Lessons from a Internet Start-Up Struggling for Growth and Customers

January 21, 2010

How do you start from nothing and capture a percentage of an online market? There’s a big difference in the growth path between a well-known branded company suddenly deciding to have an online presence and an unknown upstart staking its online claim. At first a few users start coming to the website and slowly more users come. Everyone wants instant success, but it rarely happens and watching a fledging start-up slowly build a customer base can be an exercise in frustration and patience. You can easily read the SEC 10K reports from publicly traded companies and their quick online growth is well documented. But a start-ups growth will never look like the introduction of Walmart.com. So how does your start-up compare to others? I am involved in a niche ecommerce start-up and I’d like to share with you some observations on growth over the past few years.

Refine the Business Model Early

In the first year, the company offered a limited number of products to test and see what consumers were willing to purchase. The first year was a loss. The original plan didn’t work out as anticipated and it took the year to figure out a viable business model. By year’s end, the company ended up with inventory that couldn’t be sold. Today, the ecommerce company’s goal is to offer a gazillion of specialty niche consumer products at the best price. Margins on these niche products are high compared to products found everywhere and sold by ever retailer. These are products whose volumes are too small for the large retailers. Sometimes these products flitter into and out of the large retailers. These products are highly rated by consumers and are focused in a few specialty market segments. Packaging and shipping costs greatly affect margins and a strategy had to be refined. These factors have to be taken into account when selecting a product. Packaging cost can be very high on odd-sized items or on heavy items like those made out of wood. The second year went much better as the profile of what types of products to offer was honed and the offering of products was greatly expanded. In the third year, sales volumes increased 5 times over the second year.

Finding The Customers

The start-up has been operating for three years. The start-up sells through its own ecommerce website and the company also sells on the major online shopping markets such as Amazon, EBay, and so on. Sure, it’s not free to be on these sites, but SEM isn’t free either. The philosophy was a presence on these shopping portals amounted to exchanging listing fees and sales commissions for advertising and placement costs. This was deemed acceptable while the ecommerce site was building consumer awareness of its direct site. Volume seems to be equal across the major shopping portals, but the product distribution varies among them. Customer feedback on the shopping portals is slightly less than 10% of the overall volume and it’s rarely ever negative; keeping in line with industry studies that show 4.5 out of 5 is the average rating by online rating.

The bulk of sales (80%) come from the online shopping marketplaces over the direct website. Eventually this may change as the company grows, but at the moment, it’s easier to gain momentum by going to where the customers are searching.

The majority (70%) of the traffic to the direct site comes from product review websites. Often these sites list the ecommerce sites offering the best price on the product under review. Since the company strives to be one of the lower prices available, it usually gets linked into the reviews. Prices are adjusted regularly to reflect the movements of the competitors. The ecommerce company developed web crawling software to search the web for other retailers and adjusts pricing according to their actions. After a while it became obvious when the major retailers were running their web crawlers and adjusting their prices. The larger the retailers, the less often they adjust their pricing. Medium sized retailers respond more easily in the market place. Small retailers don’t often move their prices at all.

Who is the Customer

Customers disproportionately come from small towns and mid-sized cities.

Children’s products don’t sell nearly as well as products for adults. Teenagers often send emails asking if they can pay for the product with something other than a credit card. The guess is they get money for their birthday, but don’t know how to transfer the birthday cash into an online currency.

Customers know what they want to buy and this is evidenced by the fact that they typically purchase 1.25 items per transaction. They aren’t browsing like at a brick and mortar store and their shopping carts aren’t filled to the brim with numerous items.

The company has been through three holiday seasons and still has not determined how to optimally accommodate the season. Every year they lose sales because they run out of inventory, which prompts a commitment to ramp up for inventory for the next holiday season. But despite increasing inventory every year, they still run out. Holiday sales volume is generally 3 times than the rest of the year. For the retail business, the holiday season is huge. One of the challenges for the company going forward will be to manage this season.

The Recession’s Surprise Causes a Change of Course

One of the big challenges for the 2009 was the dwindling number of suppliers. The company had to expand into more niche product areas because it seemed as though the manufacturers of these niche products were dropping like flies and going bankrupt on a weekly basis.

Going forward, the biggest challenge will be to scale the ecommerce site by create an operational structure to build the company into the Walmart of specialty niche products. A this point, the jury is still out on the business model as the company continues to struggle to answer the questions of how do you know the difference between growing pains and a failed strategy?