eCommerce and

During the last several months one of my brothers and I both purchased our first house.  Inevitably we end up in discussions about various renovation and repair projects we have in work, or on the horizon.  One such discussion included my brother’s tale of a pair of pruning shears he paid some ridiculous price for, like two to three times the price than what was listed as the price at the big box up the street.  Why?  Well, he was standing across the counter from the guy that just spent time explaining what shears he needed and how to use them to properly prune his trees.  He visited the nursery because he knew he could get the information he needed and now the interpersonal obligation pushed him to buy the overpriced shears.  In all fairness, maybe the shears were fairly priced when the value of the information and advice was rolled in.  Unfortunately he didn’t get to see the information price tag up front.  Interestingly, I found myself in a similar situation, at the exact same nursery.  For me, it was information plus a jug of some chemical needed to solve a citrus tree fungus problem.  I too couldn’t muster the shrewdness to thank the attendant for the information while passing on the grossly overpriced chemicals. 

The lesson … interpersonal obligation can be a huge component of monetizing information.  If my brother or I had found the appropriate information online from a given source we would happily have made the subsequent purchase from another source based on whatever price, trust, etc. considerations we use when actually buying a product we’ve settled on.  There would be no interpersonal switching cost associated with buying from a seller who hadn’t provided the necessary information during the shopping process.

So, the obvious question for internet retailers is how to add a sense of interpersonal obligation to the process of providing information in the hopes of converting a sale.  This wouldn’t serve as an excuse to ignore the portion of the buying cycle that falls after information gathering, learning, and item selection, but it could help mitigate the impact of low switching costs that occur at that point.  Mitigating that impact may help to pay for creating all that informative content.

If you have any neat ideas for adding “interpersonal switching cost” to the ecommerce experience please add them to the comments; we’ll do the same.

First, this is exactly the kind of post I’m talking about in this post.  I had a thought driving back to work from lunch, I’m going to write a few paragraphs about it, and then I’m going to post it.  The truth is I’m not even sure I agree with what I’m writing.  But it doesn’t matter, it’s too easy to write and post it, rather than bothering to stop and really consider it.  Much less research and ponder it until I have some real conviction about it.  So what is this thesis I’m not sure I agree with?  Blogging has made speculative, opinion based content generation and regurgitation so easy that the quality of the content has dropped significantly.  As a result, those basing decisions on the content lack any of the discipline that would otherwise inherently come with the authors efforts to research and validate their content.

I’ve seen this phenomenon to an increasing degree as I study the economic climate and changes of recent weeks.  Maybe it isn’t new but rather I’m seeing it anew as I get deeper into researching these challenging times.  In particular, there is a plethora of opinion being puked out surrounding the general “what should small businesses/startups/entrepreneurs do/think during the down market” subject.  Everyone is weighing in and while there may be some common themes there are certainly enough conflicting viewpoints to prove that either no one knows the answer or few are thinking before they write.  I’m not sure what I should do…

• Monday: Paint a clear, honest picture, control cost, get profitable and hunker down.
• Tuesday: Stand up and lead charismatically with a focus on new innovation to grab market share and emerge victoriously.
• Wednesday: Be nimble, or, oh wait, was that remain steady and stay the course?
• Thursday: Focus on value oriented products, services, and promotions.
• Friday: Roll back all non-profitable, price destroying promotions.
• Saturday: Yard work.
• Sunday: Go to church; decide to start a non-profit (yeah, I actually read a blog about switching to a non-profit, and I wasn’t even researching the subject).

And maybe worst of all, the underlying culprit, would be to react to every blog I read.  Why would I let un-scrutinized, rampant opinion and conjecture replace my own decision making discipline?  Even if it does sound smart, eloquent, and like the author knows my business.  Answer… either it’s easier to shirk responsibility or I’m not capable of taking it all in, filtering it, organizing it, and making effective use of it within my business, strategy, and timeline.  Maybe that latter ability will actually mark the difference between those who thrive, those who survive, and those who parish.

So, until it somehow gets tougher to publish, make sure you don’t knee jerk or you may end up kicking yourself in the butt.  Alternatively, scour until you find the good authors in the midst of the mess and then stick to them.  You’ll find even they don’t always agree and their opinions can’t be a crutch, but at least they’ve studied.

Finally, if you’re going to go with the “read more of what is out there” plan, make sure you also incorporate the “forget more of what you read” plan, including this post if you see fit.

This post is for the newbie’s who have compiled lots of good business reasons to take the easy route.  Let me explain.  Let’s say entrepreneur “John Doe” decides to launch a category level ecommerce company servicing a specific industry, say home improvement.  John is going to establish several partnerships along the way as he builds his business: Banking partnership, landlord partnerships, marketing partnerships, vendor partnerships, employee partnerships, etc.  We’ll use vendors in our illustration.  Let’s say John is plowing his way through various manufacturers, distributors, and wholesalers in his attempt to setup a vendor network.  Cold calls, conference calls, meetings, pleadings, and so forth.  In the midst of this effort a golden nugget appears.  The largest wholesaler in the country agrees to work with John.  Amazing!  A huge catalog, consolidated supply, good pricing, strong fulfillment, available electronic product data, everything!  John is ecstatic; he signs on, and drops his pursuit of “smaller” vendors.  John just sold his company for less than it is worth.

By entering a hugely unbalanced relationship John has forfeited all negotiating power when, in three years, his wonderful, global vendor decides to acquire or drop John.  John faces accepting their valuation, drastic downsizing while he goes back to the vendor setup process he abandoned three years ago, or closing his doors.  John took the quick and easy route for a handful of seemingly good reasons rather than putting in the time to build his negotiating position.  The quick, big dollars John saw were followed by a less than optimal transition, or forced exit.

Sometimes this conscious decision makes sense.  For example, when you’ve grown enough that the next level requires the participation of the biggest players.  However, early on, you’re likely better off applying some elbow grease to create some value.

Luckily, we were able to avoid the scenario John suffers above.  However, our banking relationship is an example of an unbalanced relationship that hasn’t gone as well for us.  Early on, we had the opportunity to engage small local banks, medium regional banks, or large national banks.  We went with the big boys.  Since then, our small fish in a big pond position has caused us to suffer in terms of customer service, flexibility, available tools and so forth.  If I had to do it over again I would have started with a medium size bank that we could grow with and eventually graduate from.  The scale of mutual value on both sides of the relationship would have been more equitable.  At this point the transition is more costly than the pain so we push on.  Thankfully, this relationship doesn’t have near the negative slant John’s vendor relationship had.

These days we’re becoming a bigger fish who can swim well in bigger ponds.  It may have been harder building our company without some of those big vendor perks but looking back it was the right decision.  We still own our company, both legally and practically.

So, watch out for those unbalanced relationships; you may be negotiating your valuation earlier than you think.  Don’t accidentally sell your business before you even get going.

Hey business owner, are you willing to be bored? (Don’t let your employees read this.)

If you’ve worked on a startup you can likely argue that it involves little boredom.  However, what I’m finding now, a bit over four years in, is that a little boredom at the top may be a necessary evil.  I think understanding this issue requires understanding resources, growth vs. leveling off, and good management.  So the question I ask myself is “If we’ve tapped into all of the financial resources available and established a qualified, motivated team, charged with managing and growing the business according to our plan, what should I be spending my time on?” 

I have come up with seven options that may be likely considerations:

1. Get all in my management team’s mix - I could repeatedly request status, take over decisions, drive their teams, and other micro management efforts.  I think we know this undermines their efforts, creates inertia and waste, prevents learning, and ultimately renders the team impotent.  The key is to get the right people, build trust, and let them go within a wide boundary.
2. Find random little things to involve everyone in - You know, that neat new idea I just read a blog about.  Instead of efficiently rolling new ideas into the strategic plan, I can simply nab people here and there to run down what I consider to be fun, but are ultimately distractions.  Nimbleness should be innate, not the result of boredom.
3. Keep coming up with new projects, assignments, and responsibilities – Even the good projects, valuable assignments and important responsibilities cannot be tackled effectively without new resources. The assumption that my team has endless capacity to tackle new opportunities will quickly lead to burnout and de-motivation.  Eventually they’ll just stop getting anything done, or ignore me.
4. Join the "data team" - I could throw my body at whatever projects are currently in work.  I am sure that there are tasks that are consistently in need of an extra hand: Data entry, physical inventory of the warehouse, answering calls, issuing refunds, cleaning the trash bin, etc.  This is a tricky one since it seems like a good idea to jump on whatever fires I can see, and I’ve done so in the past.  At some point, however, we have to stop covering the fires with elbow grease from higher compensated workers.  We need to let those groups work through their staffing, processes, or focus issues rather than building in inefficient use of our dollars.  I’ve also found that sometimes I’m more trouble than I’m worth when I randomly toss myself into a department for a couple days.
5. Here’s a scary one… replace someone on the management team - Let’s face it, my partners and I have done each of their jobs at some point in our history.  We may be a bit rusty but it could be done again.  Assuming we don’t want our business to level off and slowly die, this may be the worst idea on the list.  If we’ve worked to put together a team that can use the available resources to grow the company, any reduction to that team would be a step backward to some previous point in time.  Our growth mentality makes this a last resort driven only by necessity, and definitely not boredom.
6. Get outside the office - This may be the best option, given the right team.  If your team needs to see your car in the parking lot every day you may have to take up web browsing as a profession.  Otherwise, I can get my creative juices working on the next thing, related or unrelated to this business.  The risk here is taking your eye off the ball, moving to something new too early, or not resisting trap number three above.  There is a possible upside to this, you may quickly test your assumptions about a “qualified, motivated team”.
7. Find more resources - Maybe this is my real job.  Debt, equity, grants, profits, couch cushions, recycling, Guido…  My partners and I need to make sure we are always on the limit of what we can do, and are willing to do, in terms of fueling our business with financial resources.  This goes back to my assumption … assuming we’ve tapped into all of the financial resources available. 

At the risk of sounding pompous, I suppose I’m learning the difference between managing and leading, or maybe a GM vs. a CEO.  At the core, I think the lesson is that we can’t always do more, even if I have time to spend.  If we’re leveraging every resource available to attack the highest priority opportunities in the best way possible, maybe it’s time to let the team carry the torch, while I simply make sure the two basic assumptions are progressively being met.  Eventually, as they build, we’ll reach new milestones that will require more of my involvement and guidance.  Otherwise, if I choose the wrong option above we change our trajectory, which isn’t best for anyone.  If I’ve maxed resources, setup the team, and created the plan, maybe I can use any extra time on a random Thursday to jump start a new venture of my own with personal resources.  I wonder if Guido will still give me that short term loan at 45%?  Uh, I guess I like my knee caps too much to take that deal.

Forecasting: A Basic Process for Stabbing in the Dark

Over the last few days I’ve spent some time polishing up our financial forecasts for some interested 3rd parties.  I’m a firm believer in the value of forecasting and planning from the very earliest stages of a venture.  I do all kinds of estimating, budgeting, and forecasting for many reasons.  Sometimes I need an accurate picture of where we are, sometimes I need a conservative picture of where we will likely be in the near term, sometimes I need and exciting picture of where we could be in the longer term.  In any case, the aggregate of the analysis helps provide me with a comprehensive understanding of our business, past, present, and future.  During the refresh process I decided it may be valuable to share some basic thoughts regarding forecasting for a small business.  Although there are very sophisticated methods available to “Engineer MBA’s”, there are some real basics that I think would be beneficial to someone just starting out, and pointed in the right direction.  After all, who really wants to get into linear regression?

In general, as you walk through the accounts in your profit and loss statement you will find that some accounts are what I will call “fixed and known”, at least in the near term.  These accounts may include things like monthly lease payments, general liability premiums, or your annual California LLC fees.  The rest of the accounts are things that are generally tied to a combination of historic reality and a forward looking strategic plan.

Start with the “Fixed and Known” 

I suggest tackling the more obvious “fixed and known” accounts first.  For example, if you’re in the highest LLC fee tier then the fee isn’t going to change until it’s finally ruled unconstitutional and goes away.  Then you get a big refund check, assuming you’ve filed the right paperwork, and you can go buy a Range Rover.  Anyway, knock those easy ones out first.  Careful though, even some of these “easy” ones may need a little extra thought...  If you’re sure your office space and lease terms will accommodate your planning horizon then plug in the number.  However, if you plan to grow or move within the period, you’ll need to estimate the new “fixed and known” lease payment numbers starting at that point.  If your office space use is very flexible you may even forecast based on headcount and a standard square footage per employee.  In any case, with a little thought and consideration of your future plans you’ll be able to knock these out fairly quickly. 

Forecasting the Unknowns 

On to the tougher ones!  The revenue forecast may be the most challenging and important forecast of all.  Many times other accounts are driven by the revenue forecast.  For example, if your margin is a steady 35%, your cost of goods sold will likely be forecast at 65% of revenue, assuming the absence of early payment discounts.  The revenue forecast should incorporate your historic performance as well as future plans.  You can look at simple sales dollars, customer acquisition, order generation, average ticket, market trends, growth rate when you did X vs. Y in the past, etc.  Hypothetically speaking you may say that in 2006 you focused on “product offering breath and depth” initiative which generated 35% growth in order count.  In 2009 you plan to focus on that initiative again, while also implementing an up-sell program to increase average order by 5%.  You can use these numbers, with a 2008 actual, to build a 2009 forecast.  Likewise, if your plan includes less sales growth focused initiatives in 2010 you may forecast less growth in that year. 

Performance, Present Condition and Future Plans 

This past performance, present condition, future plans thinking is the cycle you need to go through for each account.  Using transaction fees as an example… A) In the past our volume was lower and our rates were higher. B) Recently we had our rates reviewed and lowered based on our increased volume. C) Next year we plan to implement a payment service that carries a lower average rate than the services we offer today.  If you can estimate the percentage of transactions that will use the new service based on some past marker you can easily forecast the transaction fees through your planning horizon by applying the current rate to a portion of your revenue forecast and the new rate to the remainder of your revenue forecast.  How about 3rd party vendors that don’t have fixed contracts… A) How many seats with which vendors have you used at past revenue levels?  B) How many are you using at current revenue levels?  C) Do you plan to fundamentally change seats/revenue dollar in the future?  Maybe you exchange revenue levels with customer service rep count, which is based on a staffing plan pegged back to revenue.  In either case, revenue is driving its way through to give relative reference for A, B, C, and the forecast.

In this way you’ll go through each account: A, B, C, forecast.  Historic data, current actuals, and a strategic plan is all you need.  And, well, a spreadsheet.  Hope this provides some help and motivation to get started with your forecasting early!

If you’ve ever leased commercial space you’re likely aware that parking spots can be an important concern.  In the past it has been for us.  How many spaces do we get, what lot are they in, is the lot shared, and so forth.  A good lease will answer all of these questions for all tenants involved.  Luckily in our current location the issue isn’t of much concern.  We do share a lot with our neighbor but there is ample space for all employees and visitors.  We’ve never once exhausted the available parking.  

None the less, a few days ago our neighbors decided to paint their business name on a handful of the parking spaces closest to their building.  Bare in mind, closest to their building means 20 steps closer than the furthest available space.  As one of my partners and I stood in the lot chuckling at this discovery we found ourselves thankful that (1) in this soft economy our business is busy enough that we don’t have time to unnecessarily paint parking spaces and (2) we knew all of our employees are graceful enough to gladly walk the extra 20 steps if it made our neighbor’s day a smidge better.  Just a fun share from the life of an entrepreneur.
 

What’s in a name? err, well, what’s in changing a name?

If you’ve been living in a cave you may not be aware that we recently launched OutdoorPros.com.  Ok, given the budget for our PR blitz you may get a pass on being up to speed with our new site.  There’s lots to discuss related to the strategy behind this new venture and the execution of our plan, but I’d like to boil this post down to one of the more practical aspects of this step in our growth.

When our plans to launch into a new industry began to take shape my mind quickly began running through some of the ancillary components of the effort.  Sure, we needed to build the site, establish supply, prepare marketing campaigns, and so forth, but we also needed to decide how to organize our business entity, finances, accounting, and banking around two, at that time distinct, businesses.

Long story short, we ultimately decided to create a parent company to house our various website businesses.  This decision combined with other factors has thrust us into the throws of upgrading our accounting system, changing banks, and establishing financial and operational reporting and metrics at the parent and child organizational levels.

Wow, that’s a long intro to present a few tips I hope are helpful if you find yourself in a position to change your business name.  You see, in the midst of all these dominoes, one task was to change our name and form the parent/child entities.

Our business machine has been chugging along for a while now and when I dove into our files titled “business formation”, “operating agreement”, “meeting minutes”, “business license”, etc. I quickly found myself in a pile of paperwork.  After having plowed my way through, with much help from fellow blogger Ellen, we nursed our paper cuts and got the process completed.  So, without further ado, here are the steps/tidbits presented in the order we attacked the change:

1. Make sure you can secure the necessary domain names and do so.  This is obvious to the online community by now.  If you can’t get the domain names, and I’m not talking about some slightly off version of them, pick a different name. 


2. Depending on the type of business entity you have, ours is an LLC, it may be wise to document the meeting minutes when members voted to accept the motion to change the company name.  Along these lines, this would be a good time to challenge your business type given that the new name may represent significant changes.  It may be time to grow out of that sole proprietor status and into a single member LLC, or an S-Corp.  Consult your attorney and accountant; we certainly did before deciding to stick with the LLC. 


3. Consider updating any Operating Agreement or Partnership Agreement you may have.  We were able to add a simple addendum to make the name change.  It’s a simple process and can keep the flow of changes well documented and straight forward. 


4. And the fun part… here is an overview of some agencies we dealt with to make the change, as a California LLC:
   
   • We filed with the Secretary of State to change the name of the LLC to the new parent company name.
   • We were able to keep our existing Federal Employer Identification Number (EIN) but needed to change the name.
   • We were able to keep our existing State Employer Identification Number (SEIN) with the Employment Development Department (EDD) but needed to change the name.
   • We filed for Fictitious Business Names, or DBA’s, in the name of the parent company and the two sites we currently operate with the new parent company as the registrant.
   • We filed for a business license in each Fictitious Business Name.
   • We updated our seller’s permit with the Board of Equalization.
     


5. Finally, plan a fun afternoon of errands.  The county building, the city building, the post office, some shady underground newspaper company that writes your credit card number on a post-it with a crayon, and you are done!
   

I come from what I call the “Entitlement Generation”.  We’re a group of people who operate under the pretence that we should be able to have everything we want and desire, right now.  That dream house our parents worked a career for, fully furnished of course, that car only made possible through a 10 year loan, an “activities” lifestyle for our kids, etc.  And of course, no financial worries.  We can argue that it’s subconscious or that it was instilled by our parents, but the reality of the existence of entitlement mentality, and its effects, is no less.  Now before I get into a rant, let me take it to the business arena.  As a business owner I intuitively know that my partners and I are constantly balancing some intangible equation that includes wants, desires, opportunities, requirements, resources, etc.  There are many variables and we work almost more as conductors than mathematicians to orchestrate a balanced equation.

Recently my two partners and I sat down to discuss the state of our business, our plans, finances, and future.  We’ve come through many challenges over the last three or four years and have found ourselves with an eCommerce company that is steaming along.  As the variables in our equation grow in complexity and number I come to wonder if we are entitled to everything we are pushing so hard to make balance.  I suggested we go through an exercise, a super simple one, to try to get a grasp of the key variables we are trying to orchestrate into some sort of balance.  We sat in front of a whiteboard and wrote down everything we wanted for our business in green and everything we didn’t want for our business in red.  Some items were practical and operational, some were philosophical or spiritual.  

Here are a few examples of the items we included:

• We want no inventory. 
• We want negligible debt. 
• We want strong enough cash flow and reserves to support working capital, superb growth, consistent income, and no sleepless nights.
• We want “fresh out of college” employees with super potential and motivation so they can grow with and propel the company.
• We want our employees to produce the results of seasoned professionals. 
• We want to assume that we, the partners, are not also entry level employees who are growing with the company.  After all, we’re owners, there’s a blue pill we take that provides a couple extra decades of experience.  
• We want to remain wholly owned by the partners. 
• We want to pay well with Google-esq perks and benefits. 
• We want an exciting, entrepreneurial, challenging, and fun work environment. 
• We want to fight on all fronts and capture all the available opportunity, all the time. 
• We want to roll everything we do out in an easy, scalable, error free way.  100% quality, 100% of the time, done by 3:00PM today.  Quality and quantity.

There were several more and with the board full we sat back and stared for a minute.  It didn’t take long to spot the inconsistencies.  Entitlement had certainly crept in somewhere along the way.  Do we want experienced employees or college grads?  There are pros and cons to both and maybe a mix is best.  Do we want to provide time to be entrepreneurial or do we want it done by 3:00PM?  How are we going to fund either or all in a stable way?  These questions get us back to this philosophical equation and the concept of entitlement.  It may sound uber-simple but I recommend any small business owner take a little time to go through this exercise, particularly if there are partners who may have differing opinions, priorities, etc.  It may provide an epiphany, and it may simply create more questions, but in any case you will end up with a better picture of the variables you are working with.  And then the really scary exercise; take this to your personal life.  What are you assuming you are entitled to? 

Any small or medium size business owner understands the importance of getting paid and the value of getting paid quickly.  We internet retailers really enjoy the ability to get paid quickly via credit card rather than having to invoice and collect on services rendered.  So much so, that “three day money” has become a key financial consideration in a world of 60, 90, or even 120 day money.  We must be careful though… our cash is only in transition to us for a matter of days rather than weeks or months, which may give us the false impression that a day or two here and there is of little consequence.

In our case, we’ve recently began considering new payment processing options as alternatives to our existing merchant services.  Amongst the monthly charges, transactional charges, integration requirements, PCI compliance implications, etc., we quickly came to the cash flow impact, which may trump them all.  Our current suite of products allows for each days credit card transactions to settle in our account the following morning.  Some of the options we have looked at can have that cash tied up for 3 to 5 days, or more.  There may be some associated process or rate savings but that transition is certainly an issue to address.  A simple example:  Let’s say a company sells $50,000 a day via credit card transactions and those funds are deposited next day.  If that company transitions to a payment processor that requires four days to deposit, the day they flip the switch they start four days with no deposits.  $200,000 just got moved from the “in the bank and available for use” bucket to the “in transit and unavailable” bucket, for good.  Better be ready.

Of course a loan, credit line, reserves, etc., can provide the working cash needed to cover the new transit time if other benefits, such as new customers who will value the convenience and security of alternative payment methods, make the switch worth it.  The small or medium size business owner needs to have those tools in place before they’re left holding the bag, the empty bag.