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The state of online retail

Despite all the doom and gloom in retail-market forecasts, physician retail entrepreneurs are continuing to try their hand at online ventures – often with considerable success. But as a new generation of online-only ventures runs its lifecycle, many entrepreneurs are finding that the old rules of running a business most definitely apply – and then some.

Just ask Samantha Leah, a longtime archivist who two years ago teamed up with her sister-in-law to found Beautiful Fairy, a self-publishing venture that lets customers order custom-made photo books and similar products. With Leah’s administrative capabilities and her sister-in-law’s design skills, they figured they had everything they needed to pursue their goal of offering high-quality books – but that didn’t make the venture any easier.

Getting noticed in the increasingly-cluttered online environment has been particularly challenging: “It has been quite hard,” Leah admits, “especially with the economy and trying to reach our target market – part-time mums with part-time income – and trying to get their attention enough to sell them a product that’s priced higher than what they can get in other places.”

It’s a common conundrum for small retailers trying to stand out in their fields, but online there’s an additional challenge because they can’t rely on impulse buying after customers touch and feel the products. The duo initially tried to overcome this by trying to attract customers with promotional product giveaways – but this approach quickly backfired.
“The people who utilise free samples are not necessarily the sort of people who will give you follow-on business,” Leah explains. “Our demographic just doesn’t visit those websites for shopping reasons. Once we figured out that those sorts of things were not going to work for us, we had to find different ways to build trust.”

Bricks-and-mortar

Conventional wisdom suggests that most new small businesses will fold within just a couple of years. Little wonder that business people are rushing towards the online model, which many see as a chance to bypass that statistic thanks to lower operating costs, more business and logistical flexibility, and geographically broader customer base.

Recent statistics suggest the money is there, with around three-quarters of Australians’ online spend found to be spent with domestic online retailers. That’s a market worth billions, and it’s there for the taking – as long as you take the time to remember every online shopfront needs to have the right kind of business behind it.

This was a tough lesson for Alec Nelson, who for years had operated a Godfrey’s vacuum franchise in Wagga Wagga, NSW, but eventually grew impatient when he began butting heads with management over his efforts to start selling online. Early eBay sales were a hit but drew censure over franchise territory rights, and a later decision to open a separate vacuum repair shop created friction as Nelson was forced to decide whether he wanted to remain a franchisee or head out on his own.

He chose the latter, with great success selling products via eBay as a complement to his bricks-and-mortar presence. However, he quickly came to realise the repair shop’s high skills costs were eating into margins that couldn’t be recovered through equipment sales because traditional competitors were dominating the market. Nelson eventually shut down the business and, in October 2010, set up VacuumSpot, an online shop devoted to sales of vacuum cleaners and parts.

That’s when things went pear-shaped. Despite doing what he thought was the right thing – investing heavily in an online system developed for him by a Sydney web development house – Nelson soon found sales dropped precipitously with the new site. Within the first six months, sales had dropped from around $15,000 per month to just $3,000. Nelson was, in a word, stunned.

“For three months we were just sitting there saying ‘oh my God’,” he recalls. “We ended up in all sorts of trouble with our suppliers, and I was researching like crazy about how online shops worked. I hadn’t intended to, but learned a lot about the mechanics of how online retail works, how to get found on Google, how to get design and other work done at low cost on eLance.com, and so on.”

The biggest problem, however, lay in what he assumed would have been a whiz-bang, fully featured website – but turned out to have been poorly designed for VacuumSpot’s user base. “I realised sales were dropping because the navigation wasn’t simple and clear,” he recalls. “It’s a very specific product we sell, and people were confused so they would just leave from the site.”

A redesign rapidly turned things around, and the business has picked up dramatically as Nelson’s improved online presence took hold. Sales have grown healthily throughout the year on the back of a new online environment built around PayPal-owned infrastructure. This has had the added impact of providing a company logo that consumers recognise and trust.

That growth brought other challenges, however, as Nelson was forced to revisit his sourcing and delivery arrangements. Because suppliers charge delivery fees for each shipment under a certain value, for example, he’s learned to group orders and manage excess stock more effectively. He’s also taken out warehousing space in Melbourne, to which suppliers are often willing to deliver smaller orders for free.

That keeps his own costs lower, increases profitability and allows him to minimise his own shipping charges – which in turn boosts the business and opens new options. “We can keep some pretty obscure products because our warehousing costs are a lot lower,” says Nelson. “We’ve most recently been talking about drop shipments, where we take the order and suppliers ship directly to the consumer. They get more sales and we can sell more of their product catalogue.”

The new entrepreneur

These are the sorts of lessons entrepreneurs quickly learn as they move from eBay-styled hosted stores to building and promoting their own web businesses. Freed from the expenses of street leases and seven-day retail operations, small-business owners are learning that hard work and flexibility are as important in the online world as they ever were in the ‘real’ world.

One of the crucial lessons that both Leah and Nelson learned was just how important it can be to find and market to the right customers online. Yet despite its importance, Craig Reardon, director of online-business advisory firm The E Team, warns that many online business operators simply don’t do their homework about the right approach and provision of superlative customer service.

“All of this web commerce doom and gloom from traditional retailers comes in a different light when you ask how many have a professional website, and how many are doing the right marketing,” says Reardon, noting a friend who has set up a sustainable-products site is turning over $250,000 a year. “The margins aren’t great, admittedly, but he’s not even using proper online tools.”

“It’s very much a passive approach to his website, but that quarter of a million is coming from his [traditional retail] competitors,” he adds. “Those High Street companies, in the main, are slow, defensive and technophobic – and the ones complaining the loudest are the ones that just haven’t done anything about it. They’ve got to stop looking at the notion of sales across the counter, and start looking at the lifetime value of the customer.”

Building that relationship might involve anything from asking customers for a valid email address before they leave the shop, designing elaborate loyalty programs that reward repeat behaviour, or simply building an online business as a destination for customers who share a mutual love of a particular area.

This last approach was a core part of the business plan for Cate Burton, a Sydney-based hobbyist candlemaker who walked away from a 15-year career in law and banking to start up Queen B, a combination bricks-and-mortar and online business that sells a broad range of homemade candles and related products.

As with any business, Burton says, the key to succeeding in this market is to have a clear mission statement and to make sure you follow it. “You need to have very clear differentiation, and stand for something that isn’t already out there and available,” she says. “Otherwise, there are probably companies out there doing it with a much bigger budget.”

Burton has built up a client base not only through walk-ins to her retail shop, but by writing regular blogs about her interest in candlemaking, and by sending monthly email updates to customers on an opt-in basis. Nearly half her customers click through when they receive her emails, which is a response rate many direct marketers could only dream of.

“You need to have that conversation,” she explains. “You have to be a person, and more than a business. I only email customers when I have something relevant to say, and I’m not just always trying to flog candles. That’s what I think has made people very loyal to us.”

Annual revenue growth of around 30% to 40% suggests she’s on the right track, as does a regular return of around $5,000 in new orders each time she sends out an email blast. Yet it’s crucial to not stretch the friendship with customers, she warns.“There’s no point in sending a 10-page manifesto, but if you communicate with them in tidbits you can build up an impression of who you are – and build a more substantial relationship with them.”

Taking the step

These may seem like obvious lessons for some business owners, and completely new ideas for many others. But wherever you lie on the spectrum, there’s no question that it’s easier than ever to get your business online.

Just look at PayPal – an eBay subsidiary that offers person-to-person transfers – which has joined Mastercard and Visa as the de facto third form of payment online.

“We’ve seen a lot of fear from small businesses,” says Elena Wise, director of merchant services at PayPal. “Most people who get into small business do it because they’ve got a passion for it, but many are not tech-savvy. So the technology of getting online is a big barrier to overcome.”

Tying small business websites to back-end payment fulfillment systems can be tricky, as Vacuumspot’s Nelson found. His original systems had trouble integrating smoothly with his payment fulfillment provider. This makes an integrated solution valuable for small businesses that can design their content and product layout online, then turn to integrated platforms that help publicise products using tools like search engine optimisation (SEO).

As well as building confidence in her own ability, Beautiful Fairy’s Leah says a key to building momentum for the business has been climbing the learning curve; seeking out new information on business practices on a regular basis, sourcing quality suppliers and advisors wherever possible, and taking care not to burn out with your own enthusiasm.

“In the first year you’re quite happy to work 60 hours a week, because you’re so passionate and excited, but then that starts to drop off,” Leah says, “especially when you’re not making any money and there are always bills to pay. If you keep putting those hours into it and trying to do everything yourself, it doesn’t thrive. You have to take a step back and trust yourself to see if it will float without you holding it up 24×7.”

Ultimately, these guidelines apply to conventional small businesses as well. Many will be familiar to long-time business owners, or seem like common sense to newer entrants. It’s entirely possible to fail spectacularly online, but that doesn’t mean you have to; the key, as always, is to execute deliberately and effectively, because a good business is going to succeed whether it’s online or off.   

Image Credit: Thinkstock.

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