Picture a fresh-faced entrepreneur breaking into the world of business for the first time and you might imagine them as being inspired by their personal interests or hobbies, and motivated by their passions. The custom car enthusiast opens a tuning garage. The footwear freak starts selling shoes on Ebay, the horse lover opens an online store selling riding accessories. By far the most popular advice that I hear when people ask “What business should I start?”, is a resounding “Identify your true passion in life”. The internet is currently bumper-to-bumper with courses and self-help packs designed to get you in touch with your inner passions with a view to making a business out of them.
Of course, it would be cynical to argue with that. There’s no doubt that doing something you love is part of the recipe for success. You’re much more likely to stick at it, work harder, and give more of yourself. But being passionate about what you sell is not an instant ticket to profit. In fact, it may not even be the most important factor. How many people do you think start business selling a product they are incredibly close to and passionate about, only to find that there’s actually no market for it, or worse still, the logistics of selling it are a complete nightmare. By the large number of startups that bite the dust each year, I’m willing to bet that it’s a lot.
There is another way – it’s much less sexy than following your dreams and I doubt very many people would be turned on by it – but it might just produce better results. I’m talking about bottom-up business design.
For the reasons just discussed, it’s highly likely that most small businesses selling a physical product start off as a dream in someone’s head. Some would-be entrepreneurs probably dive right in, without studying the demand or the practicalities of selling their particular product. Others, inspired perhaps by their studies, or experience in the commercial world, might undertake a feasibility study or do some market research, and then may or may not choose to proceed. This idea-based approach to starting a new venture might be termed top-down business design – the product or idea starts it all off, the rest just follows (or doesn’t).
So how do you do this backwards? Easy – start with all the crap and work your way up to the product. Let’s say you wanted to start selling widgets, and I’m going to assume, if you’re reading this, that you’re going to want to do it online (if you want to open a shop, you’re in the wrong place – try www.dinosaurbusinesses.com for help). What would the be ideal characteristics of the widget you are going to sell? I’m not talking about what interests you, or what you have experience in (that’s top-down). I’m talking about the essential and defining characteristics of a widget that would make a good, if not great, internet retail business. From my experience in selling what is probably the worst product to retail over the net (food), as well as talking to others who sell less than ideal merchandise, I’m going to suggest a few pointers.
Realistically, you’re never going to be able to fulfil all of these conditions – consider them a checklist for the absolute holy grail of internet retailable products. The closer you can get, the better.
It’s something people are actively searching for
The web is bursting at the seams with online retailers and they’re all vying for a piece of your eye-time. That means tons of dancing, flashing ads wherever you look on the net. If what you are selling is the type of product that depends on browsers, the kind of thing people buy on an impulse or the sort of article people don’t know even exists, you’re going to struggle more than those selling stuff that people are actively searching out. Those buyers go to Google and type in ‘Buy Widget’. Sellers of such widgets set up AdWords campaigns with the keyword ‘Buy Widget’. They spend a bit, but are instantly visible to everyone in the market for a widget. Easy.
It’s something techy
I don’t have the stats to prove it, but I’m sure that technologically savvy buyers are more likely, by an order of magnitude, to search for something on the web than tech cavemen. I’ve got to admit though, that this is fast changing in countries who are already used to buying online – a Google UK search for ‘Knitting Supplies’ would appear to prove that point.
It’s something that appeals to under 40s
On the same note, internet users are, on average, young. That’s not me being ageist. It’s just the way it is. Again, it’s probably changing quickly in lots of countries. Here in Spain, where I live, I barely know anyone who would buy something over the internet, let alone anyone over the age of 30.
It’s something mid-priced
Really cheap stuff, like products in the £1-£5 range, has a very unattractive price-to-postage cost ratio, especially if it’s not really small and light (see below). You probably don’t want to pay £3 postage and packaging for something that only costs £1.99. Bundling together such small, cheap products into packs could provide a solution, but in general I’d say you don’t want to depend on products in that price range. Of course, unless they have a huge margin, you also have to sell thousands of them to make any money. On the flipside, really expensive products, like high-end jewellery, or perhaps cars, will usually have to be physically viewed by customers before they decide on a purchase, so they don’t make for the best e-commerce items. For me, over the last 5 years, the average transaction value has been about £25, and the top end of the range is a little over £120. We don’t sell any single item priced more than about £80. I get the feeling we’re in quite a good price bracket.
Something with a high price-to-weight ratio
On a similar note, If you’re going to be doing logistics like 99% of internet retailers, you’re going to be using a courier and that means weight-based billing for shipping. The more something weighs, the more it’s going to cost you to send to your customer. That might not be a huge problem if it’s a high value item, but for cheap products, you’re going to have the same problem – the price of P&P is not going to be attractive compared to the price of the item. Believe me, customers hate paying for delivery at the best of times – they’re not going to be happy about £5.99 to deliver a bottle of mineral water.
The same advice applies to bulky or funny shaped objects – you’ll pay more to ship them, and unless you can recuperate that in the price, it’s a no-goer.
It’s something not fragile
Fragile products mean one of two things, but probably both: either extremely high packaging costs (which are constantly rising, by the way), and/or lots of breakages.
Breakages are the bane of any e-commerce operation – the costs implied are unimaginably high. Firstly, the customer unavoidably gets a bad impression of you (although it wasn’t your fault). Then there’s the cost of the replacement stock, to which you’ll have to add another shipping cost (because you can’t charge the customer shipping for replacing a breakage). Finally, administrating customer complaints due to breakages and suchlike can become a full time job for someone if the problem is bad enough.
I recently had a customer who was going out of her mind because of breakages. They had entered a product into one of these group buying offers – the margins were extremely tight and they had calculated costs to the penny. Unfortunately, the courier was smashing all the little jars of olives, which meant a tonne of losses and then the need to invest in much more expensive packaging, effectively wiping out her margins and then some.
For me, a fragile product would be a non-starter.
It’s something not normally prone to failure
In the tight-margin world of e-commerce, anything that causes the need for administrative intervention is going to cost you more than you can afford – and product returns will do just that. Not only are you going to be paying collection costs, re-shipping costs and possibly replacement stock costs (if you can’t recoup them from the supplier for some reason), but managing the whole returns and complaints procedure can become a black hole for your company’s cash.
It’s something uncomplicated
This is related to the above, because if it’s highly complicated, then it’s highly likely to fail at some point, even if it’s the fault of the buyer in some way (which they are not going to ever tell you, of course). If your product comes in 250 pieces and needs to be built by the customer, imagine the aggravation because of missing parts and problems caused by sub-standard installation and usage. More importantly, the more complicated and harder to use a product, the more requests for support you’re going to get and the more resources you’re going to have to devote to supporting the product. Computers are complicated, so big computer companies have to hire armies of support staff just to avoid rampaging customers who are unable to identify the power button. Do you have the resources to hire such an army? Wouldn’t you rather sell wooden blocks? Or shampoo?
It’s something that won’t devalue (too much) with time
If you’re planning on holding stock, products that expire quickly are likely to do serious damage to your bottom line for obvious reasons. If you can’t sell it on time, you’ll end up just giving it away. This can be especially painful at the start, when volumes are low, or when launching a new product into the market. Until you build up enough momentum behind a product, you might not be able to shift batches before they are obsolete. The most obvious example of this is food, but nearly everything has a ‘shelf-life’ (think gadgets, or fashionable clothes).
It’s something one-size-fits-all
I have a lot of contacts working in fashion e-commerce. They are almost universally unable to comprehend how their employers are still in business. They tell me the returns rate is huge – up to 75%. People see a shirt they like and they order one in every colour and in two or even three sizes, only ever intending to keep one. The amount of customer service and logistics overhead this produces is enormous (and tells you something about the margins some fashion retailers work with). Clothes are inherently problematic – what works for you might not work for me, and it is practically impossible to represent those variables (i.e., size) online. If customers are not able to immediately identify whether the product you are selling will ‘fit’ them, the result is likely to be an administrative disaster and a high returns rate. Food is pretty bad for this too – people complain that the sausage you sold them doesn’t taste the same as the sausage they tried in Spain. Luckily, customers tend to understand that food is non-returnable, so it’s not a problem. Subjectivity in e-commerce sucks – try to eliminate it.
It’s something exclusive
So, by now I can hear you all screaming at me – “Well done smarty, if there’s a product like that, everyone’s going to want to sell it!” Of course, you’re right. But not everyone will be able to sell it. You must identify other barriers to entry that stop the market getting flooded – perhaps you invented it, perhaps it’s manufactured abroad and you can get an exclusive import deal, perhaps you need a special licence to sell it, perhaps it’s new and you can get a first-in advantage. If it’s not exclusive to you, or somewhere close, you’re likely to drown in the competitive waters of today’s net.
OK, so please don’t come at me with a million examples of businesses that break all these conditions and are surviving nicely. I don’t doubt they exist. Hell, I even run one myself. I’m not saying that you can’t make a success out of selling products that are cheap, heavy, fragile and complicated. If you can make a big enough margin then you probably can. You might argue that in the free market, the price of products will adjust to take into account these complexities and that this higher price will reflect the skill and added value provided by a retailer who attempts to sell them. After all, if you’re not adding value, what are you doing? Just selling shampoo (my idea, I thought of it first).
Go ahead. Give it a try. Just don’t blame me if you go bald in the process. I’m not joking, sometimes selling food online turns me into a raving psychopath.