Monday, January 31, 2011
Mail order shopping
Back in the 1980's and 1990's significant mail order businesses were launched in the US and UK. Customers would browse catalogues then call a mail order business to place an order which would be delivered to them at home, an experience similar to shopping online. With the growth of online retail in the late 1990's and particularly the 2000's, US and UK customers easily made the transition from shopping in catalogues to the much more interactive experience of shopping online. These mail order businesses never really developed in Australia, so it's been a more difficult task for Australian retailers to train Australian customers online.
Dotcom boom and bust
Many of Australia's large retailers were burnt in the Dotcom boom and subsequent bust. Online retail was touted as the future of retailing and many Australian retailers invested millions of dollars in their online stores only to find that customers weren't ready to shop online. After the bust it became nearly impossible to pitch an online strategy to senior managers and board members at large Australian retailers without being laughed out of the meeting, so Australian retailers went the other way and invested very little in their online stores. Traditional US retailers like Best Buy and Walmart continued to invest in their online stores despite the bust and are now reaping the benefits. Online upstarts like US based Amazon and UK based Net-a-Porter and ASOS have grown to become major players in the retail landscape leaving Australian retailers far behind.
Lack of support industries
Delivery costs to ship goods purchased online in Australia are much higher than in countries like the US or UK. In addition to charging higher rates Australia Post contractors card inner city customers so they have to collect their online purchases from the post office, a terrible shopping experience. At Shoes of Prey we've had to resort to using the German courier company DHL to deliver our shoes to Australian customers.
Banks leave a lot to be desired in how they offer merchant facilities to online retailers. NAB is the only Australian bank to offer a multi-currency facility which allows Australian retailers to charge overseas customers in their local currency. The software, processes and the time involved to set up the NAB facility are so bad that at Shoes of Prey we use the US firm PayPal to process all of our online transactions.
If we want a strong online retail industry in Australia we need strong supporting industries which we lack at the moment.
Less competition = lack of innovation
BestBuy in the US had to learn to market and sell online which they are doing successfully in innovative ways. To compete with all the other grocery chains in the UK, Sainsbury's have developed a fantastic online store which now makes up a significant and growing proportion of their sales.
While the current situation is less than ideal, there's hope for online retail in Australia. We have an innovative, hard working culture and when we put our minds to it we can be very competitive internationally. Australian online retailers like Kogan and Catch of the Day have managed to build strong, international online retail businesses. DealsDirect and OO.com.au have established very successful businesses domestically. JB Hi-Fi, BigW and Supecheap Auto have excellent online stores and Westfield have recently launched an online shopping mall. What we need now is for the likes of Myer, Harvey Norman and Target to stop looking at online retail as a threat, and instead focus on innovating in the space. Let's grow the industry so that Australian consumers can have a great online shopping experience and so that Australian retail jobs remain in Australia. Wouldn't it be fantastic if the next Amazon or ASOS was an Australian business?
Cross Posted to Power Retail
Friday, January 28, 2011
1. Develop the product concept
2. Scale the offer
3. Measure and increase the lifetime value of a customer
4. Acquire customers at scale
1. Develop the product concept - seed funding
At this stage you have an idea but haven't yet developed the concept, nor launched and tested it. Shoes of Prey took us 9 months to get from idea to launch. Then we've essentially spent the last year tweaking the concept and satisfying ourselves that our product is something the market wants. For this stage of the business you'll need a round of seed funding.
For Shoes of Prey, Mike, Jodie and I funded this stage ourselves. We basically paid for the businesses costs as we went from our own savings and of course tracked this in our accounting system. At the peak we had put in a combined total of $150,000. Plus we have only drawn a very basic salary since launch, so there's a heavy cost in terms of our time too. If we had no savings and needed to draw a basic wage we would have needed at least $250,000 in seed financing to take us through developing the product concept.
Realistically, unless you've got a strong entrepreneurial record or some great contacts angel investors and venture capitalists are unlikely to be interested in your business at this very early stage. A great place to start at this early stage is with an incubator like TechStars or Y Combinator in the US, or Startmate here in Australia, however these incubators are designed to provide advice and assistance more than significant startup capital. The simplest place to go to raise a seed financing round is friends and family.
Coming up with a valuation for a seed round isn't a simple process. I've put this as a question to a number of venture capitalists and angel investors and there's no hard and fast rule for valuations. A good place to start though is to look at how much you need to raise, then take the process from there. If you need to raise $250,000 as we did at Shoes of Prey, how much of the business do you need to give away for that? One way to start is to look at what the business should be worth in 3-5 years time. Over that time period, given the risk involved a seed investor would generally be wanting to make a 3-5x return on their initial investment. If your business plan shows your business should be turning over $10m in 3 years time and making a $2m profit, at a reasonable 5x multiple your business will be worth $10m. With a 4x return for the seed investor, that makes your business worth $2.5m now, so you'll need to giveaway 10% of the business to raise $250,000.
If you're raising this money from friends and family it's important to live by the old adage 'Do to others what you would have them do to you'. You want to be very open and upfront about the investment and the risks involved. The last thing you want is for your business to go under and your relationships with your friends and family to go down with it. You don't want to be encouraging people to invest their life savings in your product concept. There are also fairly strict rules around who you can raise money from and the types of information you're required to give them, so speak to a lawyer or accountant before going ahead with this or any stage of financing.
2. Scale the offer and 3. Measure and increase the lifetime value of a customer
Once you've proven the product concept you'll want to set your business up so that it's able to scale and grow quickly, and measure and work on increasing the lifetime value of a customer. Some of the risk has been taken out of the business in that you've proven customers like your product but there's still significant risk on the operational side in getting your business ready to scale and it may be that you've just found a niche group of customers who like your product and the mass market won't be interested. At this stage an angel investor or even the right venture capital firm might be interested in investing in your business or in an ideal case you can fund these two stages out of your own cash flow as we're doing with Shoes of Prey.
If you're looking to raise money at this stage of your business you're going to face a similar valuation question as in step 1. The process for determining the valuation is likely to be similar, though you may be able to introduce the additional element of a potential exit if there is a good, potentially strategic acquirer who might be interested in your business in a few years time. If this is the case you might be able to put a good case forward for a higher valuation than the one outlined in step 1 above. For example Zappos and Diapers.com were both acquired by Amazon at higher valuations than 5x their annual profit.
4. Acquire customers at scale
At this stage of the business you're looking to acquire customers at a cost that's lower than their lifetime value. If the lifetime value of a customer is $1000 and it costs $300 to acquire them, but the lifetime value is realised over 3-5 years you'll likely need funding at this stage of your business to acquire customers at scale. This is the stage of a business that venture capital firms love. The risk is greatly reduced because the business has a proven concept, is ready to scale and marketing channels have been found to acquire customers at a value less than their proven and measurable lifetime value. Venture capital firms are also often well connected and the right firm can often assist you in scaling and growing your business.
Ideally at this stage of the business the greater certainty makes coming up with a valuation easier. A strong story about why your business is uniquely placed to scale into a significant sized business, backed up by sales and marketing data, and a strong case for a potential exit for the venture capital firm in 3-5 years, be it through an acquisition of your company or an IPO will put you in good stead to get a strong valuation at this stage of your business.
If you've had experienced raising money for your startup, whether it's in the online retail space or otherwise I'd love to hear your thoughts in the comments.
Cross posted to NETT Magazine.
Wednesday, January 26, 2011
We've been asked a number of times why we don't yet have a mens range. We had considered it when we were in the early stages of planning Shoes of Prey, but the main reasons we didn't start off with it were:
- the manufacture of men's shoes is, to our research, at a significantly different (and higher) price point from women's shoes which leads to market targeting issues.
- generally, women are more interested in fashion, so are more likely to want to be able to design their own shoes than men.
- women shop more frequently for shoes than men do, i.e. "men buy, women shop"
Overall, women seemed like a much better market for this idea.
Recently, I read an article published by Lightspeed Venture Partners, on their decision to invest in Bonobos, that contained a great insight into the way men and women shop. So firstly, what's Bonobos? it is a mens apparel e-tailer, focused on selling better-fitting trousers to men who have bigger legs - the fashionable medium between super-skinny jeans and baggy, pleated trousers. Since launch in 2007 the range has expanded to cover products including jackets, polos and more. Part of the success of Bonobos has been understanding how their target market shops. What the guys at Bonobos uncovered about the way men and women shop, is this:
Looking at this model against Shoes of Prey - we offer a design service, that requires time and engagement to get to the end product. We do offer fitting services, but the attraction is primarily about becoming the designer - creating whatever your heart desires. So broadly speaking, it feels like Shoes of Prey plays on it's strengths by targeting the female customer.
Do you think that this is a fair assessment of our idea to focus on women, or do you think we are missing an opportunity by not producing a mens range? What do you think men want when it comes to footwear?
Image credit jagwired
Monday, January 24, 2011
Due to the importance of packaging, the Shoes of Prey team in Japan have developed their own Shoes of Prey gift certificate and their own packaging process for Japanese customers. Unlike the rest of the world we ship customer's shoes for Japan from China to the Japanese office where they're repackaged before being couriered to the customer. There are a number of reasons for this:
- Our boxes are sometimes damaged during international shipping. A Japanese consumer wouldn't accept a damaged shoe box so repackaging in Japan allows us to use new shoe boxes.
- Our original shoe boxes were sub standard for the Japanese market so the Japanese team sourced their own shoe boxes to use for Japanese customers. We've since switched to a similar shoe box for the rest of the world.
- Our felt shoe bags can attract dust so Yuka and Taka ensure all the dust is removed from the bags before the shoes are re-boxed.
- Yuka hand writes a note in Japanese to each customer to be delivered with their shoes. (We write a note in English for customers in other markets, but English wouldn't do for Japan).
We felt that localising our product for other markets would be critical for us to grow, particularly in markets like Japan and it's fantastic to see that in action. We'll also take back with us some of the processes the Japanese team are using and apply them to the rest of the world.
Thursday, January 20, 2011
We sell custom shoes but because all our shoes are designed for women, I've never had the opportunity to design and order a pair for myself! I'd like to note here that Mike and I designed our gladiator heel which has been our best selling design, a point of contention with Jodie. ;) And I may or may not have tried on a pair of these in size 44 which we had in the office at one point. But I digress, my point is I've never been able to design a pair of shoes I could wear day to day for myself, so I wanted to try that out in the NikeID store.
Many of our customers tell us when they order their first pair of shoes that they already have a number of other designs they're planning to order. I experienced the same thing, I loved the combination of blue and yellow, but I wanted something interesting that would go with my black jeans and black jacket. So I decided to put the blue and yellow idea on hold for next time and went with a base of black.
1. You can choose a second set of laces. I went with purple for my main set and ordered a pair of green laces as my second set.
2. You can choose text to be written on each shoe. Yusuke jokingly suggested "Left" and "Right" might make it easy for me to remember which shoe was for which foot. I thought I'd be "funny" and went with 'Left' on the right shoe and vice versa.
The in store experience certainly had a number of pluses over the online experience on it's own. I got to try on the shoes for size, Nike don't allow you to return the shoes if they don't fit so I'd been hesitant to order until now. Seeing the leathers and some finished shoes was nice. They also had some clever marketing in store:
- They had a number of materials that were exclusive to that store only, offering an even more unique design experience.
- They have a folder full of little cards with images of all the shoes people have designed in the store, including the customer's name and the name they gave the shoe. A little piece of me wanted to have my shoe in that folder.
- After I placed my order they printed an image of my shoe onto a plastic, credit card sized card. This is now in my wallet and I've shown it to a number of people which promotes NikeID.
- If I wear my NikeID shoes into the NikeID store within 3 months of receiving my shoes, I get a discount on my next pair.
I have to say, I thoroughly enjoyed the NikeID experience. After 18 months I finally experienced the same excitement that our customers describe to us when they're ordering their shoes. I knew logically that designing a pair of unique shoes for yourself is exciting but it was great to experience that for myself. After placing my order I then had a second experience similar to that of a Shoes of Prey customer. The staff member explained that shipping normally takes 2-4 weeks, but that with Chinese New Year approaching my shoes might take a little longer! That was definitely disappointing to hear. We're currently communicating an 8 week turnaround to our customers, up from our normal 4-5 weeks. Logically I know this is disappointing but it was fascinating to actually experience that myself.
The next day I showed Jodie a picture of my shoe. She politely informed me that I had done what the occasional Shoes of Prey customer does and had gone a little crazy with my new found designing power, she said a green sole, purple laces and pink polka dots on my shoe were all too much! Now I admit that does sound crazy, and I will admit that the shoes do look a little crazy, but hey, I wanted something different and unique to go with my black jeans and black jacket and I'm pretty sure I'm going to get it!
Anyone else ordered from NikeID and what do you think of my shoes?!
Monday, January 17, 2011
At Shoes of Prey we ship our shoes directly from our office in China to customers all over the world. We previously used a company called EMS to do our shipping, however EMS contract with Australia Post for local delivery in Australia and as discussed in another post, we were very unhappy with their service and given 40% of our customers are in Australia we decided to switch from EMS to DHL. DHL are fantastic, our shoes take 3 days on average to be delivered to customers and they deliver to the customer's door and will call the customer or leave a card to arrange an alternative delivery time if the customer isn't at home. I've heard good reports about UPS and Fedex as international couriers too. Our average shipping cost to Australia with DHL is around $30, so we only make a slight loss charging customers $25 shipping. And as our volumes continue to grow and our monthly spend with DHL increases they will reduce our prices so it's feasible that our average shipping cost per shoe will drop to around $20 next year. As a point of comparison, the DHL retail rate for a single shipment of a parcel of shoes to Australia is about $65, so a higher shipping volume leads to a much lower shipping price.
What are the alternatives for online retailers shipping product to customers?
1. Ocean freight and local delivery.
Most traditional retailers and larger online retailers will ship their goods by ocean freight to Australia. Online retailers will then warehouse the product and ship individual parcels to customers within Australia. We used ocean freight to deliver some ready made shoes to stock in Sydney for our Westfield online store. The costs broke down as $x fixed costs for the delivery plus $y variable cost per kg. The shipment took 3 weeks door to door. If you're only ocean freighting a small shipment in terms of weight it's not cost effective because of the fixed costs, but if you're shipping lots of heavy products it's much cheaper to ocean freight. The costs for ocean freight drop even further when shipping whole containers of product as the large Australian retailers do.
2. Bulk airfreight and local delivery.
Another option is to bulk airfreight goods to Australia, then split out the parcels and deliver them using a local delivery service. Where this can be cost effective for an online retailer is when they're shipping light weight goods. Courier companies like DHL charge one rate for the first 0.5kg to cover delivery then a lower rate for each 0.5kg on top of that. If we were selling custom watches or something that only weighted 100g or 200g, rather than paying around $30 per parcel as we do now, (or slightly less given each parcel would be 0.5kg rather than our average of 1.2kg), we could bulk airfreight all the product to Australia, then reship within Australia using a local courier service. Bulk airfreighting a 200g parcel would come out at around $2 per parcel, then the local courier fee should be around $10-$15, a reasonable saving. The downside is the additional day for local delivery on top of the international delivery, and the costs of repackaging the products locally, though individual parcels could potential be labelled in China so they're ready to be unpacked and shipped immediately in Australia.
We actually use this option for our customers in Japan. There's not much of a cost saving in doing this because our parcels average 1.2kg anyway, however our Japanese partners repackage the shoes in line with the very high packaging standard expected by Japanese consumers and we use a very cool local Japanese courier company who literally run the shoes to the customer's door and provide an amazingly high level of service in their delivery, which an international firm couldn't provide in Japan.
3. Airfreight direct to the customer.
As described above, this is the option we use for Shoes of Prey. Ocean freight wouldn't make sense for us as our shoes are individually handmade in China. We've done the calculations and bulk airfreight with local delivery ends up costing around the same as airfreighting direct to the customer and it takes longer. In addition our delivery expenditure would be split across an international then a local courier company, so the discount offered to us based on our volume would be less. Airfreighting direct to the customer works best for us.
If you've had experience shippings goods from China I'd love to hear your thoughts.
Cross posted on Power Retail.
Wednesday, January 12, 2011
In the case of Shoes of Prey we're in the fortunate position that we receive payment from our customers first, then pay our suppliers after the shoes have been made and shipped. This is fantastic from a cash flow point of view. The situation gets even better in periods like the lead up to Christmas where we've sold hundreds of gift certificates. The gift certificates are paid for in advance then may not be redeemed until some months later.
It would be very tempting to see this money we have in the bank and go spend it on a fancy office or to experiment with a Shoes of Prey store, but while cash-flow is great, we need to keep in mind our profit and balance sheet. It's all well and good having cash in the bank, but when we look at our balance sheet we now have a liability equal to the cash we have in the bank for all the outstanding gift certificates we've sold. As those gift certificates are redeemed we'll be paying our suppliers without receiving additional payment from customers. The same goes for profit. Just because we've sold lots of gift certificates that are yet to be redeemed doesn't mean our profit margin has increased. If we just looked at our cash situation during December things look fantastic. But we need to remember that January and February will be quite different from a cash point of view, and despite the cash situation our profit margins haven't changed.
I may have thought those Management Accounting classes at university were an incredible waste of time, but those lecturers were actually on to something. :)
Monday, January 10, 2011
I was recently emailed this question from a reader of this blog:
I'm looking to source a product in China, do you have any tips of suggestions on the best way to go about doing this?
It's a good question. Finding a good supplier who can provide exactly the sort of product you're looking for is a critical step for an online retail business.
The best way to go about finding a good supplier depends on the type of product you're looking for.
1. Standard product, low to mid range quality
If your product falls in this category there are lots of great options available to you for sourcing. There are plenty of places to go online to source standard, low to mid quality products. www.alibaba.com is the world's largest sourcing website and is a good place to start. There are also a number of trade fairs in Asia where you'll be able to find these sorts of products. The Canton Fair is the world's largest trade fair and is held twice a year in Guangzhou, China. It's absolutely massive with suppliers of just about every standard, low to mid range quality product showing their wares at the fair.
If you're sourcing these sorts of products, even from a supplier on alibaba.com you probably won't need to spend a lot of time in asia with your suppliers, but I'd recommend at least 1 or 2 trips to meet them, build at least a basic relationship and to check and confirm the quality of the goods you're buying.
While sourcing products in this category is relatively easy, of course the downside is that there are probably already a lot of people selling the same or similar products in the market, so marketing might be a little harder for you. You'll need to find a non-product related way to differentiate yourself in the market, but that's a topic for another blog post.
2. Niche product, mid to high quality
Products in this category can be a little harder to find, as they may not be available on websites like alibaba.com or at large, general fairs like the Canton Fair. A good place to start in this category is to do some searches online for product specific trade fairs. For example if you're looking to source high quality furniture, high quality leather shoes or specific pieces of sporting equipment there are a number of trade fairs throughout asia each year where you should be able to find good suppliers.
There may also be wholesale markets in China for these products, where suppliers are permanently based. For example there are large leather and non-leather wholesale handbag markets in Guangzhou where you can source pre-designed handbags or find suppliers to make handbags you've designed.
For products in this category you'll need to spend more time on the ground working with your suppliers. If you're going to be developing your own product you'll need to work on your design with potential suppliers, get samples made and really spend time with your suppliers to ensure the quality is right. It's very easy for a supplier to make a good quality sample, then take shortcuts when making a full run of your products. The only way you'll pick this up is if you're on the ground with them, and inspecting the final product before taking delivery.
3. Highly specific product, high quality (eg. custom women's shoes for Shoes of Prey)
This category is the hardest to source and will require a lot of time on the ground working with suppliers. At Shoes of Prey we needed to find suppliers who could custom make high quality leather shoes. 99% of shoe suppliers require minimum orders in the 100's of each style and colour shoe. We needed to order them 1 at a time. We spent a lot of time on the ground in asia meeting with different suppliers and attending trade fairs to understand the industry, how it worked and who might be interested in working with us. In the end we were lucky that we were sourcing during the Global Financial Crisis. Shoe manufacturers were receiving less orders from their existing customers so some of them were more willing to work with a new and specialised customer.
In terms of spending time on the ground in China, between our three co-founders we have spent a combined 8 months out of the 2 years we've been working on the business, on the ground in China. In addition to that we have our own office and two local employees, Vanessa and Qun who understand our requirements, systems and processes and work day to day with our suppliers to ensure we're making shoes correctly and at a very high quality for our customers.
One of the things I love about sourcing products in China is how hard working and efficient most people and businesses are in the country. We were recently developing a new shoe box so we went and met with a supplier. Within 2 hours of meeting them we'd discussed our ideas, reviewed products they'd made previously, put a design together, selected materials, negotiated the price and organised for a sample to be ready in 5 days time. Attempting to do something similar in Australia would have taken weeks.
If you're looking to source products in China hopefully this information is useful. If you have any experience or thoughts to share, feel free to leave them in the comments.
Cross posted to Startup Smart
Friday, January 7, 2011
On 24 December we launched the Shoes of Prey store on Westfield's new online shopping mall. We're selling a range of ready made shoes which we've developed based on the popular styles and colours that are ordered from our website.
I must admit we were all a little sceptical when Westfield first approached us about their online mall:
- Do customers really want to shop from an 'online mall'?
- Why not just search for the specific product they're looking for and purchase it from a retailers site?
- Aren't there already shopping aggregators like eBay and don't they only work when they're either early to market like eBay or highly specialised like Etsy?
- Won't this be a half hearted attempt from Westfield designed to protect market share?
We met with Westfield and were impressed:
- Westfield are making a very large investment in their online mall, equivalent to what they would spend on a small physical mall. They have a huge team of people with great online retail experience working on the project.
- This isn't a short term play, Westfield have a 10 year plan for their online mall.
- There are some good ways they add value for the customer. A customer can go to westfield.com.au and easily search for 'red shoes'. They'll see red shoes from a number of different retailers. They can then cut the results in otherwise like shoe type or size so they're presented with a number of options from a number of retailers with exactly what they want.
- The site has a premium feel to it. Unlike eBay, Westfield are only working with a small number of retailers, you can't just sign up and sell on their site. This ensures a certain level of quality for the customer.
- Product imagery is consistent across all retailers. All product shots must be high quality and taken with a white background. This provides a much nicer experience for the customer when compared with looking at product shots on sites like eBay.
- The Westfield brand is recognised, trusted and associated with shopping. This will make it much easier for them to market and gain traction for their online mall.
- They're launching at a time when online retail in Australia is starting to gain some traction and traditional retailers are starting to take it more seriously.
I should add that I love eBay, it's been a very successful company and provides an excellent shopping experience. My point with making the comparisons above is that Westfield's offering is different to eBay's. That said, Westfield have some challenges:
- Purchases are made directly from the retailers, so if a customer buys products from 3 different retailers they'll need to pay for shipping 3 times and will receive 3 different parcels. That said this is not different to what happens when shopping on eBay or Etsy.
- Customer support is also provided by the retailer, so if there are any issues the customer must deal with the retailer. The logic here is that the online mall is like a traditional mall, Westfield are providing the framework but the customer deals with each retailer directly. This may prove to be confusing to customers as shopping online is quite different to shopping in a traditional mall and the Westfield mall is heavily branded as Westfield, so customers may think they're dealing directly with Westfield.
- Westfield have an API so retailers can provide a live stock feed to Westfield, but not all retailers are using it. So a customer might buy something from westfield.com.au only to be contacted by the retailer to be told they're out of stock. This shouldn't happen to often if retailers are manually updating their stock file regularly, but it's not an ideal situation.
- It remains to be seen whether customers will want to shop in this fashion. Customer's shop from aggregators on eBay and Etsy but both those businesses have a proven, compelling offer, for eBay it's price and breadth of range and for Etsy it's buying handmade products. Westfield's offer is different, but because it's new it remains to be seen whether it's compelling for customers.
I really hope the mall is successful. If Westfield market it properly and it gains traction it's going to introduce a lot more Australians to online shopping and contribute to the growth of the industry.
I'd love to hear your thoughts, what do you think of this move by Westfield and the Shoes of Prey store?
Wednesday, January 5, 2011
1. Develop the product concept
2. Scale the offer
3. Measure and increase the lifetime value of a customer
4. Acquire customers at scale
To look at each of these steps in detail:
1. Develop the product concept
The first step if you're interested in starting an online retail business is to develop your product concept. What's your value proposition? Why are people going to shop with you? Why are you different to other retailers? It's important to start with a good concept, but getting it right can also take some tweaking.
Amazon's concept is to offer an incredibly large range of products at very good prices with fast, well priced shipping. Zappo's (recently acquired by Amazing for US$1.2B) offer extraordinary customer service which includes customer support team members going above and beyond the call of duty, free shipping, free upgrades to overnight shipping for some repeat customers and 365 day returns with free shipping on the returns.
Diapers.com (recently acquired by Amazon for US$540m) provide diapers and related products at incredibly low prices with very fast shipping. While not in the same league as these retailers, our product concept at Shoes of Prey is to allow women to design their own shoes which we hand make and deliver to them.
Once you've developed what you think is a good product concept it's important to test it in the market, evaluate it and tweak it where required. You want to ensure you are providing the right offer before you move on to step 2 and work out how to make it scale. Zappo's didn't start out with all the amazing customer service activities they now have, these were gradual changes they made based on feedback from customers. They also had a lot of early success with search engine marketing. Search engine marketing didn't really exist when the business was founded in 1999, so this was also something they tweaked with their model after they started which helped them to scale.
A key part of this step is to launch your product concept quickly and cheaply in case your product isn't something people want. If your business is going to fail it's best this happen sooner rather than later, and if it's going to succeed there is no better way to tweak and optimise it than to be getting feedback from real, live customers. So don't wait until everything is perfect to launch, better to get feedback early and perfect the product concept after launch using customer feedback.
Developing our product concept is exactly what we've done over the past 14 months with Shoes of Prey. We've made some changes to our model since our launch, in particular tweaking our range adding Italian silk, ballet flats and ankle boots, and also redesigning our website based on feedback from our customers.
2. Scale the offer
Once you have developed the product concept, the next step is to work out how to make it scale so that you're able to supply more and more product as your customer base grows. Amazon had to work out how to do this and achieved it with their amazing warehouses and supply chain.
Zappo's took the time to develop a strong and effective company culture so that the same high level of customer service could be provided by 100's of employees that was originally being provided by only a small number. Similar to Amazon, Diapers.com had to develop incredibly efficient supply chain processes to be able to offer their low prices, on low margin products at scale. Check out their robotic pickers in this video!
At Shoes of Prey we need to ensure we can hand make and ship a large number of shoes with high consistent quality and within our 5 week promised delivery time.
3. Measure and increase the lifetime value of a customer
Once you've worked out how to scale your offer the next step is to be able to measure the lifetime value of a customer, then work on increasing it.
The lifetime value (LTV) of a customer can be described by the following forumula:
LTV = Expected Life x Avg. Revenue per User x Gross Margin
This formula highlights 3 levers a business like Shoes of Prey can pull to increase LTV.
Expected Life or the number of shoes each customer purchases from us. How can we offer better value to encourage single visit customers to make repeat purchases from us?
Avg. Revenue per User or the $ value of each sale we make. Can we sell complimentary products to our existing customer to increase the value of their basket each time they purchase? Can we upsell them from our cheaper ballet flats to our more expensive ankle boots? Can we encourage people to buy a higher value gift certificate for their friends and loved ones?
Gross Margin. How can we reduce our cost base to increase our gross margin without having to raise our prices? Can we introduce new, higher margin products into our range?
These are all things we need to work on to increase the lifetime value of our customers. For a great post describing how to measure the lifetime value of your customers have a read of this blog post from the Venture Capital from Lightspeed Venture Partners.
4. Acquire customers at scale
The final step is to work out how to acquire customers at scale for a cost that is lower than their lifetime value. If a customer is worth $200 over their lifetime and you can acquire a million customers in a year at $100 each, you've got a business that's going to generate $100m in profit.
This is obviously much easier said than done! You'll need to test different marketing channels to find out what works best. Is it TV advertising, print media, PR, YouTube, social media, search engine optimisation, search engine marketing or a mix of all of these that works best for your business? What marketing tactics and campaigns within these channels help you acquire customers at a low cost and at scale?
Once you have a business concept that people want, an offer that can scale and you can acquire lots of customers at a cost below their lifetime value you'll have built yourself a very successful online retail business. These 4 steps are not simple to achieve, but they provide a good framework to work from if you're setting out to start an online retail or eCommerce business.
Cross posted to the Nett magazine blog.
Monday, January 3, 2011
The situation came home to me in Lismore visiting Jodie's cousins and their 1 year old little boy the Wednesday before Christmas. I was tempted to stay at Jodie's parents place and continue working but at the same time wanted to catch up with the family so I worked right up until the moment we walked out the door at 4:30pm and had to explain I needed to be home by 6pm for a Skype call with a company in Europe. When we got to Jodie's cousin's place a number of other cousins arrived carrying a swing set they'd just bought for the little boy for Christmas and went on to discuss landscaping the new house while drinking beers on the porch. I joined in but was partly pre-occupied trying to find the right place to stand to get a 3G connection on my phone to send off a quick email.
I managed to switch off a little better and spend a bit more time with family over the next few days, but I still worked at least 8 hour days over Christmas.
I guess one advantage of our business is that it doesn't require that I be in one physical location all the time. I can be just as productive on the couch with my laptop while half joining in family conversation as I can be in our office. It's also great that I really love the work, so I'm not being forced to do something I don't enjoy. That said, this is still not an ideal situation.
I'm not entirely sure what the solution is. The 3 of us are lucky that our families are very understanding and don't mind too much. And at least we're aware that this is an issue so hopefully in future years, as we grow and hire more people we'll be in a better position to prepare for Christmas and manage our time more effectively to ensure we're able to take a break.
If your startup or work picks up over the Christmas period are there any strategies you employ to ensure you're able to switch off?