By Steve Gerencser
I’ve said it over and over, and you’ve read it or heard it over and over, but it bears repeating again. Your internet business is still a business and it needs to be run like one.
This really starts hitting home as the economy starts to become tight and there is less discretionary spending going on, especially in luxury markets like jewelry. I pick on jewelry a lot for several reasons.
- It’s a market near and dear to my heart
- It’s an industry full of artists rather than business people
- Jewelers are notorious for undervaluing their skills and services
- The vast majority of jewelers think that competing on price is the only way to succeed
So why am I making a big deal of this right now? Simple, a good online jewelry retailer has gone bankrupt in the past week. Bella Jewelry was a great low price jewelry retailer with a large customer base and an extremely vocal core of repeat customers. By all estimates they were a multi million dollar a year operation. And in just a few months have gone from living the good life, or at least being profitable, to completely bankrupt.
How is it possible to go from millions of dollars in sales to flat busted in a few months? Simple, they forgot the #1 rule of business on the internet, it’s still business.
How to lose it all in a few months
There are hundreds of ways to kill a business fast. But like everything else online, killing a business online happens at internet speed and if you aren’t on top of everything, it can be gone before you recognize the problems. So what killed Bella Jewelry? I don’t know for sure, but I can make a lot of very educated guesses based on what I know of the industry and looking at their business model over the last several years as a competitor.
Outside influences
The biggest outside influence in the jewelry business right now is metal prices. Gold, platinum, even palladium and silver are setting new highs for price. In one year gold went from $641.80 an ounce to a high of $1002.80 an ounce. Platinum went from $1225.00 to $2252.00 and palladium from $317.00 to $579.00. When your number one material for your product is seeing a nearly double price increase in a short amount of time you have got to be on top of your retail pricing.
Many eCommerce people get so busy “working” that they forget to keep an eye on their prices. Especially when you are a drop shipper reselling someone else’s product. Your supplier raises his prices and you fail to keep up by raising your prices. The supplier isn’t likely to give you that old price just because you forgot to update your website. If you are running thousands of SKUs it can be even worse. I know of one jeweler that has eliminated an entire category of product simply because it takes too much time to keep the prices current.
By the way, if you make osCommerce and ZenCart modules you might want to consider developing an easy price change module. I know a lot of people that could really use one.
Earning a profit
The biggest mistake I see online is people thinking that the only way to compete is to be the cheapest guy out there. Being the cheapest may get you sales, but one small mistake can cost you everything you have worked to build.
The diamond trade has been all but turned into Taco Bell with what we refer to as pajama retailers, guys selling diamonds that have never actually held a diamond in their hands, selling diamonds for 4% to 6% markup and happy to get the “easy money”. The small local music store wiped out by no margin websites like Amazon.Com and so many more. It has created a wave of online marketers that feel that to compete online they must sell things at as near to their cost as possible. While this may initially be a great thing for the consumer, over time it leaves you without that expertise in any given industry to sell and support a product and leaves you with a call center in India reading from a script or a guy in his pajamas with no clue about what he is selling, but can tell you how he ranked #1 for it on Google and developed a fabulous affiliate program.
Bella Jewelry’s problem is that they went after the eBay crowd with a new retail product. To sell in that market their margins were in the 10% and lower range. That’s “gross” margin. Out of $1 million in sales that leaves just $100,000 to pay for overhead like labor and returns.
Customer service that puts you out of business
I am one of the biggest advocates of treating your customers like the most important resource on the planet. Without them you have nothing. But like children, you can still love them and support them while enforcing strict rules.
Stores like Wal-Mart have created this sense of entitlement with shoppers that I don’t think is deserved, or even healthy. Walk in to any Wal-Mart and they will gladly exchange anything you have for cash or another product, no questions asked. That’s great for a store with thousands of locations and a very healthy 24.2% gross profit margin, it’s not so great for a single store operation with a 10% gross margin. Even with a 24% profit margin Wal-Mart’s net profit, the important number, is just 3.2%.
What happens when you run an online jewelry store with a 10% gross profit margin, an open return policy of 45 days, no questions asked, and no restocking fee? You go bankrupt in 60 days or less.
The numbers
Let’s make a few assumptions.
- $1 million in retail sales for December
- 10% gross profit margin
- a no return policy from your vendors on any modified product
- all of your products are modified
- 35% return rate in January and February (based on what I have learned from talking to people close to the subject)
This gives you $100,000 in gross dollars to refund $350,000 in returned merchandise that you can not return to your vendors for cash or credit. You just paid $250,000 to let your customers “borrow” your product for the holidays. I don’t know about you, but I don’t think I could stay in business very long if I had to pay my customers a quarter of a million dollars every 45 days.
Fallout
Unfortunately it doesn’t stop there. To have the product to sell you had to borrow the $900,000 in merchandise to sell it for $1,000,000. You had $100,000 to pay your staff, rent, buy food and maybe see a movie on Tuesday at the dollar cinema.
That $100,000 vanishes first leaving you no money to pay any of that overhead. And, it also leaves you owing your supplier $250,000 for product he has already sent to you leaving him possibly unable to pay his staff and suppliers. So it’s not just you who suffers. Every bankruptcy affects people several degrees away from you, not just you and your customers.
The solution
#1. Charge a “fair” price. There will always be someone willing to sell it cheaper than you so don’t let yourself be drawn in to that fight. Find the price that you need to charge to stay profitable and also able to survive the unforeseen.
You may think that your customers will never pay you a 25% to 100% markup on your product, but these are the same people paying 1000% markup on a bottle of water. Charge it, ask a fair price, and provide outstanding service.
#2. Keep a close eye on the cost of your supplies. When your business model involves buying off the shelf items for resale you have got to have a sharp eye for trends in pricing so that you can stay ahead of the curve and not catch yourself selling at a loss just because you forgot to update your prices.
#3. Add a restocking fee to your terms of service. You don’t have to actually charge it, but put it in there. This will do two things for you.
- It keeps the “borrowers” from using your store as a way to borrow things for a month and then send it back. You may think this isn’t happening, but there is a thriving sub-group of consumers that look for long return policies to be able to borrow things for that company party or holiday season only to return it to you when they no longer need it. Why not, it doesn’t cost them anything.I heard one story of a woman that bought a large air conditioner in August during the peak summer heat, only to return it in early October because the merchant had a 90 day return policy and it wasn’t hot out any more.
- You can be a hero for those rare “real” returns when you tell your customer how sorry you are about the problem they are having and you are waving the 20% restocking fee. You’ve instantly taken what could be a negative experience for your customer and turned it in to a positive one by making them special.
Internet business is still business, your rent just happens to be $50/mo for hosting rather than $12/sq foot for a retail space in the mall.
Posted in Business Issues, Don't Do This | What Do You Think? »
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