Posted August 24, 2007 2:11 pm by with 31 comments

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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internet retailers have no reason to share their secrets and as a result, much of what you read from the “experts” is outdated, regurgitated, erroneous rubbish.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.

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  • I disagree with most of this, mainly because success is relative (saying you can’t be successful with a few hundred dollar e-commerce site is ridiculous – yeah, you probably won’t make a million dollars, but make a profit? Or provide yourself with a healthy extra income? Certainly possible and considered a success for a lot of people.)

    Plus, I agree with Seth Godin: today’s Web is primed with niche opportunities. You just need to be able to recognize them and move a LOT faster than you did even a few years ago.

    Not to mention there are a ton of resources out there for internet marketing, small businesses, SEM, etc. etc. (SEOMoz, this site, Godin, the list goes on…) A LOT more than even a couple years ago. There’s just no golden guide in one location that provides all the answers. But that is the beauty of blogs, websites and linking – the answer to your question/problem may only be a click away.

  • Jason, perhaps you’re right. If you consider success a few hundred dollars a month, you can probably still do that in today’s online marketplace without spending a fortune or even knowing too much. But isn’t that setting the bar a little low?

  • I disagree with the majority of this article as well! The great thing about internet businesses is the small guys CAN compete with the big stores. That’s the whole point. Obviously good prices, fast shipping, quality service, phone support are a key point but a small business doesn’t have the huge overhead that a large business does and they care about their business way more than any big retailer ever can. Focus on some key products and be niche businesses more so than an all in one vitamin shop (as your example talked about).

    Walmart, for example, has stated that the best way for a small business to compete with Walmart is to be a small business. Let Walmart carry the big items and the every day items and let the small business offer it’s niche of products. That’s why so many niche stores pop up around a Walmart. It’s the same online. The big etailers don’t zero in on individual markets as much as a new business or small business can.

    Yes the keyword vitamin isn’t the best bet for a new MLM guy but with all the free sem resources online, inexpensive “start-up” site options, shipping solutions etc. if you have a great product, service or business idea it’s always better to pitch it to the world with EFFECTIVE, CALCULATED online marketing then by sending out newspaper ads and trying to make it on Main Street in your home town. Plus you can start it from your basement, start small and grow as sales dictate, set up voip or GrandCentral type phone solution – answering the phone yourself for a while, gradually add products without worrying about rent, employees, filling up a store, local business regulations etc.

    All you need is a website that makes buying secure and simple, a local post office to ship from and a product that allows you to make a profit. I’ve started many successful (profitable small businesses that continue to run in competitive industries) on less than $200 each. I’ve learned to make a website that sells to consumers not a site that wows the web designers. Their are also plenty of companies that will help (like ours small businesses market online for a few hundred bucks a month.

    Search engines want quality sites that give users quality results. Niche sites dominate searches all over the board and with blogging, personalization and local search becoming better and better it’s opening up doors to small business opportunities all over the place.

    Very interesting perspective but I disagree.

  • @Greg – I meant a site that cost a few hundred dollars, since that is the example you used in your post. Should have been more clear, sorry!

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  • Yes you’re right, it’s going to be harder.

    But, since 8 years,
    – there are now 1 billion people on the Web,
    – they each spend more and more time there,
    – payment methods are working (Credit card but Paypal, CheckOut, Amazon..)
    – costs for a first online market (and webhosting, etc.) are really reduced.

    We know that people use to read/view content and search more than before. Keys could be :
    – producing content to be crawlable (indexable) by search engines and digged by social networks
    – creating content to inform with a good level of communication with your customers (ie : “themes blogs”)
    – find niches, provide local services, give human and personal answers

    Sure I don’t name this just “retailer”, no ?

    (Excuse my poooor english)

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  • Breaking into the e-commerce space and trying to advertise your way to the top is almost surely not going to work today, as you say. But I wouldn’t advise a small businessperson to try to advertise their way to the top with Adsense or Yahoo. I would advise her to use the Web to serve people who share her passion for the product she sells. Once she’s done that for a while, she’ll have people who view her as an important resource of information and expertise. She’ll also, as D.VDA points out, have a large archive of searchable content on the topic, which will be growing larger and more complete every day.

    For small businesses at the beginning of their online experience, it’s much easier to build credibility than to build a clientele. People online are more willing to take a chance on a new retailer when that retailer can demonstrate that it knows what it’s talking about. So worry about building credibility first, and customers will follow.

  • Indeed breaking into e-commerce today is difficult. Not impossible – just difficult. If those who believe that Greg was trying to say it is impossible, I dissagree with them. If Greg really was trying to say it was impossible, I dissagree with him. Maybe someday it will be impossible (or nearly so). Billions surfing the web, hundreds opening new businesses daily. Unlike with brick and mortar, it’s difficult to learn who all your competition is. If you open a pizza shop in town, all you need do is look in the yellow pages to see who else has one. The simple hugeness of the web makes that not so easy for an e-commerce business.

    Maybe it doesn’t matter. There will always be those who follow the “build it and they will come” mode of action. E-commerce will always be sought because there will always be those who seek it. So called web gurus and experts will always find a new “secret technique” to sales or marketing, and people will continue to eat it up in hopes of becoming the next online Walmart.

    And there are always those out there who have the money to proceed, no matter how expensive it becomes.

  • 1. I disagree, I don’t think the development costs of an e-commerce site is a barrier of entry. Using open source you can get a high end e-commerce site for 3 to 5k that is very user friendly, has a nice, clean design, cms, product management, and customer management. Then if you have basic computer skills you can add all of the content and products yourself which is usually the main expense in developing a website. I know several companies that spent 50k+ 5 years ago on custom e-commerce sites that today could be developed for less than 5k using open source and outsourcing.

    2. I agree, in the mid 90’s you could put up an ugly site and have little knowledge and still make money because not many people were online and user expecations were not high. Getting ranked in the search engines was as easy as putting your product name in your title tag. Today you have to have links, but who wants to link to an e-commerce site selling commodity or no name products? Outsourcing link building is too expensive to produce a return on your investment and many link builders such as Jim Boykin’s We Build Pages state they won’t do link building for new websites for this reason. Most small business owners are clueless about viral marketing and other strategies so they do the obvious and throw money at PPC and get suckered into worthless advertisements which result in them going out of business in a few months.

    3. I agree, Internet marketing experts who start e-commerce sites can be successful, however a small business owner that has to outsource their internet marketing stands little chance to succeed unless they have huge margins.

    4. I agree, unless you have a huge margin which is possible if you manufacture your own products.

    5. I don’t believe inventory costs are rising. More retailers buy direct from the manufacturer instead of through middle men, so if anything inventory costs are less expensive. The problem is that more wholesalers and manufacturers are selling direct to the consumer. I don’t blame them, why sell 1000 products to retailers when they can sell 200 products to consumers and make a higher profit with less overhead and “own” the end consumer relationship.

    6. Because of this very reason, I think it’s critical for small businesses pondering e-commerce sites to create an informational website as soon as possible. Develop great content and earn a reputation as an industry expert. Then leverage your informational site to jump start your e-commerce site when the timing is right.

    Many startup e-commerce sites fail, not because of 1-6, but because they have little knowledge of their industry and fail to provide exceptional customer service.

  • Right on brother! You are absolutely correct that these things need to be addressed. Can someone still do it? Sure. The issue is average person jumping into this doesn’t have a clue and thinks they’ll be buying a new house with all the $$$ they pull in. The one’s REALLY getting rich here are the wholesalers and drop-shippers!

  • There are folks who’ve been told that the “long tail” of retailing gives them endless opportunities to grow healthy, profitable businesses in this era.

    Your thoughts?

  • Right on brother! You are absolutely correct that these things need to be addressed. Can someone still do it? Sure. The issue is the average person jumping into this doesn’t have a clue and thinks they’ll be buying a new house with all the $$$ they pull in. The people REALLY getting rich here are the wholesalers and drop-shippers!

  • Kevin, I assume by “long tail”, you mean niche marketing. My feeling on niche marketing is that while it may currently still offer some chance to avoid competition with the big boys, that advantage is dwindling. The big boys can drop ship too, and they are starting to do so. For example, Wal-mart only has a few different baby cribs in their stores, but offer about 30 different ones online. In other words, Wal-mart is becoming a niche player.

    The other big problem with niche markets is that they are by definition, small markets. Can you make money? Sure, but not enough. You have to have a way to scale a strategy across many niches to make some real money. Netshops is a good example of this strategy–I believe they are over $150 million in revenue.

  • Benjamin Gilbert


    Actually e-tailing models have changed and instead of setting up your own website and trying to attract traffic, many people setting up an on-line retail operation will do it through eBay or Amazon. These sites are willing to offer their vast traffic in exchange of having a wider range of goods to offer. The thousands of vendors making profit and great revenue with very low setup costs would probably disagree with you since they just take a different approach. What becomes important is not brand name but reputation since Amazon and eBay users won’t care if they have heard of the person they are buying from, as long as their on-line reputation is good.

    Just a thought


  • Everytime there is a bunch of reasons to not to do something. But always there is fools who did it.

  • SEO is still within reach of small companies which is exactly the niche I started out successfully in – providing seo to the mom and pop businesses though gradually I’ve moved up the corporate food chain.

    I’ll still take a small business (either for direct Seo or consultancy) but it is dependent on the industry they are in. I carefully choose who I work with and there are some industries or sectors I would not feel comfortable working in….

    I do agree that peoples behaviour has to change in the belief for a fewn hundred $$$ they can rake in millions from the web… I usually advise a client who wants to carry out ecommerce to also consider having a retail outlet too…

  • I too must disagree with the main part of the argument.

    I am a VERY small setup -and to top it off in a particularly competitive field (fashion design)- and yet thanks to one of the newly developed web sites, that focuses on just this goal, i am able to have a shot at starting-up my own business at a very low financial cost.

    I have my own ecommerce shop on, and although i am not able to make a living wage (as yet) there are many independant artists who already do thanks to the tools and marketplace that has been developed by Etsy, and at an extremely low cost to their members.

    I wouldn’t want the negativeness of this article to disuade others from following their dreams. All is not as cut-and-dry as exposed by the opening argument!

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  • I think some of the points are valid…but online retail can be really lucrative. I’ve been dropshipping with and I’ve made a decent amount of money.

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  • hello..

    thanks 😉

  • One of the most important factors before choosing a supplier is to understand that success in this niche requires work. I think this article is great if it helps people be more wise about signing up for a dropshipping company, but I do not agree with the apocalyptic tone.

  • I agree with the article. Some niche sites elling product not sold by the major players will succeed but in general the small guys are getting squeezed out. I believe this is because most site owners do not understand why people use the internet. I now know what that is. The answer was there all the time from the very first days and is the reason we are on here reading this article and commenting on it.

  • Jason Kuiper

    I must say as well that online sales can be very lucrative. We have been in business for a year, and we are getting close to being able to make a living off this website. Drop ship with low overhead is the key!

  • Successful Small Business CEO

    I completely disagree with this articles lack of faith in small business. Any business is hard to start and the road to easy street runs through the sewers people. If you are smart, hard working, and creative you can achieve success in life no matter how big you are! Clearly some points have merit, however the tone is very poor and I hate when people act like NEGATRON

  • John Smith

    LOL I best the person who write this article is kicking themselves to this day 🙂

  • David

    Regardless that this was posted in 2007, this article is bullshit. Why the f*** would you tell someone that something is not possible to accomplish? Opposite of motivating someone. I can’t believe this article ranks so high in Google still.

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  • accorn

    I agree with the sentiment that adwords and cost per clicks type advertising is not effective. Every campaign I have run no matter how optimized has performed poorly compared to other types of lead generation. I think probably NO ONE is getting a good return on investment on adwords today.. the only difference is that some huge corporations have tons of money to waste on it and think they should :).