Just recently, Nick wrote an article examining 3 reasons why e-commerce stores fail. Nick writes from experience — he is a longtime seller and runs his own profitable store — and he puts forward some really good points.
In the beginning of the article, Nick cites a crazy statistic: “e-commerce in particular is even more daunting – 65% of businesses fail in the first 18 months and 90% in the first 5 years!”
This is indeed a really depressing stat – but there are ways we can try to tip our favor in the direction of the last 10%!
I had planned to write a post on some of the “keys to success” of running an online store, so what better way to do that than build on the great content he has already written. I’ll take every problem he has put forward and examine the flip side. Let’s look at why e-commerce stores succeed.
Problem #1: Low profits
Low profits are the cardinal reason most stores fail. Especially if you drop-ship your products, you are looking at profit margins of 20-30% of less than fulfilling orders yourself. And these are gross margins, before you factor in all of your other costs.
Another cause for low profits is price war effect of competition. On the internet, everyone tries to beat each other on price. This will only result in everyone slashing their prices to such an extent that nobody can sell them anymore. You can actually destroy an entire product line this way.
The solution to this is pretty simple. Nick suggests negotiating better prices with suppliers, using cheaper shipping, and moving to a cheaper area of town for your offices. These suggestions are spot on, and fall under the category of “managing expenses.”
When you launch a store, you MUST bootstrap it. There’s no other way. If you spend $5000 on a design, $3000 on a marketing firm, and who knows what else right from the get-go, you are asking for trouble. Always make sure your expenses are as low as possible.
This does not mean be cheap, but just spend smart. Stores can still grow and flourish without flashy designs (although this sometimes helps), and you are better off with a cash cushion when you start out.
Another way to beat low profits problem is to play the numbers game (this has become my favorite phrase, it seems!). For an example of how effective this can be, look at Andrew Youderian. Andrew is publicly selling his online store, TrollingMotors.net, and in the post announcing the sale, he has put up some interesting financials. My own store is in a similar niche to Andrew’s and I also have really low margins – so it’s interesting to see how he has done.
On his balance sheet, Andrew shows that his margins are about 10% (which is really low), but in 2013, he is set to make about $60,000 in net profits. If you see his total sales of $600,000, $60,000 is not much, but considering he has drop-shipped the whole thing and manages to do this in only 2-3 hours of work per day, that’s pretty good!
Problem #2: No growth
Growth is a huge issue when it comes to store survival. The only way the example above for surviving on low profit margins can work is if your store continually grows.
In this situation, your profitability is completely dependant upon your growth. E-commerce startups like you and me need to “growth hack” to grow organically and economically. For more information on growth hacking, I’d suggest you check out Neil Patel’s excellent guide.
Here are some core metrics you need to concentrate on to make sure your e-commerce business is growing:
- Traffic – The more people you can get to your site, the more potential customers you have. Make sure that your traffic is qualified! You can buy 10,000 visits, but if none of them care about what you sell, it’s wasted cash.
Qualified traffic includes paid traffic, organic search, social media, referrals from other websites, and direct traffic from word of mouth.
Although you could technically make a lot of sales from a finite amount of traffic by selling the same customers new products, not all business models will fit this. So this brings us to the next point:
- New products (or a new spin) – Somewhere out there a seller is more than likely offering the same product as you. The chances of being the exclusive source for an already existing product are slim. Unless you make your own products, you need to put a creative spin on how you sell your products, and you need to keep changing that around, too.
This will keep your website fresh both in the eyes of your customers and the eyes of search engines, which means more engagement and more traffic.
- Conversion – You can have all the traffic in the world, but if none of them convert and buy, there’s no point to it all. Make sure you keep optimizing your website for conversions – you can do this by studying analytics, A/B testing, and watching your customers interact with your website.
- Raving customers – There’s no better referral than a happy customer gushing about you to friends and colleagues. Make sure your customer experience is nothing short of brilliant, and you are on track for solid growth.
As long as these four metrics are on the up for you, you are on track for good growth.
Problem #3: Competition
This is tricky – it’s not practical to compete with the likes of Amazon and Walmart alone on what they offer best – which is cheap prices and fast shipping. You need to make yourself stand out from the rest.
In a world dominated by big box stores, you still see the small boutiques on Main St. that flourish. Why is that so? Because boutique stores have their own charm – they are fun to shop in, and the store owners are the kinds of people that you know on a first name basis, trust for insights and trends, and show pictures of your pets.
Be the online boutique – don’t try to be the big box store.
Finally, and perhaps most importantly, be persistent. Be in it for the long run. You can’t expect to make millions in 3 months, contrary to what some people may promise you. It’s a business, and if you work hard, keep at it, and keep at it a little more, you can do really well for yourself.