|How long should I wait until profit starts being generated?|
So I started a ecommerce site around 9 months ago in a specific area with a 25K investment from my savings. I only started carrying around 3 manufacturers items when I opened, but now have grown to around 6-7 brands, and went from carrying 10k in inventory to almost 75k in inventory. My goal is to eventually have 20+ brands in the future with a dedicated staff that can take phone orders and do all the shipping. Right now I am doing everything, and it takes around 4-5 hours a day of my time. I had a company managing my PPC but now I am doing everything myself. I have fulfilled around 2000 orders, and done a good amount of sales (250K plus). Out of this however I do not have much profit to show.
But now the only thing is that in order to expand whatever little profit I have made just goes right back in to carry inventory. I feel that I am just working and working just to break even. Cash flow is a bit tight and I had to get a 9 month credit line for around 15k (which I will be able to pay off given the extra time). But I keep telling myself I have not even been doing this for a year, and that in order to succeed in the world of ecommerce I need to stick it out, and that as long as I can stay in a break even situation for at least 3 years then after that I should start doing good from repeat orders and so forth.
I would be interested in hearing peoples thoughts who have been in the business longer than me and if they can confirm or deny what I am thinking. I really dont want to give up on this, but every month I get worried about my cashflows, and sometimes I think I can just sell off all of my inventory and get back my 25K initial investment and just do something else. I am really trying to stay positive but it is hard sometimes.
Well, obviously I'm the wrong guy to talk to, because I've made more money each year for the last 9 years, and I still am not where I'd like to be. Seems like the more you sell, the more you spend, and it just keeps going on. I just had my first weekend "off" in about a year. Which mainly consisted of doing all the other stuff I never have time to do. Good sales is better than no sales. But it would be nice if you were making SOME profit. Are you maybe being a little too shy with the prices? Maybe boost those a little? Sometimes a little can make a decent difference overall. This was the first year where I kind of threw caution to the wind and raised prices up on most things. It just got to the point where I was like... OK, I can't keep going like this. I'm either going to end up in the hospital, or just quit. I probably lost sales, but in a way, I'm almost glad I did. Sometimes you just gotta do what you gotta do to keep your sanity, whether it's good business or not.
Took us about 3 years and lots of hard work to get a tiny profit going. Make small cuts where you can, use skype for calls, buy your shipping boxes online, ..etc it adds up. Also sounds like you might hire a part time employee to do some of the mundane work (or free ROP high school student) . This frees your time to look for better deals. Just my two cents.
Numbers I've heard- average of 3 years for a new start-up to turn a profit. Then a few more years before those profits erase the losses from the first 3 years. Obviously, YMMV and a lot depends on the industry, prior experience, the overall economy, etc.
You're good to be worried about cash flow- that's usually what kill businesses. They have thousands of dollars tied up in inventory, but can't pay the monthly bills.
Also took us three years to make a profit. In order to turn the corner, we fired the help we had hired. Even at minimum wage, the cost of wages, unemployment insurance, FICA, and Medicare was our largest expense.
thanks guys for all the advice. It does seem like the more you sell the more you spend. During last month I calculated a profit of around $2500 (SALES - COGS), but that was dwarfed by the almost $25k in inventory that I had to purchase. But the profit I am calculating does not take into account the hosting fees for my site, programmer fees for changes on my site, or any of my time or effort.
I do have fairly good pricing on everything, and adhere to minimum advertised pricing policies by the manufacturers. But the problem is that selling at MAP also means most of my revenues go towards inventory and PPC advertising. Plus you have competitors who are selling below the MAP guidelines which kills us in the PPC arena.
However I look at other players in our field, those that always charge MAP prices and have been around for 10+ years. They are now multi million dollar companies.
Its just hard to stay positive when you have some days that are good, and some days where you lose money because of high PPC spending and no sales.
Here is my story ... Last year end was year 3.
1st year (partial year) made $2k profit
2nd year took a loss
3rd year showed a nice profit.
Going into our 4th year we hired two new employees ... first quarter of year 4 we were not tracking as well so we made very slight changes to pricing .. I mean we bumped by .25 here and .75 there ... we have pretty high volume but doing this has us back on track to be profitable again.
A couple things though. Profitable doesnt mean you have cash in your pocket .. for us it means we have inventory and money to invest back into the company to grow. We are making nice salary ourselves and get distributions so for us its very worth it but its not like we are becoming millionaires, at least not cash.
|Its just hard to stay positive when you have some days that are good, and some days where you lose money because of high PPC spending and no sales. |
Yeah, I don't know how a lot of you retail guys do it... I would go nuts if I had to constantly be competing with all these other people selling the same stuff. I sell mostly my own stuff that I make. So I have a little more control over pricing. Some people on here would laugh if they knew how much I spend on advertising... It's pretty much nothing. But then I have the problem of people stealing my ideas, and outrageous material costs... Also the problem of the time it takes to make stuff. I can't call and order more... I actually have to find the time to make it. Sometimes I look at how much money is going out and it's amazing. It's like little demons come in and steal the stuff at night. I'll buy a ton of something and think... OK, that should last us a while. Then you look in the box and they're all gone a few days later. But most of the people I know in my old biz are struggling just to survive. So it could be a lot worse.
One site in my niche mainly sells retail, and they have some of the highest prices around... Yet, they are probably the top retail site in the niche. I have no idea how they do it, but they do... Just extremely aggressive advertising I guess.
Don't forget the interest on the credit line, and the interest on the interest.
If you do the math on this you can really be in debt forever but it's hard to see. You have to do the math.
0 percent interest for 9 months. I will be able to pay it off by 6 according to my calculations
|One site in my niche mainly sells retail, and they have some of the highest prices around... Yet, they are probably the top retail site in the niche. I have no idea how they do it, but they do... Just extremely aggressive advertising I guess. |
There are competitors in my niche that rarely discount below MSRP, and they are one of the top site in our field. I would kill to be like them, but its so hard to get new customers when I am selling at MSRP which is a requirement by the manufacturer. It makes me wonder how in the world they and the other 5-7 other sites like them are able to do so well when they are not selling for any discounts. Here and there I will do coupon promos, but never in violation of any MAP policies.
There are so many other little sites that are doing extreme discounting, and that are also going out of business quickly because they dont have any margin. I hate it especially when you have these idiots who are violating MAP policies just to make a quick buck...
|There are competitors in my niche that rarely discount below MSRP, and they are one of the top site in our field. I would kill to be like them, but its so hard to get new customers when I am selling at MSRP which is a requirement by the manufacturer. It makes me wonder how in the world they and the other 5-7 other sites like them are able to do so well when they are not selling for any discounts. Here and there I will do coupon promos, but never in violation of any MAP policies. |
There are so many other little sites that are doing extreme discounting, and that are also going out of business quickly because they dont have any margin. I hate it especially when you have these idiots who are violating MAP policies just to make a quick buck
I think it just comes down to reputation. And that's something that takes time. In just the last couple years I think I've finally started seeing a loyalty and trust developing between myself and customers. They don't just want to buy something from somebody... They want to buy it from me. I think there's plenty of people who couldn't care less about who they buy from, and the price is what they're all about. But there are also people who are more old school, and often times outright paranoid. They're the people that will come on a forum and ask for advice about a specific seller, or ask people to recommend somebody. They aren't just going to trust anybody. I think those are the people willing to spend more money.
The leader for overall retail in my niche, I think appeals to those people. They have a pretty informative site... Well organized... Articles... Custom product descriptions... I think there's people that are impressed by that and willing to pay more. They advertise on what is the #1 forum/content site for the niche, which is probably where most of their biz comes from. I tried to advertise on the same site, and the guy wouldn't take my money. So they must have an exclusive deal. But the site has very direct, high level traffic for the niche. That is a huge help.
I have a lot of info on my site. I also go to great lengths to help people. The most anybody ever waits to get an answer form me is maybe a day. I try to do all kinds of custom stuff, if at all possible... and if I can't, I tell them why I can't so they understand. Some people will never appreciate all that. But many do... I just look at it like you're sort of chipping away at them... gaining their trust little by little. But yes, it's a painfully slow process. And the down side is that's it's very time consuming. The pit fall in spending that kind of time on customers, is that they always expect it, but also expect the instant gratification that most big guy sites offer... The automated this, and automated that... The lightning fast shipping. It's almost impossible to be what is basically a custom shop, but operate with the efficiency of an Amazon. So for me, that's what I have the biggest trouble with now, is trying to do both.
We had the same problem in the beginning.
You are profitable - after all if I understand you correctly- you increased your inventory from 10k to 75k out of the money you earned. The problem as you already recognized is your cash flow. You earn money, but it is not available.
There are several ways you can improve you cash-flow:
- Are you accepting credit cards? Then when do you receive the payments from the provider? After one week? After two weeks or even four or six weeks? Get a provider who does not hold your money too long. We only use Paypal for credit cards because I can get the funds within 2 days on my bank account. If I would switch to a provider that holds the money only for two weeks I would immediately be short of 10k.
- Trim your inventory. You have the sales of 9 month to go from. You should now be able to calculate the estimated demand for each of your products. If you order smaller quantities from your supplyer but more often you immediately have more money available. Of course you might loose discounts - you have to find the right balance.
- Don't compete on price if possible, try to compete on service, usability and other factors. We are the most expensive seller in our niche - but I know from our distributors that we are by far their biggest customers. We sell more than any of our competitors for nearly all the brands we have in stock. Of course it depends a little on the niche - we sell luxury goods - but I know when I go shopping online I do not necessarily buy where it is cheapest. I also take into consideration: Shipping time, trustworthiness, usability of the website - (do I need to fiddle about half an hour with a shopping cart or can I find everything at one glance and be done in five minutes). Depending on your products you could find that an increase in price can lead to more sales. If a product is too cheap, many people think it most either be fake, or second quality, or old. If you do not believe me then set up a second store and compete with yourself with higher prices.
You also do not need to make as many sales to make the same profit, which means you need less inventory.
If your buy a product for $60 and the recommended retail price is $100 and you sell 20% below the recommended retail price you already need to increase your sales by 100% to make the same profit.
- When do you have to pay your supplier? In advance, in a week, in four weeks? The longer you can drag out the payment the more money you will have available. However this usually comes at a cost if you loose cash discounts.
- Avoid to offer free shipping if possible.
i usually see many things done right, but then just a few that tank profitability. they aren't the same things from merchant to merchant. finding your weak spots is the key, imo. measuring the roi of different activities is a critical part of figuring out where those holes are.
I assume the product cost is your largest expense. Here are some thoughts on giving yourself an advantage over the competition.
1. Negotiate a discount with your suppliers by buying a larger amount of product at one time or ask at what level they would give you prepaid shipping.
2. Can you find an alternate (cheaper) supplier? Maybe another distributor in the USA or the factory in China?
3. Is this something you could source directly from the factory?
Remember Amazon can make money by selling at cost or slightly below cost forever due to their quick inventory turnover. (They generate interest on their sold product before they have to pay for that product.) Hopefully, you are not going up against them.
Seems like the more you sell, the more you spend, and it just keeps going on - Yes thats true, inventory can over run your stock rooms if your not careful. Is there no way at all your supplier can expedite your orders to you so you could hold a lower stock level ?
PPC costs - You mention that PPC isnt always a silver bullet, personally id find a very good SEO firm and spend you PPC funds on them.
hope you've got yourself a good accountant because ... even though you don't think you are making any profit the increase in your inventory shows that you very much are and you will have an appropriate tax liability - be prepared for it.
(i'm in UK and maybe tax laws are very different in the usa)
same in the US, inventory costs are deducted when a sale is made, not when I buy the inventory. I am prepared for that I have been in touch with an accountant who is going to start doing monthly book keeping.
|PPC costs - You mention that PPC isnt always a silver bullet, personally id find a very good SEO firm and spend you PPC funds on them. |
So how effective is SEO in terms of conversions? I have tried a few things, spent some dollars with a SEO consultant, but nothing really came from it in terms of conversions.
|I assume the product cost is your largest expense. Here are some thoughts on giving yourself an advantage over the competition |
These are consumer brands that I am reselling, so there is no other source than the manufacturer for these products. We do get discounts for making large purchases with some manufacturers, others not so much.
Find something inexpensive that complements the products that are stock in your inventory for longer than they should be and offer a giveaway or discount it. I found that one of the most unwanted obstacles to cash flow was DEAD Stock.
Are you sure you need the 75k in your inventory?
Why not just become the #1 sales rep for a brand or two and wait for the rest to come and beg you to sell them?
This way of going forward would:
- limit the amount of money used for inventory;
- let you become an expert in your field;
- make sure you become an important partner for your supplier;
- make sure the few brand(s) you work on make(s) money;
- hire staff to take it from you at set cost so that it still brings profits;
- work on adding new inventory yourself.
idolw makes some good points, and the idea applies equally well to resellers of services as well.
However, there is also a risk involved with depending on just a few brands or manufacturers. If the supply for that brand dries up, you just lost the majority of your inventory and you have to scramble quickly to find a suitable replacement (which could take weeks or months). How can that happen?
- brand is discontinued
- manufacturer goes bankrupt
- some temporary or permanent break in the supply chain between manufacturer and you (e.g., manufacturing problems, shipping problems, distribution problems, strikes at any point along the supply chain, weather, etc.)- the greater the physical distance and/or number of supply chain links between you and the manufacturer, the great possibilities exist for disruption.
As with all things in business, one needs to evaluate the risks vs. returns. The risks can certainly be lower with a strong brand that has a long history. But there is still always a certain amount of risk- just look at what happened with GM, Aloha Airlines, and several other big name brands.
having 75k in inventory is not necessarily a problem. How often you turn that can be the problem. A quick calculation tells me you are turning this once a quarter. Not bad but id like to see that be once a month or even twice a month. To turn 75k twice a month you need 150k/month in revenue. I based this off your 250k average revenue, perhaps you started slow and are doing 75k/month now. If so, you're doing well and keep doing what you are doing.
Again, keeping inventory is not a problem if you want to sell a varied product selection and want to be prompt with getting orders out.
@LifeinAsia - I agree. To be honest, I wanted to stress the "become and expert" part as being an expert makes you quite independent and may give you better chances to switch suppliers if a brand gets discontinued, etc.
Don't forget about the intangibles here.
Most people enjoy the idea of working for themselves and the work becomes less "work-like".
Are you enjoying the process of running your e-commerce site?
I actually enjoy the days coming home from my day job and spending a few hours managing the store, packing orders, etc...