Monday, February 28, 2011

Comments requested - Shoes of Prey to Parliament House

This Thursday Jodie is headed to parliament house in Canberra as part of a visit organised by PayPal for 3 PayPal merchants to meet with Ministers and shadow Ministers of Government. The goal is to share the story of our business and raise a number of key issues that affect e-commerce businesses.

Our fellow PayPal merchants are Paul Greenberg of Deals Direct and Vahid Ta’eed of Envato.

At this stage we're expecting to meet with:

  • Senator Stephen Conroy - Minister for Broadband, Communications and the Digital Economy
  • Malcolm Turnbull MP - Shadow Minister for Broadband, Communications and the Digital Economy
  • Bill Shorten MP - Assistant Treasurer and Minister for Financial Services and Superannuation
  • Senator Nick Sherry - Minister for Small Business
  • Bruce Billson MP - Shadow Minister for Small Business, Competition Policy and Consumer Affairs

Following is an outline of the issues we want to raise. We'd love to get your thoughts on these and any other issues prior to our meetings.


We think online retail presents a fantastic export opportunity for Australia and an opportunity for Australia to develop a strong knowledge based industry so that we're competitive as a country beyond the current resources boom.

In our view the following are key issues for growing the online retail space that the government is in a position to help with:

Delivery Services - Australia Post is government owned and while more competitors are entering the package delivery market in Australia, we'd love to see Australia Post focus on this area more. We have a number of issues with Australia Post's parcel delivery service in Australia and it's forced us to switch from using EMS who contract with Australia Post to DHL for our deliveries worldwide. More background in this blog post.

Education - Education is critical for the future of the technology and online retail industries in Australia. We don't have enough computer science students to really encourage growth and entrepreneurship in these areas. Many budding Australian tech entrepreneurs have great ideas, but don't have the technical skills themselves and can't find a business partner with the technical skills to start innovative businesses. More computer science student places and scholarships are needed. The NBN is a great initiative but to take full advantage of it we will need computer science graduates.

Banking deregulation or incentives for financial institutions to encourage more competition in the merchant payments market. We're fortunate in Australia that we have PayPal in the merchant payments market because without them it would be very difficult for businesses like ours to operate, particularly in exporting our products. It would be great to see the Australian banks innovating in this space but to date their offerings have been nothing other than woeful. Here's some further background on our position on this issue.

GST threshold - While in an ideal world GST and duty would be charged on foreign online retail purchases, the productivity commission report outlining the high costs of implementing this means it's not worthwhile. Consumers and taxpayers shouldn't pay for what would be only a small benefit to Australian retailers. Don't succumb to the pressure from Harvey Norman, Myer and friends, they need to be encouraged to innovate in the online retail space rather than focusing on trying to protect themselves. More of our thoughts here, here and here.

Grants - The Export Market Development Grant is a good one for online retailers selling their products overseas, however the lack of certainty around these payments for exporters poses challenges when making decisions on marketing their products overseas. That said we can appreciate the budgeting challenges this grant creates if a limit on government spending isn't set.

One area open for improvement is that there could be less of an administrative burden to access the grant. A string of companies have sprung up to help businesses through the red tape to apply for the grant. They then take a percentage of the funds the government provides. This isn't ideal, it would be better if the administrative burdens were eased while still ensuring only legitimate businesses can access the funds.

All other grants we've looked into exclude online retailers as their requirements don't fit with our business model. Eg. Commercialisation Australia requires the business to have strong design or patent protections which don't apply to online retailers. It would be great if these other grants could be opened up to online retailers.

Let us know your thoughts on the above issues and anything else you think we should discuss.

Cross posted to Power Retail

Friday, February 25, 2011

Are Groupon, Spreets, Cudo and co good for retailers?

No doubt most of us have read about the 2 year old Groupon rejecting a $6 billion offer from Google, and closer to home the 10 month old Spreets accepting a $40 million offer from Yahoo!7. Those are incredible numbers for such small businesses and hats off to their founders and employees, but I wanted to write a post on whether these sites are good for retailers. Harvard Business School professor Benjamin G. Edelman has been conducting research into the group buying space and his research provides some interesting insights.

Professor Edelman discusses 2 distinct benefits that group buying websites can provide retailers:

1. Price Discrimination
A discount offer on a group buying site allows a retailer to target with a lower price new customers who may not have shopped with them, while maintaining the standard pricing for existing customers who are willing to pay it. Airlines have been doing this for years charging different prices for different seats, but this has traditionally been much harder for retailers to achieve.

2. Advertising
A deal on a popular group buying site is broadcast over the web, email and social media to many thousands of potential customers, many might take up the offer but even more hear and learn about the business. There is no cost to this except providing the voucher.

Those can be very good benefits but what are some of the problems?

1. Drastically reduced margins
The major group buying sites all require discounts of 50% and above, then they take a share of the revenue earned on the site. For Groupon this share is reportedly as high as 50%, from our understanding of the Australian market group buying sites generally take around 20% and keep the benefit of unredeemed vouchers. So that's essentially at least a 60% drop in the retail price a retailer receives for their product. For a restaurant or spa that has a perishable product and the marginal cost of the ingredients is 30% or less a group buying deal can still be profitable, however for a retailer like Shoes of Prey where our gross margins are less than 60%, we would be running an offer like this at a loss. We would need a reasonable percentage of the new customers to come back and buy from us at full price for it to work. This great post from Posies Cafe in Portland, Oregon provides an insight into the damage to gross margins that a poorly planned group buying deal is capable of doing.

2. Upsetting existing customers
I like yoga and love Body Mind Life in Surry Hills where Jodie and I have a membership that costs us $110 every 2 weeks as a couple. Body Mind Life recently ran a deal on Spreets which was $49 for 3 months membership. That's an enormous discount off their standard pricing and the deal wasn't available to existing members. I love Body Mind Life so much this didn't bother me too much and I actually promoted the deal to some friends I had been encouraging to try the studio, however seeing other people pay a much lower price than regular customers are paying could be an issue for a lot of customers. The other issue that could affect the existing customers of a business like Body Mind Life is if too many people take up the offer and the studio becomes very crowded. Paying a high price for a suddenly very packed yoga studio could be enough to make me unhappy.

3. Damage to brand
We don't discount at Shoes of Prey because we want to build a strong mid to high end women's fashion brand. We've also gone with more reasonable retail pricing as opposed to a higher standard retail price that has room for a percentage of sales to be sold at a discount like many retailers do. Offering a deal on a group buying site would change this approach and potentially damage our brand. We also have a strong social media presence including over 19,000 Facebook fans. A group buying deal would no doubt be posted by customers straight to our Facebook page, so many customers taking up the offer would be our existing customers and we would have then started training them to shop for discounts. This issue isn't applicable to all brands, particularly if they already discount. GAP sold 400,000 vouchers via a Groupon deal in a single day in the US and they wouldn't have done that if they thought it would damage their brand too much. The jury appears to be out though on whether that deal was a profitable one for them.

Whether a group buying deal works for your retail business comes down to your business, your strategy and how you can structure the deal. We actually did a deal with Spreets in their first week of operation back in February last year. We ran with a $50 Shoes of Prey gift certificate for $5. We were hesitant to do the deal at first because we were worried it was misleading - you can't actually buy anything on the Shoes of Prey website for $50, but we made sure that was clear in the offer details and we sold 25 or so vouchers and had no complaints. Another group buying deal we could consider doing would be on our ready made shoes. It's cheaper for us to make lots of the same shoe so that could give us a better margin to work with, however that deal would be off brand in that it doesn't allow the customer to design their own shoes and it goes against our strategy of not discounting, so I'm not sure that would be appropriate for us either.

Have you considered or actually offered a group buying deal for your business?

Cross posted to Power Retail

Wednesday, February 23, 2011

Online Retail Forum Wrap Up

Above: The massive warehouse in Sydney. Photo credit.

Last Friday I attended the Australian Government's Online Retail Forum in Sydney on behalf of Shoes of Prey to talk about the state of e-commerce in Australia.

The event was attended by representatives from a wide range of companies, from the likes of Australia Post all the way to Harvey Norman (a company who, in the past, has been dismissive of the internet as a sales channel).

Our particular panel consisted of Paul Greenberg from DealsDirect, Cameron Poolman from Grays Online, and Peter Strong from the Council of Small Business of Australia and myself.

Some of the insights from our panel included:
  • E-tail is retail -- sure, it's a different channel with its own peculiar mechanics, but the fundamentals remain the same. As Paul Greenberg likes to say, "retail is detail", whether online or offline.
  • The customer is king. Great customer service is critical to running a successful online business. Zappos was called out multiple times for their strong customer service culture.
  • Online business in Australia is on the rise. Deals Direct for instance has shipped to over 1.3 million unique addresses, and Grays Online is a $300m+ business.
  • We should keep looking to the US for inspiration. (Paul and Cameron travel to the US once a year to keep abreast of new e-commerce developments.)

Two points I made specifically: 
  • Australia Post needs to lift their game to improve the reliability of their package delivery. Pleasingly, the representatives from Australia Post told me they are currently working on a number of exciting initiatives, including the ability of consumers to register their details electronically and then re-direct packages while still in transit. This is going to be a killer feature if it gets off the ground.

  • There needs to be more competition in the payments arena if Australia is going to start exporting globally. Currently there is only one bank in the entire country that will allow you to charge credit cards in foreign currencies (the National Australia bank). And, as we've already found, their product is not easy to use, or cheap to setup -- in fact they required us to hand over a $10,000 deposit in order to get started. (Side note: We currently use PayPal for 100% of our payment processing, and love them. That said, we'd love to see more competition and innovation in this space, as payment processing is a critical piece of infrastructure.)

Despite not entirely hitting the desired mark with the press -- resulting media reports tended to focus on possible job losses caused by e-commerce -- the event overall was very positive. It demonstrated a clear commitment from the Government to encourage investment and innovation in the sector; and hopefully should pave the way for more programs aimed at encouraging Australian businesses to start transacting online. That's great for consumers, and great for companies like ours.

Monday, February 21, 2011

Using Custom Reports in Google Analytics to identify influential pages

Like most online retailers, we’re always looking for ways to turn our website visitors into customers.  We use Google Analytics to monitor the performance of our website and our online marketing and to understand how to make our website even more appealing to potential customers.

As part of our ongoing efforts to improve our website, we recently asked ourselves: which pages on our site are most influential to our customers’ purchase decisions? For example, if someone visits our testimonials page, does that make them more likely to make a purchase? How about watching the videos on our leather page, visiting our gallery, or arriving on our small shoes or wedding shoes landing pages?  We knew the answers to these questions would help us maximise the number of purchases from our website.

Custom reports
To start answering these questions, we created a Custom Report in Google Analytics to review the “Highest Converting Pages” on our website.  You can make a copy of our custom report setup here and use it with your own site data.

This report shows us three key data points:
  1. Pages that people visited (Page column)
  2. The number of views each page received (Pageviews column)
  3. How many sales (ie goal completions) were generated in that same visit session after visiting one or more of those pages (Total Goal Completions column)
Analysing the data
We then divided Total Goal Completions by Pageviews (on a separate spreadsheet) to discover what percentage of people who visit a particular page end up making a purchase. We assumed that the higher the percentage, the more valuable that page for turning visitors into customers. We could then promote the content on those pages more across our website. 

We kept in mind a few circumstances that could impact this data. For example, people visiting our shopping cart or logging into our members area will have a high conversion rate, so we filter those pages out. Customers looking to purchase may be more likely to visit our page about our returns policy. We also kept in mind that we were looking at the same visit session only. Often, customers make multiple research visits before they finally make a purchase.  Therefore, we were conscious that there may be other pages that motivate purchases, but are not reflected in our custom report because they were viewed in another session.
After reviewing the data, we determined that our most influential pages were:
3. Tab2 - the delivery tab on our product page
Taking action from our insights
Knowing our most influential pages has helped us maximise the number of purchases we generate through our website. Once we reviewed the data, we took the following next steps:
  • We’re in the process of redesigning our shopping cart, and we’ll look at ways to incorporate this information within each step to reduce drop off and increase conversion rates. For example, we’ll provide information about our returns policy and deliveries within the shopping cart pages itself. This will reduce the need to click away to our FAQ page.
  • We’ll also consider making some of this information, especially our customer testimonials, more readily accessible on our home page and custom shoe designer.
  • We’ll include some of this information on key search engine marketing landing pages such as our gift certificate page.  For example, we’ll incorporate customer testimonials in order to assure those purchasing our gift certificates that they are providing a gift that will be appreciated.
  • This will be good information to incorporate into discussions on our Facebook fan page and in videos on our YouTube channel.

We’re excited by the range of insights that Custom Reports provides us.  It allows us to slice and dice our data within a single report rather than having to combine separate reports within a desktop spreadsheet.  We would love to hear about the custom reports that you find useful for your online business.
This post was first published on the Asia-Pacific Conversionroom blog.

Friday, February 18, 2011

A Star Trek online retailing future

Shoes of Prey is a pure-play online retailer and we've decided against offline retailing for the time being. As we look to grow our business an important question for us is how large can the online retail industry grow as a percentage of total online retail sales and what will the industry look like in the future?

Estimates of online retail sales as a percentage of total retail sales in Australia vary from around 3%-5%. In the US online retail sales currently account for around 7.5% of total retail sales and in the UK the figure is closer to 10%. Jeff Bezos, Founder and CEO of Amazon in a letter to shareholders in 2000 said with growth in processing power, disk space and bandwidth he expects the online retail market to eventually settle at around 15% of total retail sales. That's an old quote and I wonder if that estimate is high enough?

Shoes of Prey is not even 18 months old so even thinking 3-5 years out is a long way for us, and clearly the online retail market is going to grow significantly within that time frame which is our main concern. But it's interesting to think about how large the market can grow in the future.

The major barriers to buying a product like women's fashion shoes online are:
  • The exact look and feel of the shoes, particularly the colour and quality.
  • Fit and not being able to try the shoes on.
  • For many women shopping is a fun experience and browsing products in store is a form of entertainment that is difficult to recreate online.

Let's look forward 10-20 years and see how these issues might be addressed online. Keep in mind that the first time most of us used the internet or even a mobile phone was only 15 years ago and now I have a device in my pocket that can tell me exactly where I am in the world, accurate to within a meter by communicating with satellites in space. Yes, space. So I don't think these ideas are too far fetched!:

The look and feel of the shoes. We've already seen an increase in our conversion rate since adding video content to our website and the anecdotal feedback from customers is that the videos provide a better way for them to see and understand the look, colour and quality of our shoes. Fast forward 10-20 years and perhaps, in your own home, you'll be able to pick up a holographic image of a shoe you've designed on Shoes of Prey, hold it in your hand and inspect small details like the stitching and colour tones. With a swipe of your hand the image transfers to your feet so you can see how the particular peep toe shape you like looks on your toes.

Augmented reality on a screen was so 2010!

You can then put on holographic images of the different outfits in your wardrobe to see how the colour of the shoes matches the outfit. A couple of your friends are available on Facebook so you invite them to a holographic chat in your living room. Your friend bends down to take a closer look at how the peep toe looks on your toes and suggests you switch to a slightly wider toe shape so you make that change to your shoe design and your friends agree the shoes will look fantastic so you buy them.

Fit and not being able to try the shoes on. We've already covered how a 3D image of a shoe you can try on could help with some fit decisions, but what about your shoe size? In 2030 you step in front of the 3D holographic camera in your living room and tell it to connect with Shoes of Prey to take measurements of your feet. The camera scans your feet and takes key measurements down to an accuracy of less than 0.1mm. Our software then creates a digital shoe last for you, develops a pattern based on your design and last, then prints the pattern and adjusts a physical last which our technicians then use to make your shoes. The result? Shoes that are much more comfortable than the mass produced shoes available in stores.

A fun shopping experience. It's raining and there's too much traffic on Saturday morning so from the comfort of your own living room you walk through the holographic rendition of the Westfield Bondi Junction mall. A couple of your friends have joined you from their living rooms and you browse the shop windows. Melbourne Cup is approaching and you need some new shoes so you pop into the Shoes of Store where the holographic versions of Carmen and Susie are there to lend you a hand with designing your shoes. Together you review the outfit you have planned (your online wardrobe organiser has helped you select the dress based on who will also be at the Melbourne Cup event you're attending and which outfits they've seen you wear before) and you design a pair of shoes that goes with your outfit. You realise you don't yet have a hat so you call in an assistant from a boutique hat retailer who joins the group in the Shoes of Prey holographic store and helps choose a hat to go with both your dress and new shoes.

My take is that the experiences described above are actually better than the equivalent experiences as they currently happen in physical retail stores. If that's the case, online retail could well become more than 50% of total retail sales. To be honest though, if this is the future of 'online retailing' then retail and online retail will have effectively merged into one. We can already see this starting to happen with 'multi-channel retailing', consumers researching products online which they then buy in store. Or visiting a store, selecting a product then checking on their mobile phones if it's available at a lower price nearby. Technology is only going to blur the lines between retail and online retail further.

While the estimate that online retail sales should grow to 15% of total retail sales is actually probably quite bullish for the Australian market over the next 3-5 years, I think it underestimates where the industry will be in 10-20 years time.

What do you think?

Cross posted to Power Retail

Wednesday, February 16, 2011

What is your competitive advantage?

Harvard Business School professor Michael E Porter says that competitive advantage ‘arises from discovering and implementing ways of competing that are unique and distinctive from those of rivals, and that can be sustained over time’.

This is also tied closely to barriers to entry. 'Ways of competing that are unique and disctinctive ... that can be sustained over time' will make it harder for new entrants to compete in your market.

Let's take a look at some successful businesses and their competitive advantage:

1. Facebook - they own the social graph, and all your friends are on Facebook. I might prefer the features that a new social network offers, but if it doesn't know who my friends are and none of my friends are on it there's no point in me switching.

2. Google - habit and your default search engine. When they launched in the late 90's and for a long time afterwards Google's competitive advantage was their search algorithms, they provided much better search results. However they've not been able to completely sustain this into the present time. Microsoft have invested hundreds of million of dollars in Bing and they've arguably closed that gap, but people don't just switch their search engine. We're all used to 'Googling it'. If we need to find something we visit, or we use the default search engine on our Android or iPhone which is Google, or in Firefox or Chrome, Google. Google develop and give away the Android operating system and Chrome web browser just so they can be the default search engine without having to pay a fixed fee or a percentage of their search engine ad revenue to Apple or Firefox. Being your default search engine is now Google's competitive advantage.

3. eBay - They've built a network of buyers and sellers. For a competitor to enter the market they need to build up that same network of buyers and sellers. Too many buyer and no sellers won't work, neither will too many sellers and not enough buyers. Building this network is hard to do.

4. Apple - I find this one harder to define but I suspect it's 2 things. 1. Their internal systems and processes that allow them to create, develop and manufacture amazing products that completely disrupt markets like the iPod, iPhone and iTunes, or create new ones like the iPad. 2. Brand loyalty that has developed as a result of competitive advantage 1.

What is our competitive advantage at Shoes of Prey?

There are a few potential candidates:

1. Our website and online shoe designer. While this is different to what is available in the shoe retail market and took some time to develop and build it's not hard for another company to build an online shoe designer like ours so this isn't our competitive advantage.

2. Manufacturing custom shoes. This is difficult to do and from our research there aren't many shoe suppliers in the world who will entertain making custom shoes. We work with two of the best suppliers in the market. That said we outsource this part of our business, there are other custom shoe manufacturers in the market and the investment for a company to build their own custom shoe manufacturing operation wouldn't be that significant nor would it be difficult for a company with experience in manufacturing, particularly shoe manufacturing. A company like this might then struggle with the online marketing this business requires, but again that skill can be purchased. So manufacturing isn't really a competitive advantage for us.

3. Our customer base and our relationship with our customers. I think this is where our competitive advantage and potential barriers to entry lie. We've had millions of visits to our site since our launch so we have reasonable brand awareness but best of all our customers are passionate. They love our product from the experience of designing their shoes online, our customer service and the end product, the shoes themselves. They're passionate about our product and passionate about our brand. A brief read of the interactions on our Facebook page give an idea of this.

So I think our competitive advantage and main barrier to entry lies in our customers. The thing that would be most difficult for a competitor to replicate would be our customer base and our relationship with those customers. That's the key area we need to continue to focus on, improve and develop the most.

What's the competitive advantage of the business you work in?

Cross posted to StartupSmart

Monday, February 14, 2011

Why didn't our Valentine's Day Facebook campaign work?

Happy Valentine's Day everyone!

We thought we'd experiment using Facebook to target male friends of our Shoes of Prey fans with a Valentine's Day ad, to see if we could encourage purchases of Shoes of Prey gift certificates for Valentine's Day. Unfortunately the campaign didn't work at all, our ads simply weren't clicked on and I'd love to hear your thoughts as to why.

To the left is the ad we used. We were targeting male friends of fans of the Shoes of Prey page aged 25-64. We set the landing page as a special gift certificate tab on our Facebook fan page. The reason for doing this was so the social element would be added to our ads, anyone seeing the ad could see which of their friends liked our fan page, and because we were only targeting friends of our fans, everyone who saw the ad had at least one friend who liked our fan page. If your landing page is your Facebook page then the social element happens, if you use your own website as the landing page then there is no social element to the ad. We ran the ads in Australia, New Zealand, the US, UK, Canada and Ireland.

For our normal Facebook ads we get a reasonable amount of traffic for around $0.15 per click. We bid between $0.20 and $0.40 for our Valentine's Day campaign (a higher amount for Australia which converts better for us). Overall we had 26,000 impressions and a dismal 7 clicks on these ads. The normal click through rate for our Facebook ads is around 0.1%.

The obvious reason why this didn't work is that the image just didn't attract guys to click on it. Our theory was that the image would catch the eye of guys as a Valentine's Day reminder and the social element would encourage them to then click on the ad. Any thoughts as to what we could do different next time? Did any other Valentine's Day ads on Facebook or any other ad networks catch your eye this year?

Friday, February 11, 2011

Payment processing in Japan

Japan is well known for being the most advanced mobile phone markets in the world. I'd read about mobile phones being used to pay for things in Japan but I hadn't realised how cool this actually is until I was in Tokyo recently. You can pay for your taxi, buy something at the convenience store and use public transport simply by swiping your mobile phone over a pad! That is uber convenient. The technology used is Near Field Communication (NFC). Your credit card is associated with your phone payment account so the money is just deducted off your credit card. There are actually competing mobile payment providers and you can see the 3 different mobile phone payment pads in this convenience store. This service has been available for about 5 years in Japan now.

The closest thing I'd seen to this before is the Octopus card in Hong Kong which allows you to board the train and make purchases from a lot of stores. The Octopus card is an extra card you have to carry though, using your mobile phone which you have with you anyway is an extra step of convenience.

What I find interesting is that Apple (iPhone), Rim (Blackberry) or Google (Android) haven't tried to implement something like this in other markets... yet. The Google Android Nexus S incorporates NFC and recent reports suggest the iPhone 5 will as well. No doubt we can expect that Apple and Google will shortly be moving in on this market. Given their high market share of devices in countries like Australia and the US there is huge potential to role a payment system like this out and take a small percentage fee on all these transactions.

Wednesday, February 9, 2011

The benefits of differentiating your offer for online retail

Originally published to Power Retail.

The growth of online retail is making business much more difficult for retailers who sell branded products that aren't their own. It's very hard for a retailer selling say a Canon camera to differentiate themselves. Yes, they can offer better service or a better in store experience, but for a $1000+ product those differentiators are minor compared with the actual cost of the product itself. Why would I pay $1349 for a digital camera at Harvey Norman (which I have to go in store to purchase because it's not actually available online) when I can purchase it from an online retailer based in Hong Kong for $570 (inc shipping) ? (The Canon 550D and Kiss x4 are identical cameras, the Kiss x4 is just the Japanese version). Even if the Australian government charged me 10% GST for importing it Harvey Norman is still more than double the price.

Harvey Norman, Myer and many other Australian retailers are experiencing this exact issue at the moment. They've decided to blame this on the government not charging GST on sub $1000 online retail purchases made overseas, but as can be seen from the above example that's just a red herring and isn't the real issue. A historical lack of competition in the Australian retail market has meant Australian retailers are used to operating on much higher gross margins than their foreign counterparts and now that online retail is opening up the local retail market to foreign competition, Australian retailers are suffering.

This is the danger of retailing someone else's product. When the end product the consumers want can be purchased from many different retailers, margins are going to be squeezed. That's great for the consumer and generally positive for the owner of the branded product but bad for retailers.

There are two solutions to this:

1. Differentiating your retail offer
Zappos, Amazon and Net-a-Porter are all great examples of this. They mostly sell other people's products but they've been able to build strong points of different between themselves and other retailers. For Zappos it's their extraordinary customer service, for Amazon it's convenience, fast shipping and through their operations the ability to be the lowest cost retailer and Net-a-Porter it's their online shopping experience and packaging.

2. Differentiating your product offer
Apple is arguably the best example of this. Given their rapid store roll out and the number of fanatical customers constantly in their stores Apple's retail stores must be a very profitable part of their business. Apple products are available in other stores but they can essentially control the retail pricing through their wholesale pricing. They don't need to be pushed on margins to compete, if I want to buy an Apple product I can't get it for half the price by shopping around.

Australian retailers are generally poor at differentiating their retail offer but are getting better at differentiating their product offer. Woolworths and Coles have done big pushes with their house brands 'Select' and 'You'll Love Coles' in recent years. Supercheap Auto had a similar roll out of house brands while I worked there. That said the goal of these house brands is generally to just match the quality of the major national brands but gain more control over the pricing and the brand. Because the product is not significantly differentiated Woolworths or Coles can't charge a premium on their house branded corn flakes over Kelloggs corn flakes, they actually have to charge less because it's a very similar product minus the well known and trusted brand.

We're in the good position at Shoes of Prey where we only sell our own product, and it's significantly differentiated from nearly every other women's fashion shoe sold on the market in that customers can design it themselves. While we can't price our products ridiculously, we're not pushed on margins in the same way that a retailer selling a well known branded shoe can be. If a customer wants to design their own shoe there aren't a myriad of options available to them. Ideally we'll also build Shoes of Prey into a well known, trusted, iconic brand so even if other companies enter the custom shoe market we're still in a strongly differentiated position as the only retailers of Shoes of Prey shoes.

Hopefully other Australian retailers start to move in the direction of differentiating either their retail or product offer. The issue for retailers having their margins squeezed on products that aren't their own is only going to increase over the coming years as Australians get more and more used to shopping online.

Update: On Monday Myer and Sass & Bide announced that Myer had acquired a 65% stake in Sass & Bide for $42.25m. A key component of the deal involves Myer having department store exclusive rights to sell the brand. No mention of whether that extends to online sales, but it would be a smart move for Myer's online store if it did.

Monday, February 7, 2011

Welcome to the Shoes of Prey team Penny!

Today we welcome our 9th member to the Shoes of Prey team, Penny. Penny comes from Yueyang in Hunan province. Penny is in her third year studying Information Systems and Information Management at Hunan Business University, however she's focused her time learning English and speaks it very well. She's joining us full time and will be working with Vanessa and Qun in our China office. Penny will take 1 month off in June to prepare and complete her University exams. While at University she's worked many different part time jobs including promotional roles and at restaurants. One of her favourite jobs was dressing up as a robot cat to entertain children at a kindergarten!

Penny will report to Vanessa and she'll be working with Vanessa and Qun to ensure all our shoes are photographed, packed and delivered to our customers on time.

Welcome to the team Penny!

Friday, February 4, 2011

Comparing the costs of launching an online vs physical retail store

I was recently asked the question:
I’m planning to launch an accessories retail shop. I will almost certainly do this online, but I wanted to know exactly what overheads I’ll save compared to a bricks and mortar store. Generally, are the savings extremely high? What kind of overheads do you cut down on by having an online store?
It's a great question. It's certainly much cheaper to launch an online retail store compared with a physical store, and there are significant cost savings to be made. That said, there are also some significant disadvantages to operating an online only store. So it's worth looking at both the pros and cons.

Advantages to opening an online only retail store
There can be significant cost savings opening an online only retail store when compared with a physical retail store. The major costs you won't incur:

The annual rent you'll pay can vary significantly depending on your target customer and the type of store you're looking to open. We were recently looking at Oxford St. in Paddington, Sydney as a potential location for a Shoes of Prey retail store and rents there can get as high as $150,000 per year for a 70 m2 store. A good location in the major mall of a capital city will be much higher than that, as will a store in a premium Westfield centre. Australia has some of the highest retail rents in the world with Sydney ranking second highest in the world for retail rents and Brisbane and Melbourne are not far behind. By operating online you'll avoid paying rent which is a major cost saving.

Unless by some incredible coincidence the previous tenant had fit out the store in a way that exactly suits your brand, you're going to need to spend some money to fit out a physical store if you lease one. We received a quote for moving some walls, redoing a floor, painting, fitting out an alarm system, replacing the air-conditioning and some other works to a store we were looking at in Paddington Sydney. We were quoted $120,000. That didn't include shelving, fixtures and fittings which would have cost extra on top of this price. To keep a store fresh it will need to be re-fit out every 5 years or so and requirements to re-fit out stores are usually written into leases at major shopping centres.

A physical retail store needs to staffed whenever it's open. If your store is going to operate 7 days a week and average 10 hours open per day you're going to need 2 full time staff just to keep the doors open, and more if you want to have 2 or even 3 people in the store during busy periods. Depending on the quality of the staff you want to hire, you're looking at least $100,000 a year in staffing costs. You'll need people to run the customer service for your online retail store, so you're not getting out of this cost completely, but if you launch with email only customer support as we did it's much more flexible in terms of staffing. As you grow and hire staff you can add phone and chat support as we've done at Shoes of Prey, but you can get away with much lower staffing at launch to keep your costs down.

Electricity, insurance, phones and other incidentals
There are a whole range of smaller costs that you'll incur opening a physical retail store. Many of these you'll also incur with an online store but they will generally be lower. You don't need expensive to run down lights to light up your store, insurance for a small warehouse is generally much cheaper than a retail store and you can get away with a Skype In number instead of a phone line for phone calls.

If you add all that up there are certainly some significant cost savings in opening an online store compared with a physical retail stores.

Disadvantages of opening an online only retail store
While there are some significant cost savings in opening an online only retail store, there are also some significant disadvantages which need to be weighed up against the benefits.

Building your online store
Like rent, the cost for doing this can vary significantly. To start out you can try an off the shelf system like Shopify that makes it really simple to put together a high quality online store without a great deal of technical knowledge. Hire a designer to put together the graphics and you potentially have a good online store for under $5,000, plus a percentage of your sales ongoing depending on which Shopify plan you go with. At the other end of the scale you might want to do something unique and different like we did with Shoes of Prey. One of our co-founders Mike Knapp is an ex-Google software engineer so he built the site in house, but the value of the time he's put into the site would be worth many $100,000's. To get to launch would have cost us around $80,000 in Mike's time so that was still cheaper than if we'd launched our business with a physical retail store.

Most online retail businesses will need to warehouse the stock they're selling. The size of the stock will determine how expensive warehousing is going to be for you. Most online retailers I speak to, us included, used the founders living rooms as warehouses when starting out, so the cost here is more your sanity than a physical cost. As you grow though you'll need to look into warehousing. There are third party providers who will manage the warehousing of your stock for you, or at the other end of the scale you can set up a multi-million dollar facility as DealsDirect have done in Australia.

If you're selling online you're going to need to ship your goods to customers. You'll need to work with a local company such as Australia Post (which has it's challenges) or a local courier service. We're a more unique case at Shoes of Prey because our products are mostly made to order. We use DHL to ship our shoes directly from our office in China.

Potentially the biggest variable in opening an online store versus a physical retail store is marketing. I'll break this down into 2 sub components:

Traffic - A physical retail store in a good location provides great foot traffic and customers to your store. Just by being there you'll hopefully be selling product. A poorly marketed online store might sit there with very few visitors. If there's nothing to differentiate your online retail store it can be an uphill battle getting visitors to your website. That said, if you have a unique proposition you can bring a lot of people into an online retail store. Back in March we had a record day with 197,000 people visiting our site. Good luck fitting that many people into a physical retail store! More than 2/3 of our traffic and 60% of our sales come from people outside Australia. We'd need a massive network of stores to achieve this offline.

Conversion Rate - It varies greatly depending on the product but a good physical retail store should make a sale to around 20% of customers who enter the store. An average Australian online retail site will sell to 1% of visitors to the site. Our conversion rate at Shoes of Prey is much less than that. There are a number of reasons for this, it's certainly much easier to visit an online retail store than a physical retail store, but there are also issues around not being able to see and touch a product. This is a significant issue for us selling women's shoes online as shoes are something most people would ideally like to try on before they buy them. We try to counter this with great photography and educational videos on our site, but until technologies improve significantly online retail stores will continue to have much lower conversion rates than their physical counterparts.

There are some significant cost savings in opening an online retail store compared with a physical retail store, but there are also some potential disadvantages as well. We're clearly strong proponents of online retailing at Shoes of Prey but you need to ensure you have a unique offer and a strong point of difference from your competitors to succeed in the space.

Cross posted to Startupsmart

Wednesday, February 2, 2011

Our Japanese courier company

On my recent trip to Japan I was impressed to learn about the local Japanese courier service we use to deliver shoes to our customers. Unlike every other market we ship shoes from our office in China to our office in Japan, repackage the shoes then delivery locally to customers.

The Japanese courier company we use is called Sagawa. We have a corporate rate of ¥600 (AUD$7.30) for next day delivery across most of Japan. That's cheaper and faster than Australian Post but what I love most about them is that their service is amazing.

When they're on foot the couriers run everywhere they go, they literally run! They do an Outward Bound course and run up Mt Fuji as part of their training. They'll come to our office multiple times a day to pick up shoes if we need them to, and when delivering the shoes to customers they'll leave a slip if you're not home, and if they don't hear from you they'll often try again later that day, then each day after that until you either contact them to arrange a time or your shoes are delivered.

Sagawa provide an amazing service at an amazing price and it's supporting industries like these that help online retail to thrive in the Japanese market. Obviously it's easier to offer this service at this price when you're servicing a market of 127m people living in a relatively small area but the service offered by the likes of Australia Post is just too far at the other extreme. For online retail to thrive in Australia we need supporting businesses like Sagawa.

Cross posted to Power Retail