question: I know you decided to bootstrap the business, but would you ever consider using credit to expand the business? I ask because I was told in a financial management class that credit is the lifeblood of growth. That said, some very successful companies have bootstrapped themselves (CSN stores, for example). Why or why not? How do you see the future of your business?

Also, how long did it take you to become profitable? What were some of the early impediments to profitability?

A: $0.20 is my salary and $0.03 is payroll tax. Profit is indeed gravy – whatever’s left after all expenses are paid. Assuming that there is a profit, Kraken Enterprises pays me a nice Christmas bonus at the end of the year, as the law stipulates that S Corporations must do. Incidentally, corporate profit distributions are not subject to payroll taxes (although they are taxed as ordinary income – it’s not a Romney-scale tax dodge). From a tax perspective, it would make sense to minimize my paychecks to plump up that end-of-year bonus. But the IRS stipulates that corporate officers must take a “reasonable” salary. Guess who decides what’s reasonable?

Being extremely debt-averse, I would only use credit if I was certain that the investment would yield more than enough new income to cover the debt. I’d also have to make sure that I wasn’t personally liable for my business’s debt – business credit cards require personal indemnification, and banks require collateral. People think that being a corporation insulates you from personal liability, but that’s not quite true.

Credit is certainly crucial if you want to hang out with the big dogs. That’s never been my objective for Kraken Enterprises. I want it to provide me with a reliable living until I retire, and then be attractive enough to sell. It needs to double its current size to do that – challenging, yes, but not high finance.
I recently identified $15,000 worth of improvements that might kickstart double-digit growth again and I have not completely ruled out borrowing that much. But, like everyone else, I’d like more confidence that the economy’s not headed back into the crapper before I roll the dice. 

It took two years to show my first profit. The chief impediment was my own cluelessness about online retailing in general and the direction of Curio City in particular. 

Q: I was intrigued by the link in the first section of your lecture regarding rejecting becoming an Amazon seller. The link unfortunately didn't lead to a post so I was unable to further research that particular topic. I'm curious as to why you rejected becoming an Amazon seller and if it had anything to do with the amount of money it would take off your profitability. The organization I work for recently became an Amazon seller in order to expand their offerings through the Amazon Marketplace. So far it has paid off really well for us. We are a much larger corporation than Curio City and have the capital to take on the added costs associated with becoming an Amazon seller but I can see how this could be a risky move for a smaller, personally run business like yours. Could you expand some more on your choice here?

A: Sorry for the bad link. Here’s the first time I rejected the idea, and here’s the second.  Bonus: Internet Retailer magazine’s take on it.

E-Commerce for Dummies Part 1 Q&A

Did you miss me last week? No, I did not fall to the zombie apocalypse. I was busy answering student questions about my “E-Commerce for Dummies” e-lecture. Justice demands that I milk that work for my next few posts. Regular readers will notice that I’m covering a lot of old ground, but perhaps from a different perspective.

Here are the student questions and my answers from Part 1. 

Q: The utilization of dropshippers seemed to hinder a start up's will to carry what they want, their quality control, and all of their revenue. Toward's the end of your discussion, on how investing several thousands of dollars and your own personal space is much more plausible and efficient then using dropshippers, you mentioned your "strategies for kicking it out". Could you expand on those strategies, and what exactly you mean by kicking it out? Are you referring to the hopes of producing so much inventory that eventually you would have to find warehouse space?

A: The short answer is that there are physical limits to how much inventory I can store and how many orders I can process and ship. At some point, it will outgrow my house. The seasonal nature of retail means that I only approach my limits about eight weeks out of the year, making it hard to justify the expense of outsourcing fulfillment during the 44 slow weeks. My posts “Kicking It Out” and “The Zombie Store” go into a lot more detail, but I’ve grappled with this is a topic many times over the years. 

Q: You have mentioned that rent, loan, payments and payroll consume all the revenue in brick-and-mortar stores. It is true that brick-and-mortar stores don't make money compared to online business. Could you please tell me that what were the challenges you faced in the initial stages of your online business and in how many years did you break-even and how did you manage to do it?

A: You might have noticed that most online shops are very specialized, and there’s a reason for that: It’s easier to market a specific product or category to a narrow audience. As a matter of fact, one of the possible futures for Kraken Enterprises that I ultimately rejected (Tentacles of the Kraken) involved setting up a series of highly specialized stores, rather than one general store. But I wanted Curio City to be a general-interest shop, so figuring out who my customers are and what they’ll buy was a huge challenge. My wife had one idea (“nice things”) and I had a different idea (“high-end toys for adults”.) Neither of those individual approaches ever really found an audience and trying to mash them up didn’t work at all. After years of trial and error I figured out that the ideal Curio City product has some of the following characteristics: Unusual or clever, useful, easy to understand, fun or funny, modestly priced, good quality, lightweight, and easy to ship. Panther Visionlighted caps meet all of those criteria to some degree…and it’s no coincidence that they’ve been my #1 product for years.

I opened for business in October 2005 and my first profitable year was 2007. Homing in on successful products and mastering Google AdWords, while controlling expenses carefully, was what tipped the balance. 

 

One specific challenge that comes to mind was finding an affordable, reliable web developer who would implement and customize my shopping cart, and who would be available on short notice for troubleshooting when I needed him. After I finally found such a person, he quit after two years, and I had to start that search all over again. 

Finding a reliable web host was harder than you might think, too. Curio City is currently on its fourth host. Fortunately this one (MDD Hosting) is awesome. The earlier ones? Not so much.

Q: This may be a really basic question, but I have experience only in the non-profit world, so I don't know a whole lot about the nuts and bolts of a small business.

How do you find suppliers, both ones that drop-ship and ones that don't? Do you just decide what you want to sell, and Google "[widget] manufacturers?" How does the pricing work? Do you get to negotiate prices with them, or do they set firm prices? How do you find out about new products?

A: Initially, I just googled “gift wholesalers” and some related terms. Since 90% of everything is crap, that involved a LOT of shopping. Almost all of those early products were duds, but a few are still with me today (you can tell them by their low SKU numbers). Bird kites (the Canada Goose is SKU 1) gradually developed into one of my top lines. I’ve sold nearly 1,000 Mini Briefcases  (SKU 16, the only survivor of a larger selection of business card holders). Basically, I started with a wide array of product types aimed at the demographic that I thought would become my customer, then looked for things that were similar to the most successful ones. 

Pricing is fixed unless you’re a very large customer. When trying new products, I generally order the minimum six or eight or 12 pieces. Before deciding to carry it, I check to see how many other stores are carrying it and whether it’s selling for “full price” (meaning double its cost). If there’s a ton of competition and they’re discounting, I’ll pass. 

Two of my best products – Panther Vision caps and Whisky Stones – were recommended to me by friends. Not being much of a consumer myself, I pay attention to what my online friends are interested in.

Every spring I endure the Boston Gift Show, or Cavalcade of Crap, where I sift through the tons of mass-market kitsch that fill your typical tourist gift shop. Novelty golf balls and Switchables night lights both came from the Gift Show. So did Pursehooks, which were a huge seller for about a year. 

Sometimes I find decent stuff in trade publications like Web Wholesaler. That’s where keyboard stickers came from. 

Of course, once you have some history with particular vendors, you can simply browse their new catalogs twice a year. 

The world is awash in merchandise. Affording it is a much bigger challenge than finding it.

Q: After reading your first lecture I decided to do some further exploration of your website to get a better understanding of your inventory. Being such a non-specific e-tailer how do you choose the products you list? Do you research online retail trends for "gift" type items in order to see what consumers are purchasing or are your inventory decisions more based on profit margin and supply availability. Being so non-specific must lead to a lot of risk in bringing in inventory that you are not certain will sell. I imagine this is another reason why maintaining your own inventory is the most feasible option rather than relying on drop shippers.

A: I just look for products that fit Curio City’s profile of being useful, reasonably priced, high quality, good value, and (above all) unusual and/or fun, and if the pricing measures up I order the minimum allowable quantity to test it. What gets it in the door, though, is my hunch that I can sell six or eight or a dozen of them. 

After you get some experience and history, new products become a better gamble. But the truism that 80% of your sales come from 20% of your products always seems to hold up, so even though I’m always trying to zero in on the magic 20%, I know that most of my bets will dribble out slowly, never to be reordered, and I’ll have to mark many of them down to cost (or even lower) just to liberate the inventory dollars.

May Flowers

May was already blooming nicely before a bulk order for Dove kites kicked it into overdrive. Just look at these rosy numbers:

May:

Total income: +30.5%
Total COGS: +22.1%
Payroll: -21%
Marketing: +2.1%
Net Income (Profit): +368.9%

 
Year to Date: 

Total income: +0.8%
Total COGS: +2.6%
Payroll: +2.3%
Marketing: +17.4%
Net Income (Profit): -98.2%

For the month, sales rose more than COGS did. That’s good. Marketing costs barely rose at all. That’s also good. I made up substantial ground on the bottom line. That’s very very good. The drop in payroll is just a calendar quirk. 
 
For the year, COGS is up more than sales; that’s bad. Payroll is also up; that’s bad for Curio City but good for me. My failed Facebook experiment accounts for most of the marketing overrun, and that overrun accounts for much of the bottom line deficit. That’s been whittled down to $660; a lot of money, yes, but still possible to make up. Quickbooks says the top line is a scant $195 ahead of LY; Excel reports a slightly rosier $450 edge.

Facebook's tumbling stock price reins in my compulsion to curse them for ruining my bottom line. I'm not the only one losing money on that company. Curio City will never be worth billions of dollars, but it will probably survive longer than Facebook will. 

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For years I dreaded what would happen when Panther Vision lighted cap sales inevitably dropped off. That’s happening now. They’re still a major product line, but they’re no longer my only engine. Fortunately, bird kites and golf balls have soared enough to plug the gap. The seasonal nature of those lines worries me, but maybe the caps will come roaring back in the fall. And there’s always a chance that Switchables (which are going through another one of their dormant stages) will surge again, too.

Without seeing Panther’s sales numbers, I can’t tell if the decline in lighted caps is my problem or theirs. There are an awful lot of competitors selling them now; that would be my problem. At the same time, endless design changes have complicated the line so much that it’s become confusing to sell, let alone to shop; that would be Panther’s problem. You've got your basic 4-LED solid caps, your 4-LED camo caps with and without color accents, your 4-LED Runner's caps, your 6-LED caps (some of them with the old 4-2 arrangement and some with the new 3-3, some with green lights and some with red), your 2-LED promotional line (which I don't carry), and a new power switch being phased in across the lineup. I know that the marketplace compels manufacturers to constantly innovate, but life was easier and sales were better when all they made was the basic 2-LED cap in half a dozen colors.