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Would you start this website?

6:21 pm on May 31, 2012 (gmt 0)

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Last summer I discovered a website that had pretty much cornered the market in its very specialized niche. There was a long list of things the site owners were doing wrong. For example, they didn't accept credit cards. Instead, they required customers to give their checking account routing numbers and account numbers. Despite all of the flaws, the site was generating $2-$3 million annually in gross profits.

I researched the niche, and tracked every single sale, and figured the gross profit. (Because of the nature of the niche, all sales and sale prices can be viewed by anyone). After a couple of months of research, I concluded that the site could be beaten, and that I could overtake them in sales and profits.

I spent months preparing a business plan. I worked with a consultant from SCORE on developing the plan. I then was referred to an advisor at an angel investor group in my city, who also helped me refine my pitch to investors. I have $50K to invest, and need another $125K.

I wouldn't risk that kind of money unless I was certain I could succeed, and I was very certain. I've been running my own website in this general niche for eight years, and have a lot of experience to draw on.

At the end of March, I received an email blast from a large online retailer in the more general niche, announcing the launch of a site they were partnering with, one that does what the existing site does, and what mine would do. I figured the retailer would bankroll the site, and I decided to sit on the sidelines to see what developed.

They did many of the things I had intended to do that the first site wasn't doing right. They accept credit cards. They have a well-designed, good-functioning site. The retailer is providing promotion through their own site, and through email blasts to their huge email list.

I was expecting them to offer products at least as good as the first site, but they don't. The first site, despite its flaws, for the most part offers top-shelf products. The new site offers some lower-priced niche products, and then has a ton of gift certificates from national restaurant chains, home improvement chains, Walmart and other places completely unrelated to the niche.

Despite the gift cards and so on, the site is making money. They don't do as much in dollar sales or gross profit as the first site, but their gross profit margin percentage is double that of the first site.

The retailer doesn't appear to be bankrolling the site. Instead, they're getting some percentage in exchange for their promotion, and also for supplying some of the goods sold. At least for now, the site isn't spending a lot on product. Their cost of goods sold is a third of that of the first site.

Sorry for the long prelude, but I thought it was necessary. Here's the question: given the changed circumstance, with the new site in the mix, would you proceed?

I think the new site can be beaten, as the owners don't seem to have a grasp of who their customers are (the gift card thing), and there's some other areas where they're weak.

They would be much tougher to overtake than the first site, though.

Any replies are much appreciated.
10:49 am on June 1, 2012 (gmt 0)

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Yes, do it, you didn't come this far to give up now. If you don't you will regret it, if it fails just move on to the next project.

I understand you are apprehensive and most people have a "wobble" before taking a big risk but to be successful you have to take risks.

Good Luck
11:07 am on June 1, 2012 (gmt 0)

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It sounds like you're on top of things in terms of doing your homework and it's normal to be a bit shaken with an unexpected player come into the market, but if you think you can differentiate your service from theirs, then go for it.

It might be an interesting time to do it as well. Although it's not ideal that a large retailer enters the market, it does mean the existing businesses will be looking at them and not at you when you enter the market. Good time to fly under the radar while they are both looking at each other.

What do you need to achieve to get your beachhead? Is there a lot of repeat business in the industry? Will social media convert well into sales? How quickly could either competitor improve their services to match your offering?

The question is can you estabilsh a customer base and keep ahold of it before your competitors can react? With solid research, that's generally possible. Where to after that? Do you have a phase 2, phase 3, phase 4 plan?

Definitely don't be put off by added competition - that's just a sign that the market is profitable and you are on the right track.