With the changing business landscape, where should small online merchants go?
Many small businesses would go into reselling in order to capitalize on existing brand equity. This sounded like a good idea because it seems easy to drive traffic to brands that already have people searching for them. This has become tougher and tougher because of:
1-Lack of information/pricing disparity: 10 years ago, if someone came into your retail store you could educate a consumer on the features of your product and command a premium price. Currently you have to compete with every merchant in the world at the click of a button. Regardless of the seasonality of your product, the liquidity issue of others you all have to compete on the same item. With marketplaces like Amazon that aggregate the SKU everyone competes on one SKU.
2-Disappearing competitive advantage-If you are reselling the same SKU, what can you compete on? Fast Shipping, Good customer service, quality products, price? All these factors are becoming more and more standard. In the early 2000’s before paypal.com the customers expectation was to get their product in two weeks. They would wait for a check to clear for 7 business days! Can you imagine that now? Customers are irate after 3 business days wondering what kind of schmuck you are. The largest factor when you are reselling is PRICE. This leads to a race to the bottom of the barrel. This is exactly what you don’t want to go.
3-Advertising Economies of Scale- Public companies and small business’ use different methods of calculating ROI’s on their advertising. A large company like Amazon can looks at the lifetime value of a customer in a very different way. Because of their huge flywheel of product they have a larger flywheel. They can look at a customer who is buying a shirt as someone who will also buy diapers, toilet paper and toothpaste. A large company will look at the purchase of an item like:
Purchase $100.00-Advertising Cost $200.00+Lifetime Value $10,000=$9,900.00 profit
They can also finance the loss per sale thereby bidding up the advertising on google and other venues to above the profit that can be gained on one sale. This is difficult for small business’ to finance. The $100.00 loss of cash flow on the initial sale times by 10,000 customers turns out to be $1,000,000. A public company can report this cash loss to shareholders and account for the loss in cash flow by offsetting it with lifetime value. A small business can’t finance the short term cash flow loss in order to capture the lifetime value.
4-Brand control- Bigger brands are becoming stricter and stricter with MAP guidelines and where you can sell their product. Why build someone else’s business who can tell you what price and where to sell?
1-Brand Equity-Instead of building someone else’s brand equity, you are building your own. Even though this is a slower and tougher process, it’s worth it. You can eventually sell your brand equity for a large multiple because you own the goodwill of the brand.
2-Profit margin-Because you aren’t competing with everyone else on the exact same SKU you don’t have to race to the bottom you can control your pricing. You also don’t have distributors and other layers so you can capture most of the profit.
3-Advertising-This is the tricky part of building your own brand. People won’t be searching for you initially. You have to have some ingenuity here to create a unique product, branding and get eyeballs to your product. We will be publishing more blogposts regarding that.
4-Control-You can control where you sell it and who sells it. If you don’t want to have competitors you don’t need to find any resellers. You can sell on any marketplaces you want and at the pricing you want.
With these factors above in mind, choose carefully where you want invest your precious investment and intellectual capital.
Good luck selling,