After sizing up the competition and assessing the potential strength of your product line in the world of ecommerce… well, it is time to call a meeting with the people at your company who wear the green eyeshades.
You will have to face up to the practical details of the daily financial operations – the true make or break point for most fledgling companies in the ecommerce marketplace.
Now, while you are still in the planning stage – and before you have committed your company to an ecommerce venture – is the time to consider at the macro level such concepts as:
- Attitudes of your major investors
- Acceptable risk/reward ratios
- Anticipated capital requirements that must be reserved for other purposes
- Effects on your on-going business of reduced cash reserves
- Possible new sources of investment, such as partnerships, joint ventures or liquidation of non-producing assets
Funding An Ecommerce Start-Up
In order to make these macro evaluations realistic, a few areas of specifically ecommerce-related financial requirements should be brought into focus.
- First, there is the seed money needed to test a wide variety of advertising and merchandising premises and techniques.
- Assuming reasonable success with the tests, there is the mini-rollout stage that verifies the test results over a large enough audience to provide statistically accurate forecasts regarding product preference, average order, demographics of customers and many other factors.
- Then – and here lies the rub – a very substantial investment must be made to crank up the program over a period of time so that the numbers of customer acquisition campaigns or other forms of customer contacts are sufficient to allow anticipation of profit.
In most cases, your original investment will not snowball into a profitable business without one or two timely infusions of additional capital.
The obvious question on everyone’s mind at this point is “how much?”
Unfortunately, I know of no simple answer or formula that will even begin to address that question properly. It takes a lot of demanding work to develop the figures. One must think through elements such as:
- How many SKUs will you be offering?
- How many departments will be represented?
- How many, if any, of your own customer names will you be using (e.g., an email database of your current customers from your adjacent business) and how many, if any, names will you be renting from others?
- How fast do you want to grow?
- What kind of return on investment (ROI) can you anticipate from ecommerce versus, for instance, opening a new brick and mortar store?
- What advertising vehicles (Facebook ads, Instagram, print catalog and package inserts, cold traffic Taboola-like networks, broadcast mailings and SMS texts, etc.) are correct for your product and your market?
- What other advertising media will we be using, and how much?
- What scale of investment will be needed for office, equipment, or warehouse now, two years from now?
- How much added inventory will be required for the additional volume?
Direct response and performance marketing can be awfully expensive to get off and running, but it can be extremely efficient and profitable once the wheels are turning smoothly.
Unless you are really interested in building a Mom-’n-Pop business over an extended period of time, the start-up cost is going to be in the seven figure range for most moderate to mid-size companies.
Retailers can expect to invest about the same amount of dollars as they would to start up a new, full-size store. A distributor might use the cost of a new warehouse at a new location as his best guesstimate. But either of these rules-of-thumb might throw you way off the track. There is really no substitute for well thought out and researched financial facts.
If developing the business plan leading up to operating and production/distribution budgets cannot or should not be done in-house, get in touch with a couple of reliable ecommerce consultants or agencies. Have one or both of them prepare the material for you (perhaps two opinions are better than one). Then you will have some reasonable financial parameters to use as a basis for your judgment.
Getting The Rest Of The Management Team Together
Still looking good? As you have explored financial considerations, you have no doubt heard some sensible objections, but so far no “full stop, please!” Now it is time to call in the operations manager, the merchandise (or perhaps production) manager and the marketing (or advertising or sales) manager.
Before the meeting gets under way, there is an overriding question that you might want to jot down on your memo pad: “What effect will this new business have upon our current business?”
If you are a retailer, and if the ecommerce business is targeted correctly, it should enhance your present operation, while at the same time, you will be reaching out to a totally new universe of customer segments. But, if you are a manufacturer or distributor, what will be the reaction of your dealers or stores?
Even in this day and age, many reps, dealers, and stores are instilled with the antediluvian concept that ecommerce promotions steal business from the over-the-counter market… Wrong! In literally every case study that I have seen, just the reverse has proven true.
Just to be sure, some tests should be engineered to verify that ecommerce is, in fact, synergistic with your current business.
Back to the managers’ meeting. Several key areas may need to be examined by each department. Personnel and timing are probably the two considerations that are shared by everyone. Personnel issues are too complex to be covered in this article, so we will concentrate on time factors.
Here are some questions to be considered during these early planning stages by your management group.
- What are the seasonality factors, and where? Whether you are going global or national ecommerce campaign timing is frequently different from that in your retail experiences.
- How much lead time do you need for media promotion?
- When can photo samples be available in all necessary colors and sizes? New products? Prototype models? Do not believe the myth online campaigns have short lead times.
- What months are traditionally the best for ecommerce in your business? What other months should you test?
- How can you schedule your promotions to take advantage of your vendors’ schedules and thereby achieve better quality/newness/price positioning than your competition?
- Optionally: How should you schedule your ecommerce campaigns to deliver more store traffic?
Timing and the Almighty Dollar
Some specific relationships between timing and financial management should be looked at during the planning period.
- Consider all the merchandise vendor related cash flow factors such as: dated billing, delivery dates, back-up order standards, returned goods credits, time-related discounts.
- Determine how much money must be spent and when for: fulfillment facilities and supplies, web services, payroll, print and online media, media production and distribution, recruiting and training, merchandise research and buying expenses, additional warehouse, and equipment.
- Consider creating an integrated accounting system (“old” business plus the “new” ecommerce baby) to provide management with overall cash flow projections, and to permit anticipation of funding requirements.
- Prepare a crash retreat plan with appropriate early warning time/cash flow/response triggers built into the system. Everyone in a position of responsibility should be aware of these numbers and their implications. Every major promotion should be monitored in this fashion.
The Time Equation and Operations Functions
One could write a whole book on this subject, and, in fact, many already have. I will, therefore, defer to their well-presented analyses and comment only briefly here.
At this stage (remember, we haven’t said “GO” yet) the greatest management problem is to keep the space and equipment demands down to a dull roar. Sure, it would be grand to have a 25,000-square-foot, air-conditioned warehouse with every gadget for a continuous-line pick-and-pack system.
But one really good small-online-store-experienced manager who is allowed to pick his own workforce and set up shelves and a pick-and-pack line should be all the high-tech that’s needed – at least until you find out if you really have a chance at building a substantial ecommerce business.
IT software systems, both self-hosted and SaaS, abound. Almost any volume of sales that one can conceive of building during the first year or so of business will fit all the ready-made solutions. The time to invest in a state-of-the-art custom-tailored solution is AFTER you have had time to get a handle on your new business, and after you have had a chance to analyze up-and-running systems at other ecommerce businesses.
The most urgent message regarding timing in the operations department is to avoid the tendency to optimize at the beginning.
Other Ecommerce Start-Up Pre-Commitment Considerations
I deliberately treated the element of timing separately in the previous section because of its extreme importance to the success of a business plan. The considerations that I will deal with next are intended only to suggest some avenues that might lead to constructive thought.
You’ll have to tailor those lines of thought and the precise details to your own field of business and to the products and services that you have to offer.
Setting up (or shaping up) an ecommerce operation is in many ways much like any other distribution system. As in virtually all cases, primarily, the product, the timing and the price must be right for the market. Then, the service must be the best possible. Finally, the advertising or promotion must reach the right buyer at the right time with the right message.
That is where the similarities start to disappear. True, in ecommerce the product comes first. But the ecommerce product may not be the same animal as the retail winner. For instance, ecommerce customers can be confused by too great a selection of any one item, but they demand a wide assortment of merchandise within the product mix that they perceive as your area of specialization.
One of the more painful aspects of the transition from pure over-the-counter retailing to a mix of ecommerce sales and over-the-counter selling is the fact that some favorite vendors must be left behind (at the counter). They are set up to deal with retail stores, and the vastly different financial arrangements, schedules, reorder requirements and even merchandise assortment required by the ecommerce merchant are just not within their understanding or their ability to service in an acceptable manner.
Merchandisers tend to be loyal to and comfortable with their usual sources. They are frequently reluctant to go out hunting for the new and strange. This resistance to change is one of the major management hurdles you must confront during the pilot stages of an ecommerce program.
Some advanced-thinking retail stores which successfully added ecommerce channel to their day-to-day business, for example, have solved this problem by having an ecommerce-trained merchandise buyer work directly with the regular buying staff to acquire merchandise for the online store. Of course, the ecommerce specialist must have his own open-to-buy budget and responsibility.
You will almost certainly have to re-evaluate the sources with whom you are now dealing. You must ask yourself these questions:
- Can they really handle multifold increases in volume?
- Will they live with the staged, cancellable backup orders that you will require? (Or are you willing to take all the inventory risk?)
- Will they continue to produce the items that are successful in your online campaigns, year after year, even unto terminal boredom?
- Here is a tough one: Can you really afford to buy from a manufacturer 6,000 miles away when you have a live, money-making campaign out there working for you, and your open-to-buy budget restricts you to a commitment of only one third of anticipated sales?
- Is the vendor’s word his bond? Will he deliver what he promised, when it was promised? If the goods are not in the warehouse, then you have lost a sale that might have cost $40 to get in the door. There is no such thing as an impulse buy when an ecommerce item is out of stock.
You must also consider that the relatively modest level of service adequate in the retail community just will not cut it in the ecommerce world. Returns can be astronomical in some merchandise categories. Shoe returns are around 20%, women dresses around 15%, and so forth. Hard goods should not rebound at anywhere near those percentages but still will run well ahead of over-the-counter figures in almost all categories.
These returned goods must be accepted with exquisite good grace, refurbished if they are not completely worn out, or remaindered if they are unfit for resale to your customers.
Be sure you ask these other questions of yourself and your company:
- Is anyone else selling your kind of merchandise online? If not, why not? There may be a very good reason. Do some research before taking another step.
- If someone else has pre-empted you, will your ecommerce be perceived as a “me-too” site? That is absolutely the kiss of death.
- Can you establish a position as the authority on the products or services that you are offering?
- Do you honestly feel that you will be rendering a unique service to your prospective customer by sending him or her your promo?
As you can well imagine, loads of other merchandise-related elements need a great deal of attention. For pre-commitment thinking, however, these are the major areas of concern. And once past these encumbrances, the worst is over.
Your sales/marketing manager should really get charged up about the possibility of an ecommerce program. If the battle plan gets off to the right start, a quantum increase in sales volume over a relatively brief period of time is possible. The start-up, however, is critical.
Speaking of critical, a critical path diagram will help, but the plan diagram must also be set up to include vendor/production/distribution/customer service/schedule/ and, above all, financial overlays.
All the good courses on marketing and business management point out the advantages of having such a plan. But before the plan comes strategy, and before strategy, a delineation of objectives. Picking up from Marketing 101, here is a list of objectives, some of which might apply to your potential ecommerce start-up.
- We want to move more goods because:
- We will be able to buy better: more varieties of lines, greater depth when selecting styles, bulk quantities.
- We will achieve economies of scale in systems and handling.
- We will achieve greater profits.
- We will maximize vendor clout, get better deliveries, and earn more “first option” opportunities.
- We will sell at increased margins because:
- Ecommerce customers are not as price conscious as are over the counter customers.
- Fewer markdowns are required because of predictability of ecommerce sales volume.
- Staple items form the foundation of the ecommerce product mix and can be offered again at full margin next month or next year.
- We can follow product trends as they move across the countries.
- We can broaden our customer base by:
- Reaching local customers who sometimes prefer to shop online rather than making a trip to the store.
- Establishing a position of authority in specific product categories,
- Expanding geographic parameters.
- Reducing the impact of changing neighborhoods and lifestyles.
- Finding and acquiring a new “kind” of customer.
- Targeting customers for “our” products – wherever they may be – without concern for concentrated markets.
The operations area is the least complex (but potentially the most controversial) of the functions represented so far in your meetings. The integration of an ecommerce overlay on top of your present business may only involve the already mentioned change in approach on the part of your merchandise (or production) department, and the development of a new or expanded customer service and fulfillment operation.
So, separate, or integrated facilities?
Controversy sometimes erupts around the question of whether or not to maintain separate warehousing, inventory, and fulfillment operations for the ecommerce business. “Why do we need separate facilities?” is the often-heard query.
There are lots of answers: employee attitude, packing requirements, production velocity, complexity of systems, returns processing, single-item pick-and-pack systems design and management, accountability, dedicated inventory… and more.
Several companies that started out with combined operations have, after some bitter experiences, moved or segregated their ecommerce operations. Others have gone to outside fulfillment services for some or all their needs.
The safest and easiest way to put yourself in a position to make this judgment is to engage the services of specialists in the fulfillment field. First, consult with them about your products and your special interests. Let them know the scope of your ecommerce aspirations. Then, go to visit some reasonably large fulfillment operations and/or ecommerce warehouse facilities, and take all the time necessary to watch it in action.
An increasing number of the “good guys” in the ecommerce business have been able to achieve 24-hour or less order turn-around time. Their considerable investment in facilities to accomplish this capability was not done in an altruistic flush. Their customer tracking systems were able to tell them quite clearly what the costs would be if they did not give their customers the kind of service that the competition (both ecommerce and retail) is providing.
Since you are still at the tire-kicking stage, discretion would suggest that you plan for at least a sectioned-off area in your own warehouse with dedicated staff and software.
Alternately, you may opt for a full-service outside fulfillment source. The cost will be sensitive to size of product, total number of SKUs, the number of line items per order, and whether the orders come only from online sources and are validated.
(There are other extra charges, but you do not need to clutter up your thinking with that very considerable laundry-list at this time.)
An in-house fulfillment set-up will not cost any less than an outside service. In fact, unless it is very carefully engineered, the chances are that it will cost you more.
The advantages of an inside system are many, but the key factors are:
- You will be aware of and react more quickly to problems with specific items of merchandise such as returns, poor vendor deliveries, bad color lots, shipping breakage and so forth.
- The heart of the ecommerce business is customer service, and the best way to get a real handle on that is to be right out there on top of the fulfillment operation.
Where Do You Go From Here?
If the consensus of the senior executives assembled is to escalate your ecommerce plan to at least the next level – that is, introduce the concept to the line troops – something concrete will have to be developed to inspire that meeting.
Let’s start with some broad strokes to bring the newcomers into the picture, and then spell out some well-defined projects to get things rolling. A list cherry-picked from the “objectives” enumerated previously is a good starting point, and might look something like this:
- Reach “our kind” of customer who resides outside of our normal store trading territory.
- Sell to a new group of prospective customers within our expertise area.
- Increase sales and profits among our current customer base.
- Improve our sales-to-gross-margin ratios.
- Identify and qualify site selection opportunities.
- Counteract “outsider” competition now cutting into our share of market.
The Master Plan Worksheet
The next consideration deals with the assembly of a masterplan. Now, we move from the philosophical to the functional and the hard-work phase gets underway.
But before the steamroller develops too much momentum, pause for a minute, and consider where you are going to install the red-button-shutdown triggers.
Wall Street has taught us “first loss, least loss.” And if a big red flag pops up, the auto-shutdown system should take charge until you have had plenty of time to re-evaluate the situation.
Once a set of corporate objectives has been proposed and accepted, you will be looking to the troops to pull all the components of a plan together so that everyone has a clear picture of who is doing what and when, and how much this is all going to cost.
The purpose of the master plan is to organize the preparation of the various slices that are going to build that pie.
Included in the master plan for each functional area should be each department’s own version of the following components:
- List of appropriate departmental objectives
- Strategy and underlying logic (competitive and/or operational)
- Specific performance objectives for: three-month, six-month and one-, two- and five-year periods
- Multi-stage business plan to accomplish the above, including at least the following subjects:
- Physical space required
- Full-time and part-time personnel needs
- Equipment required (new or now in-house)
- Identification of all key vendors and sources including back-ups where appropriate
- Time frame for each stage of plan including discussion of anticipated lead-time for acquisition, installation, and training
- Capital requirements and cash flow anticipation
Once all the departments have reported back to you (in a timely manner, of course), the final corporate master plan can be drafted. If your team really does the research that is required to produce all the information outlined above, you will be light years ahead of the rest of the pack when you lift off the pad.