Six reasons NOT to try to be an online retailer
The internet retailing landscape has changed dramatically over the past eight years. In a summary, it used to be very easy but now it is hard and getting harder every year. The gold rush is over, and if you are someone without much money or business experience that thinks you can build a reasonably profitable ecommerce site, you are fooling yourself.
I am about to become very unpopular with the consultant types out there but here is a simple truth as I see it… This is no time to be starting an ecommerce business unless you have a way to address the six issues below.
1) Startup costs for online retail now exceed startup costs for offline retail.
In 1999, I started my first business for $1000, but it would be almost impossible for that to happen today. Online shoppers require a level of expertise in 2007 that is very expensive–a high quality ecommerce site simply cannot be developed at a low cost (unless you do it yourself). I recently did a cost analysis to determine if our company should venture into brick and mortar and learned that starting a brick and mortar shop was quite inexpensive compared the cost to build a quality website. Yes, I know you can put up an ecommerce site for as little as a few hundred dollars, but you are fooling yourself if you think you will be successful with it.
2) It takes far more knowledge to compete online than it used to.
I will be the first to admit that if I were starting online in 2007, I strongly doubt that I would achieved the same level of success. You have to know an incredible amount about ecommerce to be successful today. I wish I could recommend good sources of information for startups, but I don’t know of many. The highly successful internet retailers have no reason to share their secrets and as a result, much of what you read from the “experts” is outdated, regurgitated, erroneous rubbish. I would say that you can learn the very basics of ecommerce from those sources but not much more than that.
3) SEO is becoming more out of reach for small companies.
This realization is something that is becoming very clear to me. Search engine optimization is becoming more expensive to do and will become more and more dominated by large companies rather than small ones. If you look at if from Google’s prospective, that makes perfect sense. Let’s take my industry of health supplements for example. Do you think Google wants to show listings for vitamins from the largest companies on its front page or the overpriced offerings from some insignificant MLM distributor? In the past, you might have seen an MLM distributor on the front page but not in the future.
4) No paid advertising options are lucrative for small companies.
I know some people will disagree with me here, but I honestly believe this. We have tried numerous advertising opportunities and as expensive as Yahoo and Adwords are, they are the only places that we pay for advertising that are even close to profitable (they are profitable only on a small set of our target list of keywords). However, in spite of the enormous losses that most companies take in CPC campaigns, there is evidence that per-click costs are actually rising.
5) Inventory costs are climbing.
There were days when drop shipping or maintaining low levels of inventory worked quite well, but not so much now. Price competition has decimated the drop shipping model except for large companies that have the volume to negotiate attractive pricing. If you ever flip through a wholesale distributor catalog and compare the “wholesale” prices to the street prices on the web, you will be in for a shock–quite often, the street price will be lower. While this issue is not problem for established businesses, it can be a barrier for startups who are cash poor.
6) The trends indicate that startup conditions will get worse rather than better.
For each of the five items above, I have watched the situation worsen for startups over the past few years. I believe that for the next few years, that will continue to be the case. In fact, I see a possibility for a turnaround only on #4. I have been predicting that CPC costs (and other paid advertising costs) will eventually begin to fall as the startups fail and the growth of new startups lessens.
It is also important to understand that total ecommerce growth is slowing–currently at 20%, but a far cry from what it was a few years ago. This brings more pressure to the marketplace and puts startups in the position of having to steal customers from established companies rather than just capitalizing on the growth in the industry.
All this being said, there are ways for startups to succeed, and there is hope. I will be discussing my thoughts on advice for startups in a post next week.