How to Start an Online Store: Part 5 – Ecommerce Marketing, Sales Channels and Testing

Here we are. The fifth and final part of the guide to starting your online store. It’s  been a fun ride for me and I hope it hase been fun and informative for you. Before we dive right in, let’s take a moment and go through a quick recap of the steps we’ve covered so far.

As you remember, Part 1 covered planning and finding the right business model. Part 2 was focused on registering your business, finding and negotiating with suppliersFulfillment operations and making your back office work were the main subject of our third part and last week we’ve covered branding, ecommerce software and content in part 4.

Now … it’s marketing and sales time!

During this section of the guide you’ll discover how to expand your reach through additional sales channels, market your brand and products and finally – how to test the main areas in your online store.

So let’s go ahead and have a look at…

Adding Sales Channels to your Online Store

First of all – what is a sales channel? The answer is quite simple: any method of getting products to the market so customers can purchase them. For example, your online store (the actual web store) is a sales channel. It showcases products, it tells their price and allows customers to purchase these products.

Let’s assume that by now you have already started your online shop. The web store is up and running and customers start showing up. But the web store should not be your only sales channel. Your customers are complex and their habits diverse. One day they’re browsing your store, the next they’re hanging out on Facebook and meanwhile they search product info on their mobile phone. You should be there also.

You could have your products lined up in a Facebook store. You could build a mobile app that engages customers outside your store and collects orders.

It’s not just online, either. Offline engagement shouldn’t be a taboo either. Maybe a brick and mortar showroom for your main products is not cost – effective. But you could set up a pop-up shop occasionally.

There are numerous ways you can add sales channels to increase your market reach and some are really easy to set up. Others are a bit more complicated but in the end it’s mostly about your product, your brand and of course your budget. Let’s see which are the most popular sales channels and how you could benefit from them.

Call center

Out of all the sales channels you may choose, one really complements the online store. The call center can be a simple line you for customers to demand information on products.

(Zappos’ call center is legendary and effective. It’s both a sales and suppor channel.)

 

It can just as well be a full fledged call center with operators answering calls and helping customer choose the right product, handling orders and managing complaints. It can also mean people calling prospects or indecisive potential customers or just plain cold calling sales leads. No matter the choices you will be making, the phone is a great connection to the customer and you should build a smooth phone support operation.

 

Social media

You could ask – isn’t social media more about marketing and communication, connecting and understanding your customer? Yes it is but it can work just as great as a sales channel.

For example – Twitter is testing purchase options (right now with just a few high profile retailers such as Amazon) and ways to drive targeted traffic to stores through offers. Pinterest is also testing options to drive targeted customers to your online store and they do that through their ads. That is great news as Pinterest is more efficient into turning views to sales than any other social network. It works awesome for industries such as travel, home-deco and fashion.

And let’s not forget Facebook. Being the largest social network in the world it is a place you should be digging into. For a while, the network was so popular with retailers that a term was coined to split Facebook commerce from everything else: f-commerce. Recently, the company lead by Mark Zuckerberg has focused more on advertising revenues than helping retailers get close to their customers but it is a great channel to study, nevertheless.

There are some companies that will make selling on Facebook as easy as it gets. And if a Facebook store may look like a great option for your store, this involves apps connecting your store to Facebook.

(Shopify, among others, built options for users to connect their stores to their fan pages and sell directly on Facebook.)

On the previous chapter we’ve discussed the most popular ecommerce software choices. Turns out most of them get some sort of support for a Facebook store by third party apps. Here are some of them:

  1. Shopify for Facebook: Shopify provides useful tools for store owners that want their Facebook fans to browse products and place orders directly on Facebook. These add-ons work as extensions for online stores that retailers can set up easily.
  2. StoreYa is a simple solution for owners of stores running on the usual ecommerce platforms. The company supports Shopify, Magento, Prestashop, WordPress and even marketplaces such as Ebay or Etsy. Although the Facebook Shop is their main product, they also offer other effective marketing apps for store owners.
  3. StorefrontSocial works with new and existing retailers to connect them to Facebook fans and allow for an easy store set-up. Unlike previous options, StorefrontSocial works as a standalone platform where you can either set up a new store or import existing products. It doesn’t allow for an existing platform connection.
  4. Beetailer is yet another option extending your existing store to work on Facebook. It integrates great with platforms such as Magento, Shopify, Prestashop or even Amazon Store. Plus – if you have less then 30 products, you get a free account so you can test and see how it all works.

There you have it – these applications are easy to set up and you can start selling directly on Facebook thus adding a new sales channel. And once you start adding sales channels, you now you have to look into …

 

Mobile Apps

What is the device you think customers use the most throughout the day? It’s the smartphone. Mobile usage has gone through the roof lately and its bound to continue.

(Number of smartphone users in the US (millions). Source)

So you want to be close to your customers. Mobile apps provide a special sales channel, one that’s personal and it makes impulse buying all the more attractive.

How do you add a mobile sales channel?

There’s an app for that. Actually more:

  1. Shopgate makes it possible to turn your store into an app. It connects with Magento, Shopify, Prestashop and other ecommerce platforms to enable store owners to build mobile apps. It works on both iOS and Android operating systems and provides support for both smartphones and tablets.
  2. Shoutem is not built specifically for eCommerce but among others it supports building mobile apps for your Shopify store. The interface is quite simple and doesn’t offer many options but it gets the job done if you happen to be a Shopify user.
  3. MobiCart works with established ecommerce platforms and can help you build your mobile app. They integrate with Prestashop, Magento and others.

Give mobile apps for your store a try. The more smartphones become a part of our daily lives, the more we will use them. Your store can benefit from users that are not strapped to their desktop or notebook. And speaking of that, a great way to interact with customers are the …

 

Pop-up Shops

Pop up shops are temporarily stores, in the real world, where online store owners can showcase their products and interact with their customers. The pop-up shop sales channel has really taken off recently and store owners have started adopting this online-offline connection.

(Adidas pop-up shop. Not exactly low-budget but hey – one can dream, right?)

Setting up a pop-up shop is a personal choice but works great if it’s posted either in a high-traffic area (such as a popular shopping center) or at an industry event. For example you could set up a pop-up shop at a home-deco event if you are a store selling home decorations. It is a great way to interact with customers and get feedback on your merchandise.

Companies such as Storefront help shop owners find retail space temporarily by connecting them with retail space owners. To help online stores they’ve put together an ebook that is free for download. I encourage you to have a look at it as it explains the main steps in setting up (pup-up) shop.

 

Online Marketplaces

Last but definitely not least – the marketplaces. Amazon, Ebay, Etsy, Sears, Buy.Com, NewEgg.com and more. You name them. They provide lots of options to lots of users and chances are your next customers are there shopping right now.

( Ebay – the original online marketplace )

The reason marketplaces are the last on potential sales channels is because I want to emphasize just how important they are. Just like the “old” shopping centers, customers go to marketplaces because diversity means options and options mean they can find what they are looking for.

Diversity drives customers. It drives sales. So you want to be there but plan ahead before you dive in.

As an online store start-up you should be looking for as much exposure as you can get but still try to focus on the right marketplace. Amazon and Ebay are the obvious choice but before you join them you have to ask yourself:

  • are these marketplaces right for me? Not all that’s great is great for you. Just because they have traffic, that doesn’t mean you will get traffic and if you do, you don’t know whether that traffic will turn to sales. The most important aspects you should be looking for are exposure and sales.
  • can my product be found? expect to have competition. If you are among the few selling the product AND your product is popular, than the answer is YES, the product will by found by the customer. If your product is also sold by hundreds of other sellers, there are thin chances you will be the one showcasing the product. Try to make your product look special and attractive through copy, media and of course, price.
  • will my product be bought? If you have indeed managed to get customers to have a look at what you are offering, you must also get them to buy. Most important things are the way you showcase the product to create desire (“A beautiful hand-crafted lamp“), urgency (“A beautiful hand-crafted lamp in LIMITED offer”) and affordability (“just $49.50“).
  • do customers trust me? Marketplaces usually have some sort of peer-review mechanism. Customers can review sellers according to their fairness. Your reviews are your digital reputation. Positive reviews mean more sales, negative reviews can mean NO sales. So try to be as fair, effective and open with your customers.

Handling orders from marketplaces.

Listing your products on all marketplaces can seem like the right choice but it’s usually not. Each marketplace is a sales channel itself. You should be sticking to those that work for you and improve your experience there. Until your business is large enough to allow you to handle orders from more marketplaces, focus on fulfilling orders effective and quickly.

Most marketplaces offer some form of integration with your existing store and you should use those. Product information should be going out of your online store and orders should be synced with your order management system. This way, the order management team can have a single point of entry for orders instead of getting lost in a dozen of order management systems scattered throughout the marketplaces you are using.

The big ones will get bigger

Marketplace orders will continue to be a large part of your business. So large that they will, in the future, dwarf those from your online store. The reason is people tend to gather and shop where they will find diverse products and retailers. Just like in the real world. Online is even more so – marketplaces get even more traffic from search engines, have more money to spend on ads and are better at keeping customers returning.

Connecting sales channels

Each sales channel you will be adding will bring you more exposure and more sales if handled correctly. The sales channels I’ve described so far are the most popular ones right now. But they are not the only ones. As technology evolves, so will commerce. New channels will pop-up and some I haven’t mentioned here will probably increase in importance.

Think about the impact Internet of Things will have. Maybe in the future the greatest sales channel for groceries will be smart appliances. Think of a refrigerator than can place orders for customers when it’s depleted. It sure is going to be an interesting challenge to integrate those in a sales channels mix.

( Omnichannel means connecting all sales channels in a way the customer finds natural )

By adding sales channels you wil turn from an online retailer to an multichannel retailer and if all channels work seamless together you will become an omnichannel retailer. If you want to know what that means – have a look at Macy’s omnichannel strategy. And if that is not enough dive into this omnichannel report I’ve wrote to help retailers integrate their sales channels.

Marketing your Online Store

Marketing is one of those concepts that’s so hard to understand and yet so overused. Most of the times its meaning is so cluttered by useless acronyms and buzzwords that people have trouble understanding what it actually is.

I am not saying that marketing is easy. It’s not. Yet is not the Holy Grail of human knowledge either. It’s just communication. Talking, showing, describing products to the people most likely to buy it.

It’s that simple. The basics need to be simple.

If you are going to survive as an online store owner, you need to keep your marketing basics simple. You have a product. Hopefully a great one. There are people who want to buy that product. Most don’t know they want to buy it from you. You need to show them why they should buy the product you’re selling. You need to show them why they should buy it from you. And then, if everything I’ve shown you so far has been decently implemented, just let them buy it.

Everything else is gimmicks. If you’ve got the basics right, everything else will fall into place.

The market

To get people to buy your product, you need to know who these people are, what they want and how they act. Most likely not everybody will want your product. But if you’ve done your planning right, you pretty much have know a lot about your market.

Targeting demographics

Yup, your customers are “the target”. Why is it called that you ask? Well, because your communication targets them. Until the internet became the norm and we’ve started gathering more data than we can handle on customers, we used to define them through demographics. That means basic info on consumers. Age, sex, marital status, location, education … this kind of data.

( Pictured here: advertising in the 60s. Not pictured here: Google algorythms and tabacco advertising ban )

These targeting methods were made popular when mass marketing was just blooming, in the days of TV, print and outdoor ads made by the likes of Mad Men. When you ran your ad in the magazine or on national TV, you needed to know who’s going to use your product, make sure you understand their psychology and shout from the top of your lungs how cool the product is. Once the ad was approved, there was no going back. Advertising agencies would research, create and test the ad before the campaign was launched because there was no way you could change, tweak or even pull back a campaign in real time.

So demographics were the bread and butter when you would push your message to the market. But the Internet changed that into …

Targeting behaviors

Basically, if you were a mid-class urban wife with no college education in the 60’s there were slim chances you would receive ads trying to sell you repair tools for your car. Even if you were actually a mechanic. The same would hold true if you were a man and would be looking for a sewing machine to fulfill your lifelong passion of becoming a fashion designer.

You would have to find those products yourself. We’ve come a long way and thanks God, we now have the freedom to fix our own cars and sew our pants, no matter the gender

That happened when contextual marketing (the ads you might see when searching on Google), interactive marketing (information instantly delivered when interacting with say an website) or behavioral marketing hit the shelves.

The last one, behavioral marketing, is probably the single most important aspect in online retailing. Technology now personalizes marketing and responds to customer behavior.

For example Amazon’s recommended products (“See what others have purchased”) is a form of behavioral marketing that is based on a complex research on previous customers behavior before they purchased something. Simply put, when people would purchase something, their interaction trail (the products they’ve seen so far) becomes an indication that people taking the same or similar steps would most likely purchase similar products.

The ads you see on Google feature a similar concept. They are shown as to answer your needs. Some ads respond better than others at what you are looking for and thus have a better chance of getting clicked. Google trusts this system so much that they invoice advertising on clicks, rather than how many people have viewed the ad.

So basically we went from effectively targeting people to targeting people’s behavior. Still, demographics and customer profiles are very important and a lot of what you will be doing is to try to guess customer responses based on demographics assumptions. Such assumptions might mean you will favor ladies over men if you are selling women’s clothing (doh!) or rather more complex assumptions such as “Men over 32, employed and married are more likely to buy a family car”.

Indifferently of your assumptions, test them and always quantify your results with …

Analytics software

Here you go … numbers. Charts. Estimates. Hope Miss N., your math teacher, was your favorite back in school, because this is going to be damn complex. Nah, just kidding. Most analytics software is pretty much plug and play and the numbers and charts I mentioned are usually generated on the fly and in such a manner you can easily understand.

You can’t have marketing without analytics and research. Fortunately, it is a lot easier now for a small online store than it was 40 years ago for the largest companies in the world. What is not so fortunate is that it’s easier for everybody so you’ll have to dive deep and understand what your analytics are saying. So will the competition.

Once you have installed Google Analytics or one of these other ecommerce analytics software, you will probably dive in and see what your customers are doing. What you will want to look for is patterns that lead to increased sales. Special products, a certain type of copy, products featuring media versus those that don’t have media. Look for what makes your sales increase.

Targeting, knowing, marketing – the most important ecommerce marketing strategies for your online store

So you know the target, you have the analytics figures, now it’s time for the actual marketing. The web is full of resources to fine tune your online marketing understanding. I will show you which are the most effective ways of marketing so you will have a bird’s eye view on what makes an online store sell.

Search Marketing: SEO

As a startup there are really little things you can do better with smaller budgets than writing quality content and optimizing for search engines. SEO (Search Engine Optimization) is a really large concept and many people earn their living through SEO services. You will probably ask a SEO expert to help you find the perfect balance so your store will show up in search engine results. But before you do that, have a look at the basics. These are the things you will need to keep in check so Google will bring the right customers to your store:

  • content: write great and extensive content. For humans. Describe your product like you would want it described for yourself. Don’t do “keyword spamming” which is the result of cramming keywords in your description so more people would find you. It just doesn’t work that way.
  • code: your webstore is visible on customers’ browsers thanks to programming languages that output information in the way we are accustomed to. Search engines index this information and if you are to have your store indexed properly, you need the right code. If you are not technically savvy, better call someone who knows what they are doing. In the previous part there is a section dedicated to finding technical support when integrating your store.
  • links: get other (relevant) websites to post links to your store. Although not so important now as they were in the past, links are necessarily so search engines can find and index your web store’s content.

Email marketing

Ask your customers to leave you their email address so you can update them on news and offers. This is a great way to get people right back on your store.

But don’t annoy them and don’t do spam! Everybody hates unsolicited email. Make sure your customers give you their permission to send them emails. You can use apps such as Mailchimp or CampaignMonitor to save customers’ emails and then send them newsletters.

Social media marketing

Where would you go if you were to market a product? The answer is fairly simple: where people gather and interact. Social media outlets such as Facebook, Twitter or Pinterest are now used by billions of people. That’s where your online store should be.

Just like interacting with friends, some things work better than others. Here are some tips on how to use social media to interact with potential and existing customers:

  1. listen first, talk later: social media is a great place to gather insights on your market, your products and even your brand. Some of those insights may not be friendly but you should pay attention to them nevertheless.
  2. focus on building strong bonds rather than gathering masses: it’s just like with your friends. It doesn’t matter if you have 10 or 10 000 friends. What matters is how strong your connection with said friends are. It’s better to have few, engaged fans rather than many fans that do not relate to your brand or product.
  3. find the influencers: some people wield more influence than others in their social circle. And they somehow do it naturally. You should get close to these people, develop relationships with them, show them your products and share content they might find interesting.
  4. provide value, not sales pitches: yes, your products are great but don’t bore people with constant product sales. Provide content. If you sell hats, show fans their history, tell them about the manufacturing precess, showcase famous hats. Make it interesting and valuable.
  5. be patient and constant: don’t tweet 40 times one day and than stop for a month because no one followed or retweeted you. Social media success takes time, patience and constant effort.

If your social media strategy is not going the way you’d want it to, there are always the ads. Most social networks provide ways for you to get closer to your potential customers, faster. Most people call them ads  . Facebook, Twitter and Pinterest – they all provide advertiser with the possibility of engaging fans through ads.

And speaking of ads, one of the most effective way of advertising your store and products is …

Paid earch

Remember those Google ads I’ve mentioned earlier? That is Google AdWords, a very effective form of advertising that places ads on search results, ads that are directly related to your search.

For example, if you were to search for “cars”, you will be shown the natural search results AND special search ads. These ads are fueled by advertisers that pay each time someone clicks one of their ads.

You can be one of those advertisers. By carefully analyzing traffic and allocating search ad budget, you can determine with high accuracy the number of clicks you need to convert visitors to buyers. Because search ads are contextual, this means you can optimize your ads in such a way that only those interested in purchasing your product might click it.

However, paid search campaigns are usually better managed by professionals. Even though you might spend a little extra for someone to handle your ads, just leave it to the professional.

And one more thing: Google is not the only one providing the option for paid search ads. Bing does it and Amazon does it, so there’s room to play there.

Performance marketing

Performance – well that sounds nice. What is it?

Performance marketing is a broad term that means advertisers pay a fee depending on how well an action is performed. This action can mean showing an ad a certain number of times or making that ad transform into a special action. The standard actions you might want to encourage are:

  • clicking
  • downloading a certain file (say a product catalog )
  • showing interest in a product (the user becomes a lead)
  • buying a product

And because marketing people happen to love acronyms, you might find the info above coded in three-letter words:

  • CPM means Cost Per Mille (that’s Latin for thousand) – one thousands being the standard minimal block of ad views you can purchase to show an ad.
  • CPA means Cost Per Action – the generic code for any action you might define with those selling the ad space. It is used for sales and therefore sometimes referred to as Cost per Acquisition.
  • CPC means Cost Per Click – the cost you will be paying whenever someone clicks on your ads
  • CPL means Cost Per Lead – the cost paid whenever a visitor shows interest in your product

Performance marketing is sometimes used interchangeably with affiliate marketing. That is  more of a misconception, as affiliate marketing, though popular, is a subset of performance marketing. It works as a shared revenue deal, where the retailer shares a portion of the revenue with the publisher (the one displaying the ad), whenever advertising turns into purchases.

Affiliate marketing is ran through affiliate marketing services, that cover three very important aspects: they connect advertisers to publishers, they make sure all sales are registered and attributed to the right publisher and they handle transactions between advertisers and publishers.

If you decide to go along the affiliate marketing path, here are the most important affiliate networks that can help you sell your products:

  1. CJ Affiliate (formerly Conversion Junction) is the global leader in pay for performance programs. It is the home to many publishers that can help you run your ads.
  2. Rakuten Linkshare is the big contender to CJ Affiliate and a fast growing one.
  3. ShareASale is a great affiliate marketing resource for retailers. Slightly smaller as it may be, it is still very effective.
  4. ClickBank works great for entrepreneurs and content creators. It is effective and easy to use.
  5. Avangate is an young yet fast growing performance marketing company that’s focused on software and digital products.

Comparison Shopping Engines

A great way to get your product out there is place it in comparison shopping engines. These applications gather information from more online stores and show potential customers what is the best way to shop in terms of pricing.

It basically works for those that are price competitive so before you join such a program, make sure your prices are aligned with the market.

(Shopzilla is one of the most popular comparison shopping engines)

Most comparison shopping engines are CPC based and you will pay anytime people click your products, arriving at your web store. The top four most popular are Google ShoppingShopzillaShopping.com and Pricegrabber. Getting listed can draw targeted traffic and can mean a very scalable way of converting traffic to sales.

Other marketing options

So there you have it – these are the most effective ways you can market your new online store. But don’t stop here, don’t settle. Marketing in the digital world is usually a matter of imagination. Be curious and try new things that might be fit for your online store.

For example you can attract relevant bloggers to mention your store and review the products. You can put out press releases and talk to the media. You can  run contests and sweepstakes to increase reach and turn fans into loyal customers. Once you have the basics up and running, you will be ready to add more and more marketing options to your online store.

Testing and optimizing

Remember: your work is never done. If you want to keep your customers happy and sales growing, you need to constantly optimize and tweak your store. To do so you can run tests that determine what works and what does not. When testing you will be looking for either errors, bottlenecks or usability issues. Do so through:

  1. Functional testing: test your store’s functions. The navigation, user account, user login and others. Each needs to be thoroughly tested and improved
  2. Process testing: we are talking business processes here. These are things like managing orders, fulfillment, shipping or warehouse management. If your company process don’t run smooth, customers get their orders delayed, mixed or canceled.
  3. SEO testing: as I’ve mentioned previously, search engines will always be a very important factor in driving traffic to your online store. Check to see how you stand against competitors and against previous positioning.
  4. Mystery shopping: put yourself in the customer’s shoes and see how’s everything going. Place an order and see how operators behave, how long does it take for the order to arrive and more. You might find some interesting things there.
  5. Hot areas testing: some parts of your shop are more important than others. You can improve conversion rate through a careful  inspection and recurrent A/B testing of what you could call “hot areas”:
    • Homepage
    • Product page
    • Checkout cart
    • Payments
    • Forms requiring customer input
    • Mobile interfaces

Customer journey maps

A great way to see how customers interact with your company is drawing customer journey maps. These “maps” show your existing sales channels and how customers interact with them. Customers may find you on social media, browse products on the web store and place orders through the phone. This is a customer journey map.

When these journey maps get too complex you have to constantly test and look for signs of problems of sources of frustrations for your customers. It may be a poorly designed checkout cart or the voice of your phone operators. By understanding your target customers and their journey maps you can have a guide to testing what works and what doesn’t on your store.

( A blank example of potential sales channels. By connecting the channels you can draw journey maps )

Testing means improving and you should strive to make your store better and better. Little improvements and constant focus on making the customer experience better turns your store into a success. So keep testing :).

And that’s it!

We’ve got this far. Wow! Testing is the last section in our guide to starting an online store. It’s been a great ride and I hope these posts will help you build the store of your dreams. If you’ve managed to get this far I believe you are ready to start your own store. Give yourself a pat on the back for having the patience to get through all this data. It’s not easy, I know, but it is a lot easier than just starting a store and then figuring it all out along the way.

I am more than happy if I’ve managed to help you on your path to becoming an ecommerce entrepreneur. If this guide was useful to you, please refer it to someone else who may be in the need for know-how.

You’ve taken a large step ahead to running your own business and online store. You may be anxious and a bit scared but rest assured. So was Jeff Bezos when he started Amazon. Knowledge, hard work, innovation and persistence will get you far. Have a safe trip in reaching out for your dream!

 

How to Start an Online Store – Part 3: Fulfillment

<< See Part 2 of “How To Start an Online Store“: How to register your business, finding the right suppliers, integrating them in the supply chain and setting the right product prices.

So you’ve got this far. Starting an Online Store is a lot easier when you’ve got the right info and this is the place where you can find it. It takes a lot of drive do get through Part 1 and Part 2 of this guide, so good for you!

During this part of the guide, you’ll get a better understanding of what fulfillment means and how to build a company that can effectively manage orders and ship the right products to the customer.

Good, good … fulfillment. Yeah! But wait …

What is ecommerce fulfillment?

Good question! Although the term fulfillment is used quite a lot, not everyone has a clear grasp on the whole idea. I mean – why fulfillment? Well, it’s actually a pretty simple concept. Order fulfillment is anything that has to do with fulfilling your promise to the customer. That promise is you’re going to ship the products they’ve purchased, those products are going to be in good condition and they will arrive as soon as possible.

Fulfillment also covers the reverse process (also called reverse logistics). That means getting merchandise back from the customer. That type of operations happen:

  • in case of a package return
  • when the customer refused the package
  • the shipping company was not able to get deliver the goods

So basically when your ecommerce business is fulfilling an order, it is actually making good on its promise to deliver merchandise in the best way possible. Although the concept is not that really hard to grasp, making it happen is a little bit harder.

In order to make sure your fulfillment operations you’ll have to look for the answer to four very important questions:

  1. am I moving the goods in the most effective way? This is a question you will always have to be answering to. The answer is usually no. If you have answered yes too many times – you are not really trying that hard. The truth is ecommerce operations are evolving very, very fast and there is probably always something you can do better.
  2. am I always shipping the right products? You have to understand that sometimes you will not be shipping the right products. Yup – that’s a fact. It may happen when you’re using a drop-shipping service or when your team is overwhelmed with the number of orders (say during the holidays). You have to minimize these type of mistakes and always strive to correct your mistakes.
  3. is my team working in sync or are there any communication or operational bottlenecks? Your ecommerce business will not always run smooth. The most common reasons are either the team is not communicating properly or the IT systems are not fully connected (say your order management and inventory management tools are not synced). You have to stay alert and solve these type of issues as soon as possible.
  4. is my fulfillment scalable? You won’t need to ask yourself this question in the first days but eventually you will have to check if your operations are ready to scale if you’re successful. To do so – try wondering what will happen if all of a sudden you were to receive each day ten times as much orders as you’re expecting right now. How about if your sales were to increase one hundred or one thousand times? Would you be ready? How would you manage this change?

The 4+1 steps in ecommerce fulfillment

Fulfillment is probably the most complex and tedious part of ecommerce. It is also the one thing that is the least talked about in terms of ecommerce. It’s not flashy and it’s not cool. It’s complex, involves a lot of tweaking and a lot of work to getting it right. While most ecommerce guides will point out to the importance of picking the right shade of orange for the “Buy now” button, few will speak of how important fulfillment is.

Just to get a glimpse of how important fulfillment is – think of your car. While having the right color and the right type of leather is important, the car won’t start without an engine. Fulfillment is the engine that keeps ecommerce going.

There are just five basic steps in fulfilling ecommerce orders. Four of them are mandatory and one is optional. Hopefully you will cover this last step as few times as possible. These five very important steps are:

  1. Receiving the orders
  2. Receiving the products
  3. Processing the order
  4. Shipping the ordered products
  5. (hopefully not needed) Handling order returns

Overview of the Fulfillment Process (including returns)

1. Receiving the orders

Customers will place the orders through one of your sales channels. It may be your online store, on the phone or through a mobile application or a pop-up store.

There is a great variety of order management software out there and later on on this guide will get through some of them. It matters less what you will be choosing later on. What matters from a fulfillment standpoint is what the order info should contain. Here is the minimal information you will be needing:

  1. who is handling this order (who will be managing the order and who will actually be picking and packing the products)
  2. the customer info – usually name, address, whether the customer is a person or a company, whether the customer has already purchased from your store before
  3. special discounts or shipping conditions – this may happen when the customer has used a voucher or a special promotion and is entitled to a smaller shipping fee, a gift or a bonus product.
  4. order info – total cost, estimated shipping cost, whether the order is prepaid or paid on delivery, and where you will be shipping the products from (either internally from your warehouse or from a drop shipper)

Most of the time, you will be receiving more info from your order management tool but these are the essential blocks of information to keep in mind.

2. Receiving the products

Before moving on to the actual order fulfillment bullet points I have to make a point. You don’t HAVE to fulfill the orders yourself. Some companies outsource their fulfillment to other companies. My advice is you should keep most of your fulfillment operations within your company. You won’t be able to ship products across the globe but you can pick, pack and carefully wrap orders for your customers.

When medium and large online stores are fighting each other over consumer mind share, we only see the marketing and superficial aspect of this battles. But the fact is, underneath all this visible struggles, the real battles are won in the warehouse. Your real chance for success stands in picking, packing and shipping the right products, within the timeframe you’ve promised.

It may seem hard to handle fulfillment operations and it sure is. But because it is hard, you have to master it before the competition does. Walmart and Amazon, two of the largest retailers in the world, are also two of the best supply chains in the world. It’s not that these companies have developed spectacular fulfillment operations because of their huge sales but the other way around.

Glad we’ve got that out of the way. Now – what’s the best way you can receive products in your inventory?

It all starts with an order to your supplier. It is usually called a “Purchase Order” as you are placing an order to purchase products. We will assume that you have already set up an agreement with your suppliers and they will ship the products. You will probably pay as you place your order, when the order arrives or at a given time after the order has arrived, if you have agreed as such with your supplier.

Once the products have arrived at your warehouse you will need to:

  1. verify their integrity – check whether the goods are damaged and if so return those that are damaged
  2. count the number of products – check if the supplier has indeed shipped the correct number of products
  3. check if the product cost is the one agreed upon – if you have agreed to either pay on delivery or at a given deadline you will probably receive an invoice with individual costs split. Check to see whether these costs are those you have agreed upon when placing the order
  4. add the product SKU’s to your inventory management – Standard Keeping Unit or simply SKU is what retailers use to define unique types of products that can be sold. They are used to track goods movement through inventory. The SKU is not to be confused with the product model no, although this can be included. The SKU code is formed using product characteristics (such as manufacturer, size, color etc.) and it is usually used as a barcode so it can be tracked easily using bar code readers.
  5. add bar codes corespondent to the SKU’s you’ve just issued for the products. You can do this using special bar code printers and special stickers that will be attached to the product package.
  6. once the product is received and marked it will be sent to your storage unit (or warehouse) where it will be placed in a way that it can later be easily picked and packed.

( Basic check list when receiving products from the supplier )

Placing the products in the inventory is a very important part in receiving the products. The better you keep track of where the products are, the less time and effort you will need when picking and packing the products.

When placing the products in storage you need to keep in mind some very important aspects:

  1. not all products are equal: products should be placed according to how popular you expect them to be. Some products will be sold faster and they need to be easier to reach. Either closer to the packing unit or lower on the shelves so they can be easily picked.
  2. however, all products have to have their position in stock clearly assigned and saved. Each SKU should have a clear position in the warehouse. You will probably develop your own warehouse numbering system but you will probably have to add things such as aisles, sections, levels and positions to keep product identification easy and scalable.

Hopefully at this point you have managed to get the products in your inventory, they are correctly marked and stored and you are ready to pick said products for the orders you are going to be shipping.

3. Processing the orders

Once you have the products in the inventory and orders are coming in, it’s time to process these orders.

Order processing is split between four main areas:

  1. picking
  2. packing
  3. quality control
  4. movement to appropriate shipping station

 

Picking products from the inventory

Picking is probably the most time consuming part of order processing. It also gets a lot more complicated as your business grows and it may be prone to errors. Having more products in your inventory will increase the complexity of picking the right products in the fastest way possible.

If you’ve managed to place the products in the right spots (as stated in the step above – receiving products) your chances of correctly processing orders increase big time. The reason is it will be easier for picking staff to move fast through the aisles and pick the right products.

How does product picking work?

To have a streamlined picking process that works just as well with 10 orders per day or 1000 orders per day you have to decrease the chances for errors. To do so, your picking staff will cycle through these steps:

  1. Receive a pick list – the pick list is a … well … list of items to be picked from the inventory. It may vary depending on how you run your fulfillment operations and what kind of software you are using but it usually contains:
    1. Product location (section A, aisle 3, level 3 etc.)
    2. Product code (usually the SKU)
    3. Quantity to be picked
    4. Product description and image (for quicker identification)
    5. Barcode (usually used to confirm product picking directly into the inventory management system)
    6. Product bin
  2. Create the optimum route to pick products: usually picking staff will collect more orders to improve efficiency and gather all the products in one trip. This route is usually generated by the inventory management software based upon the warehouse layout.
  3. Pick products and place them either in separate bins based on ordered items or a general items to be sorted later at quality control or packing stations.
  4. Bring products to the Packing Station, where they will be sorted, placed into the right packages, and so on.

( A basic example for a picking list )

Packing ecommerce orders

Packing is the next step in the fulfillment operation. Once the products have been picked from the corresponding aisle, shelf or bin, they are sent to the packing station where they will be split into orders and prepared for shipping.

The packing operation is usually split into these further steps:

  1. Choosing the right package – depending on the products shipped, they will be placed into special packages, according to specific needs. For example a wine bottle will be shipped in a different package than say, a dress or a cardigan.
  2. Scanning and marking the package – after the products are placed into the right package, products are usually marked with specific documents, usually used by the shipping company so their transport progres can be tracked. They are also scanned so the inventory management software will register said products as getting ready for shipment.
  3. Adding invoices, product slips or other documents and / or marketing prints – this step includes placing needed orders information or documents (warranty certificate or invoice), as well as marketing materials that should reach the customer (say a discount voucher or a bonus product).
  4. Preparing the package for quality control and shipping

 

Quality control

Once the products are placed in the right package, a quality control station will check for any errors that may happen.

Quality control personnel will usually check for one of the following errors that may appear:

  1. Wrong products: products may sometimes get mixed or the wrong information has been sent somewhere along the order management process. The most important aspect is that quality control will make sure the customer gets what he or she ordered.
  2. Wrong address / customer: sometimes orders get mixed and orders are sent to the wrong customers.
  3. Wrong payment information: there is a multitude of payment options and you do not want to ask your customer to pay something that was already paid for.
  4. Shipping options: maybe the customer opted for a quick delivery option. Quality control needs to make sure the product gets to the customer in the specified time frame. Another shipping mistake happens when online stores work with multiple shipping partners (say one for internal shipping and one for overseas shipping). It is important for the order to be routed to the right shipping partner to avoid delays or extra costs.
  5. Specific order information: quality control also needs to check for specific demands such as gift wrapping or a specific timeframe to be shipped at.

 

4. Shipping orders

Once the products have been picked, packed and quality control made sure there were no errors in the order management process, the package is ready for shipping.

Online stores usually partner with one or more shipping companies to deliver the goods. The shipping station will check the package weight and direct it to the right shipping partner.

Most shipping companies will provide you with a general framework on how to handle packing and preparing for shipping. Here are the most popular ones:

 

When these companies (and others) will charge you for their shipping services they will take into account some (or all) of the following variables:

  • package weight and size
  • departing country and arrival country
  • departing city and arrival city
  • shipping insurance
  • tracking services (now most of these companies offer this service bundled with others)

 

Once the orders are picked by the shipping company, the order status is constantly updated so customers and the online store knows where the packages are at the moment.

When the products are delivered the status is updated and the order is confirmed. After this point the product is in the customer’s ownership and any reverse process wil be treated as a return.

 

5. Handling ecommerce returns

Oh, returns – can’t live with them, can’t live without them. Just kidding. A clear and friendly return policy is what sets the likes of Zappos.com apart from the competition. They will let you return the products you’ve purchased within 365 days, free of charge and as their return centers will check the products you will be credited within 7 days with the money you’ve spent.

Great, right?

Ecommerce customers love a great return policy and you need to be ready to handle one. The logistics involved in such a return process are usually dubbed reverse logistics. This means you will reverse the steps mentioned above.

Basically you will unship the products, unpack, unpick and un-order everything.

If you offer free shipping, you will have to handle the shipping costs from the customer to your return center (for small and medium companies, the return centers are the same as the fulfillment facilities).

Now, the big problem when getting information on handling returns is that most of the resources out there are either

  • irrelevant (usually stating how important return policies are or how to market your return policy) or
  • boring (usually a bunch of text mixed by logistics experts that have no need to explain how reverse logistics work)

What will follow will hopefully be a bit more relevant and a bit less boring. The big idea you have to keep in mind is returns are the reverse process of everything you have read so far.

You will have to tailor the following concepts to your specific company structure, accounting, IT systems and processes.

That being said there are three main areas you need to focus:

1. Getting the products from the customer and into your fulfillment center.

There are usually three main options to do this:

  • using your shipping partner: most shipping companies offer return services. What they will do is go to the customer, pick up the package and send it back to you. Either you or the customer have to pay for these services. Companies offering free returns also include a special options for customers to use within a certain timeframe, in order to ship products back. This is usually a special voucher the shipping company will then use to charge you instead of the customer.
  • using your own network of brick and mortar stores: if you also have a network of stores (either classic or pop-up stores) you can direct the customers to these stores to save on shipping costs

2. Getting the products back into inventory

Once the products are back at the fulfillment center you will have to get them back into inventory. The process is similar to what you would do if you were to receive goods from your supplier. The main differences are:

  • in terms of accounting this operation will be treated differently
  • products need to be checked for damage or missing items
  • instead of paying your supplier, you will either credit the customer

3. Returning payments to the customers

Once the products have been checked and returned to the inventory, you will need to issue a refund to the customer and inform said customer of these changes.

And … that’s it.

It may seem complicated right now but keep in mind that thousands of online store owners are doing all these things. Now that you’ve got the basics, you will be able to deal with most of the operation challenges you will face. If there is anything else you need to know – just ask in the comments sections bellow.

This concludes this part of this guide. This is probably the hardest and the most important part of making your store run smooth. It involves many operations, usually lots of people and it needs to be built in such a way that it will easily scale when your company is growing at double digits.

Next week we will focus on branding, designing and choosing an ecommerce platform for your online store. See you soon!

Book review: Delivering Happiness by Tony Hsieh

In Delivering Happiness we get a glimpse of how a promising startup becomes a multi-billion company and the life events that shaped its leaders. Tony Hsieh, author of Delivering Happiness, is CEO of Zappos.com, one of the largest online retailers in the US. The company he built, alongside other co-founders, was acquired by Amazon in 2009, in a deal valued at over $1.2 billion.

delivering-happiness
You can also get more resources on building your startup at deliveringhappiness.com

If you’re planing on buying the book you’re definitely not wasting money. It is a great insight in the mind and life of the man that drove Zappos from a great idea to a company worth billions. But Tony Hsieh is an entrepreneur, a story teller and probably a great leader for his company. There’s plenty to learn from him. But he’s no writer. At least not yet.

From a literary perspective – don’t expect too much. „Delivering Happiness” is fun and easy to read, it’s packed with practical advice and real-life stories to get the point across. But Tony is no Hemingway.  The writing sometimes rushes through some really important events and sometimes lags behind boring details. For example there is a bit more info on how Tony decided he should build a worm farm when he was nine years old than there is on how actually did Amazon decide on acquiring Zappos.

Literary style aside, Tony Hsieh’s life story and Zappos growth is nothing less than amazing. The book cycles through three very important areas on building a business, overlayed on top of Tony’s life story: Profits, Passion and Purpose.

It seems as if the book is less about Zappos and more about Tony’s search for purpose. From an individual point of view I believe anyone can relate to striving for purpose. Just as the title hints, Tony Hsieh’s purpose was ultimately delivering happiness to the people around him: employees, vendors, customers.

You’ll get a feeling of just how entrepreneurial Tony is from the first chapter, Profits. He shares funny stories that show his drive for profits. Be it an worm farm, a newspaper delivery operation or the pizza delivery business he created in college, we see a clear drive for profits that ultimately leads Tony to cofound LinkExchange, a media business ultimately sold to Microsoft for $265 million.

But it wasn’t all great. Building LinkExchange, Tony felt the initial energy and culture in the company ultimately faded away. In the days leading to the company being acquired by Microsoft, many employees became unexpectedly greedy, trying to squeeze as much as possible from the transaction. This fact left a bitter taste with Tony. However, the patient took the bitter medicine and applied the lesson to Zappos.

One of the most important aspects to Zappos is clearly the focus on customer service, something impossible to build without a spotless company culture. It was the bitter taste Tony felt in the days leading to closing the LinkExchange transaction that set the tone for Zappos „fun and a bit weird” culture, one of the assets that helped the company reach more than 1 billion in sales in less than 10 years.

It was the culture that helped the company evolve, kept its employees with the company when the going got tough and it was the culture that drew attention of Amazon CEO Jeff Bezos.

It was the culture that showed Tony and other executives that they have to steer away the company from previous investors, which wanted more profits and less customer focus. This ultimately lead to what Tony calls a „marriage” between Zappos and Amazon – the transaction that tied the knot on two of the largest online retailers, two companies that take pride on being customer centric.

„Delivering Happiness” is a great  book for any entrepreneur. It outlines the struggles and hard times that are usually invisible in the media. It shows how painful and energy draining it is to build an world class company. It also shows how important passion and purpose are when trying to scale beyond the startup phase.

Delivering Happiness shows Tony Hsieh’s struggle to go beyond being an one-shot entrepreneur. It shows the struggle to go beyond profits and build an organisation that brings together passionate people that ultimately share a common purpose. It is the story of how this purpose came to improve the lives of those inside and outside the company.

Book Review: On China, by Henry Kissinger

How do you describe China? How could one understand a land with historic roots that spawn for almost 4000 years? No easy task, that’s for sure.

Henry Kissinger, the statesman credited for opening the US ties to Communist China in 1971, tries to do just that in its book “On China”.

On China, Henry Kissinger
On China, Henry Kissinger

The book is a framework for anyone willing to dive in the complex culture that China has carried throughout the ages. It is a vast exposition on what makes China so enduring and so different from the type of empire we have come to know in the west.

The reason “On China” is reviewed here, a blog on the future of retail, goes beyond the obvious (manufacturing). By reading Kissinger’s masterpiece, we will get a glimpse into the future, through the lens of the past. We can see China is not a rising power. It is a returning power. It is a land that fostered the strongest economy in the world through 18 out of the previous 20 centuries.

China predated the Roman Empire. It survived it and lived on to be reached by the British Empire. It survived this one as well and now it survives another one. The fact that its economy keeps rising and rising, its retailers take the world by storm and the country has moved beyond its Mao Zedong legacy shows the quiet force this country packs.

The Wei Qi principle

Henry Kissinger proposes the Wei-Qi game as a start point to understanding China. As opposed to the oldest western strategy game, Chess, Wei Qi has some key differences.

First of all – there are a lot more pieces that have to be used in the game. The pieces are all equally valued. As opposed to chess, the Wei Qi pieces are all just as valuable. There are no knights, no bishops, no king and no queen. All pieces are equally important and equally effective.

The point is not to find the pivotal action to winning the game. The point is to avoid being surrounded. Throughout China’s troubled history, generals have discovered how costly defeats are, when the enemy surrounds the troops. The war strategy has shifted from direct engagement to battles that are won before they are even fought, through good preparation, as the mythical Sun Tzu general would have noted.

These simple yet powerful differences and others such, have shaped China’s destiny throughout the centuries. Western history barely mentions the Chinese Empire, yet the court viewed itself as ruler of all that is “Under the Heavens”. The Chinese Empire rarely fought outside its borders (viewing such act as a crime). It nevertheless encountered its fare share of troubles with barbarians outside its borders, constantly being attacked. Unlike its western counterparts, it used diplomacy, rather than force to subdue weaker civilizations. The court was well taught by centuries of rich history on how to negotiate alliances, resisting attacks, integrating barbarians or even using politics to break alliances between its closest enemies. Sometimes using the enemies farther away to control those closest to the empire.

The fall of the empire

Throughout the centuries diplomacy and politic skill has been enough to keep the “barbarians” at bay. Eventually, even the Celestial Empire had to run out of luck. In the beginning of the 18th century, Western colonial powers, as well as Russia, were knocking on the gates of the Empire, trying to develop a commerce relationship. Russia, being closer and in a position to threaten China, was the first country, Kissinger notes, to be allowed to have a de facto embassy. The embassy was in fact an orthodox mission but it was a lot more than the British Empire had.

The British, as well as other colonial powers, were barely allowed a presence within the empire. Commerce was carefully regulated and restricted. In time, as diplomacy failed to get results, the British decided to use force. As China previously refused to get  western military technology, it was quickly overwhelmed by better trained soldiers, using more advanced weaponry. The “Barbarians” forced their way towards the capitol, eventually being stopped by Russia’s diplomats who negotiated a temporarily redraw. But this help from the friendly Russians was costly. China agreed to a humiliating act that would offer vast territories to Russia, in exchange for its help.

This humiliating treaties, rising internal instability, and the enemies at the gates eventually lead the empire to crumble. In 1912, the last Emperor abdicated, and China became a republic.

It wasn’t for the better, as China was virtually ungoverned. Henry Kissinger lists intervention by the United States to help the forming republic, supporting the existing nationalist government. But it was not this government that eventually won the power. It was a new leader, a communist leader: Mao Zedong.

The Communist China

Kissinger lists Mao’s rise with a reverence that may seem unnatural at times. After all – Mao is seen less like an enlightened leader in the western world, and more like a power hungry criminal that lead its country, as well as the party close to imminent self destruction. Whether it is diplomatic courtesy (you have to expect reverence from a high level US statesman) or genuine interest, if not admiration – Kissinger is clearly inclined to describe Mao as a Chinese savior. Whether it is the fact that he reunited China, or that China survived the Soviet Union’s threat, Henry Kissinger sees Mao as an important geopolitical player.

Mao defied and somehow survived both the US and the Soviet Union. Unlike the weakened European countries, Mao repeatedly declared his country was not afraid of the Nuclear Threat. No one will know if he was just bluffing to resist on the world stage, or he was actually not caring if 300 million Chinese would die in a Nuclear war. The “Great Leap Forward” and the “Cultural Revolution” would later point into the second direction.

The farthest enemy

Although Mao listed Confucianism and “the old ways” as obsolete and not to be used, he did resort to one of these tactics when the Soviet Union deployed 1 million soldiers at the Chinese-Soviet border. The soldiers were not much of a problem, but the nukes were. China and USSR were no longer comrades, and the Soviet Union was likely planning a preemptive nuclear attack. Mao decided to apply the old strategy of using the enemies from afar against those closer.

In 1971 Henry Kissinger lists its meeting with both Mao Zedong and Zhou Enlai. At the time, Zhou Enlai was the prime minister for over 22 years and he left a deep impression on the US statesman: “In 60 years of public life, I have never met a person more fascinating than Zhou Enlai“. This meeting extended in the next year with a visit from Richard Nixon and it was the the start in a long relationship between the two states.  It was also the visit that probably stopped a nuclear attack on China.

Mr. Enlai was eventually replaced and Mao left its position, leading the way for a new leadership. It was this new leader, Deng Xiaoping, that turned China from a starving, barely educated country, bathing in Mao’s shadow, to a growing economic power.

His work was later continued by Jiang Zemin, that encouraged education, technology developments and eventually helped China join the WTO in 2001.

Since 2001, just 13 years ago, China became a leading manufacturer, the sourcing choice for retailers worldwide, to a dominant power that now exports not only products, but rather leading businesses.

Henry Kissinger ends the book by reminding the reader of the Crowe Memorandum,  an analysis of pre-WWI Germany and the causes that lead to war. Though he envisions a future where the Pacific Powers (US and China) can collaborate in peace, he does pose the question of whether such a future is possible. The last paragraph cites Zhou Enlai, at the first meeting in 1971, when the Chinese PM mentioned their meeting will “shake the world”. The big question, for this new century, mr Kissinger asks, is could China and the US build the world, rather than shake it?

 

Equal Opportunities for All. Are Electronic Markets Making the World a Better Place?

hands

In 1932, Ben Graham asked a tough question: “Is American Business Worth More Dead than Alive?”.  At the time US and the World were struggling through the depths of the Great Depression. The 1929 and 1930 stock market crashes left anyone with a sense of reality discouraged with stock exchange.

But Ben Graham, then a small investor with a brilliant mind, noticed something interesting. The stock market crashes left companies deeply undervalued. The companies were worth more taken apart than sold as a whole. They struggled with banks that not loaning them money and investors far too prudent.

30% of all listed companies had a larger value disassembled than sold as a whole. Their net quick assets (cash, marketable securities, and accounts receivable minus current liabilities) were worth more than the value investors were willing to pay for. Mr. Graham basically said: it’s now safe to invest again.

It’s 2014 and now we wonder how technology companies are evaluated. We strive to understand how something so seemingly small and useless as messaging app, a social network and an electronic market can be so highly valued. If Ben Graham would look at Amazon, would he decide to buy? Well I don’t know about the messaging app or the social network but if it were for the electronic markets, I bet mr. Graham would say: it’s now safe to invest again. Below you’ll find out why.

The Prodigal Student

Ben Graham lived until 1976. Although definitely not a poor man, he didn’t die a very wealthy one either. He had no problem ensuring his wealth increased steadily but he was more fond of reading Proust in French and Plato in Latin than gathering fortunes.

It was one of his disciples that reminded the world about Mr. Graham. It was this disciple, the worlds richest man for a very long time, that made Ben Graham famous, repeating his mentor’s name every chance he got.

Warren Buffet
Warren Buffet

Warren Buffet made his first investment when he was just nine. He ran his own business by the age of 14. He was a millionaire by the age of 32. He tried to get Ben Graham to hire him for years until the mentor finally accepted he was ready to join his company.

He than evolved continuously. Using Graham’s method he increased his fortune by the year. There were of course setbacks but he managed his money and his partners’ like no other.

But there was something Warren was not fond of: technology. He refused to be one of the early investors in Intel because he just didn’t understand technology. He was more focused on long term companies that he understood. Amid the Dot Com Bubble, when everyone was rushing in to buy tech stocks he said:

“Technology is just something we don’t understand, so we don’t invest in it.”

They laughed and they lost. The Oracle of Omaha, as mr. Buffet is often called in media, was right again. He left the bubble unwounded. An than he bought tech stocks.

Warren Buffet invested in IBM and Intel. These companies fit his principles. They were strong companies, that he could expect to own indefinitely. They survived the hype and escaped stronger.

Fairness and the money

Fairness is a concept that sometimes eludes our understanding. At least most of us. Warren Buffet is not like most of us. He was able to see beyond the hype when tech stocks were overvalued and he was able to see beyond the public opinion when important matters were disputed.

He and his wife were one of the few anti – segregation militants in Omaha, back when rasial differences were the norm. He fought strongly anti – semitism in his hometown. He pledged $31 billion to charity and now he is one of the strongest advocates of increased taxation on the rich.

“So let’s forget about the rich and ultra rich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased,” he said. “The ultra rich, including me, will forever pursue investment opportunities.” Warren Buffet

Warren Buffet was never an elitist. He believed everyone should have equal opportunities at pursuing his interests and he stands even today as the living proof fair opportunities make up for very successful people.

But for the recorded human history, wealth has been unequally spread. From the dawn of man kind, through the Roman Empire, the Middle Ages, the Industrial Revolution, one thing was constant: wealth is not distributed equally. For a very long period of time also wealth (especially inherited) also mean life opportunities.

Here’s how we perceive wealth disparity right now:

[youtube http://www.youtube.com/watch?v=QPKKQnijnsM]

The long story short:

  • wealth is not distributed equally
  • not only is wealth not distributed equally, but it is actually in the hands of those that don’t deserve it
  • the distance between the lowest paid and the highest paid earners is absurd
Wealth Distribution 1983 - 2010
Wealth Distribution 1983 – 2010. Source: Professor G. William Domhoff, University of California.

Wealth disparity may indeed be a problem. If it meant the poor stay poor and the rich stay rich forever.

But it’s not really that way. At least not anymore.

In the past 20 years the top 1 percent increased their share of total net worth from 33.8% to 35.4%, with a peak of 38.5% in 1995. The next 19 percent increased their share of total wealth from 47.5% to 53.5% and all of these at the expense of the bottom 80%, who lost a 7.6% share of total net worth.

The rich 1% didn’t get much richer. The rich 20% got richer on the expense of the poor. It’s not the rich that take away from the poor. Nor is the middle class disappearing . The middle class is getting a lot richer.

There is a rich 1%. It’s just not who you think it is.

Think about it for a second. Are these categories fixed? Are people in the bottom 80% destined to remain there? Are the top 1% staying there forever?

The previous two examples, Warren Buffet and Ben Graham, although not dirt poor, did not come from rich families. Sure, they were not starving (well except Ben Graham, at an earlier point in his life), but they were definitely not rich.

Yes, Warren Buffet’s father was congressmen for 4 terms, but he did struggle at length in his youth to keep the family finances afloat. Through extensive work he managed to provide a decent lifestyle for him and his family, and thus young Warren was provided an opportunity to put his outstanding mind at work.

So did Ben Graham. His mother inherited a decent fortune from his father but lost it all in 1907, when he was just 11 years old. What he did receive was a brilliant mind and before 25 he already had a $500 000 small fortune.

It’s not inherited wealth. Graham and Buffet improved their financial status with as a result from their innate intelligence and hard work. They did not receive a fortune. They received a fair chance at earning their fortune.

They’re not the only ones. Forbes top 10 richest people are similar cases:

  1. Warren Buffet was born in a middle class american family, earned his wealth through heavy saving and intelligent investments. Worth  $60.3 billion.
  2. Carlos Slim was born to immigrant parents. Slim was early to invest (bought first share at 12). His story is a lot similar to Buffets, although he came from a much poorer background and in a poorer country. Worth $72 billion.
  3. Amancio Ortega, founder of the Zara brand and – was the youngest of four children. His father – a railway worker. His first job, at 14 – shop hand for a local shirtmaker called Gala. Worth $65.3 billion.
  4. Ingvar Kamprad – founder of IKEA – was raised on a farm. He started business as a little boy selling matches to locals. Worth $52.8 billion.
  5. Larry Ellison – founder of Oracle – son of an unwed mother and an italian pilot. He was given for adoption at the age of 9 months. Worth $43.3 billion.
  6. Sheldon Adelson – business magnate – his father was a taxi driver and his mother ran a knitting shop. Worth $37.5 billion.

And they’re not the only ones. Have a look at Forbes top 400 richest people and you’ll notice the self made billionaire is not the exception. Out of 400 richest people, 386 were self made. That’s an astonishing number. 96.5% of the richest 400 are self made.

So it is not inheritance that builds fortune. It’s sometimes the opposite. As numbers would have it wealth is a result of fair opportunities, a brilliant mind, drive and hard work.

Well … at least if you’re lucky enough to be born in the US.

The opportunity disparity in the world

Income per capita in the world. Source:
Income per capita in the world. Source: Keith Sill.

In the past, before the airplane, the radio, the telephone and eventually the internet chances looked pretty grim for those born outside rich countries. Capital was scarce, life was hard but most of all education was a real problem.

Starting with the industrial revolution, unless you were born in the Western Europe or the Western Offshoots (United States, Canada, Australia and New Zealand) your chances of getting a decent lifestyle were slim to none. Getting an education – even worse.

So if you are reading this from a computer in the western world and you are complaining about the 1% stealing your wealth know this: 96.5% of Forbes 400 are self made. You have an equal opportunity at getting rich.

Those born outside don’t have this opportunity. Or do they?

Technology made Western World rich

As the world moved from the pre-industrial to post-industrial era some won and some lost. Income grew and grew, helped by the magical vector of technology. Human workforce was replaced by exponentially growing human ingenuity.

The working hand was replaced by the steam-powered machine. Carriages were replaced by cars, trains and railways. Houses were replaced by steel and concrete behemoths. In the western world people were no longer working the fields but rather in factories and offices. Capitalism fought and (relatively) quickly replaced all other economic ideologies.

Marketing and advertising were born to help sell excess production. The stock markets were fueled and exploded. Multinational companies roamed the world to sell the products the West could make better, faster and cheaper.

Technology patents piled up until masses of workers became nothing but managers, lawyers, tradesmen, pencil-pushers. Those brilliant enough to harness the power of technology and improve their peers’ lives were rewarded with vast fortunes.

The temple of the mighty dollar discovered and pushed new concepts and new ways of doing things, growing faster and faster apart from the rest of the world. Until it built the personal computers and the Internet.

The Internet leveled the playing field

When the Internet came online it was a military application. It quickly evolved into an academic research network that spread throughout the world. There weren’t too many people willing to bet big on its economic impact yet the internet economy is now expected to reach 4.2 trillion by 2016.

Robert Lucas, Nobel Laureate
Robert Lucas, Nobel Laureate

Nobel Laureate Robert Lucas stated that economies that are at the forefront of economic and technological development will grow by approximately 2% per year. Those below them are usually kept below by what he called “technology frontiers”. Advances in genetics, IT, robotics and others that help labor and capital be more productive, are technology frontiers. Once technology frontiers disappear, lower economies will grow 2% + an additional growth rate determined by the income gap between itself and the richest country. So – the later the technology frontiers disappear, the bigger the income gap. The bigger the income gap, the faster the growth. The world tends to balance inequality.

Countries that are later to develop can adopt new technologies easier and the main factor that helps emerging markets evolve is technology and education.They can freely adopt and integrate these, without having to go through the research and developed the countries at the top of the food chain had to.

Even though countries may start development later, they tend to reach the same point in terms of income.
Even though countries may start development later, they tend to reach the same point in terms of income.

Internet made everything easily accessible. It quickly became the gateway for anyone willing to access the sum of all human knowledge. Western colleges now post courses online free of charge. Online academies help students become specialists in any desired field, ranging from business, to communication to computer sciences.

In a simulation of Lucas’s model (on the left) you can see how countries that are later to break through technology frontiers are also those with the fastest growth. For most countries the bulldozer that broke through the technology frontiers was the Internet.

With the widespread adoption of the Internet, global opportunities shifted quickly. Countries that were previously kept in the dark by economic conditions, lack of education and poor access to information now had a fighting chance. They were no longer tied to menial jobs and export of raw materials. Giant leaps were made in the past twenty years in terms of global access to information and decreasing the opportunity gap between the Western Countries / Western Offshoots and the World.

Jan Koum’s rags to riches story is deeply iconic on how much the field was leveled in the past years. He grew up in a village near Kiev, Ukraine. He lived through poor conditions until he put his skills to use in the US. Just as his country was being torn apart by an anti-government revolution he sold his company, WhatsApp, becoming a billionaire at just 38.

And it’s not just software, code and people. Goods are quickly moving from country to country, continent to continent. All due to the new electronic markets, enabling global access for small to medium producers and retailers.

Companies such as Amazon, Ebay, AliBaba.com are connecting the world and taking out the middle man. With less losses on the way to the end consumer, products are cheaper and competition is itself leveled. Everyone gets an equal opportunity and a decent start.

The electronic markets are changing commerce for the first time in human history

Take China for example. It was pretty late to the party in terms of economic development. When it did start to grow, it took the world by storm. 

As for electronic markets, China hadn’t had to invent or discover the internet. It just adopted it. It made a great leap forward in terms of manufacturing. It made an even bigger leap forward when it comes to e-tailing and electronic markets:

China's compound Growth rate, 2003-2011 - 120% . China grew 7 times faster than the US.
China’s compound Growth rate, 2003-2011 – 120% . China grew 7 times faster than the US.

If you look carefully at the China’s e-tailing market growth, the growth rate it’s pretty similar to Robert Lucas’economic growth theoretical modeling. China’s quick adoption of ecommerce as a means to get a larger retailing coverage was a breakthrough in a very important technology frontier: electronic markets.

AliBaba.com compared to Amazon and Ebay
AliBaba.com compared to Amazon and Ebay

It is estimated China’s internal ecommerce market will reach $655 billion by 2020. The figure, as astonishing as it may seem, is dwarfed by AliBaba.com’s sales figures.

AliBaba.com, China’s main ecommerce company, is focused on B2B / C2C transactions between Chinese manufacturers and the rest of the world and it reported gross sales of $170 billion in 2012. That figure has only been ever  reported by two companies: Walmart and AliBaba. It was founded in 1999 by 18 people and an initial investment of 22 million dollars. Now it is the largest ecommerce company in the world and quickly becoming an unbeatable force in retail as a whole.

The company is a prime example of how a previously complicated international supply chain can turn into a click of the button. AliBaba is responsible for developments in key areas of China’s economy:

  1. increasing exports by connecting manufacturers and retailers (B2B)
  2. improving retail coverage for the internal and external customer (C2C)
  3. improving Chinese suppliers reliability and accountability through its certification programs

Companies such as AliBaba, Amazon , Ebay are supplying the world with something it badly needs: equal opportunities. With electronic markets easily available and growing fast, people all over the world are starting to have, for the first time in history, equal chances at attaining success.

It’s not Equality, but Meritocracy  is as good as it gets

By empowering individuals to access the same wealth of possibilities, the new tech companies are changing the way we think of human development.

Our history has been sadly occupied by mostly dynastic forms of leadership. Aristocracy, brute force ruling, totalitarian states have one thing in common – unequal opportunities for those that deserve them.

Marxism brought a fake yet inciting concept: that all man are equal. Indeed we are all created equal. We should have equal opportunities. But perfect equality is neither attainable nor fair. Even among equally gifted individuals, drive and hard work can shift the balance more than we care to admit.

Equal access to opportunities is needed and desirable. We have to make it possible that even if the future cancer – curing Nobel Laureate is born in a poor village in Africa, he has the chance to rise. Even if the physicist that will invent faster than light travel will be born in a poor family, he has the chance to reach his full potential.

Our electronic markets are so far the only way we can ensure equal opportunities to all mankind. What made Warren Buffet rich was a brief period of time when stocks were great to buy, his innate intelligence, his access to the best information he can get, a close relationship to an intelligent mentor. And hard work.

Beside innate abilities that turn out to be not so important, everything else above is now available or shortly be available to each citizen of the world.

Companies that are building electronic markets are not overvalued. They are a new breed of companies that work for the betterment of mankind. Knowingly or not. That’s why we need to look at them not from the previous brick and mortar, asset only point of view, but a new one. We need a perspective where we look at a company and choose to invest in it based on a simple question: “Does this company get us closer to an equal opportunity world?”

It’s not all good …

However – be sure equal opportunities do not mean equality. Man was not born a machine. He is a creative force of nature and as long as it will use his creativity and intellect, opportunities will be used.

Unfortunately a dark veil has been pulled over, at the dawn of our productive society. Many of us still act as if we depend on simple, repetitive jobs to make a living. Whether it is our instincts fighting the technology we hardly understand or  a self perpetuating fallacy we must stop trying to act as machines.

The world is potentially free. We must leave all repetitive tasks to technology and become the creators we are able to become. Those that fail at this will be the 80% struggling tomorrow.

Higher Education can’t Keep Up: Online Retailers Need to Hire Experience, not Diplomas

It’s pretty hard for anyone to admit it but it’s true: universities can’t keep up with the times. They cannot deliver qualified individuals for the growing online retail segment because there is nothing to be qualified on. Of course, there are some courses that cover some successful business models but truth be told there is no use in knowing Amazon’s business model as long as there is already one Amazon on the market.

The original college drop-out overachiever.
The original college drop-out overachiever.

How did it come to this? When did this pillars of economic evolution start to lose ground? Let’s have a look at some of the potential causes and some answers on how to hire and develop the right individuals for the online retail segment.

Universities teach rules. On the internet rules are meant to be broken.

The whole concept behind higher education was that one might benefit from (1) a few extra education years, (2) access to some very experienced professors and most important although not usually talked about – (3) a network of like minded, probably successful colleagues. These three factors don’t really apply to online business in general and online retail in particular:

  1. with wonder kids such as Mark Zuckerberg and the Google Duo, dot-com entrepreneurs are expected to be successful before their early thirties. Spending too much time in the academia is not really the best choice if you are an aspiring young millionaire. Have a look at this M. Zuckerberg’s interview back when Facebook was Thefacebook.com. The thing you should be thinking about – how can someone driven, ambitious and aware can stay in college for 4 years when he feels ” ‘near future’ being like anytime in the next seven or eight days.” Remember – this guy is a Harvard drop-out.
  2. as for the “very experienced professors” – there is no way they can actually be that experienced unless their name is somewhere along the lines of Jeff Bezos or Jack Ma. The high education fees and the time spent in conventional education facilities are not really that useful when it comes to innovation. Professors are not really the most adaptable types. Most of them are still trying to understand and explain the Dot.com Bubble. They are historians rather than explorers. Of course, understanding our past can save us from some trouble but it can also lead to a certain lack of innovation, a thing the internet thrives on.
  3. the network of like minded, probably successful colleagues is not really spending that much time in the classroom. They are studying, alright, they are building networks and they are building stuff. Just not where you would expect them to do that. They hang out in technology hubs, they read books on their Kindle and their laboratory is probably a Macbook.

Unfortunately a college diploma shows only that the individual can remember some things and can obey rules. That’s great for middle management and below but what do you do when you need to hire talent? Where can you find people that can turn Brick and Mortar stores into online retailers?

How to attract talent that can develop Online Retail Companies?

No matter how big your company is – you will be always faced with recruiting issues. How to look for the right candidates, how to attract them and how to keep them are always distinctively  difficult issues.

Some of the larger companies, such as Walmart, have chosen the path I believe works best: buying entrepreneurs. When I say buying  – think more than cash. The large pay check is one type of incentive, but not the only one. The right kind of people need a purpose, a direction and the freedom to choose their own teams. They will be motivated by a large vision, a goal to strive to and a team that can help them achieve that goal.

Here’s how Walmart CEO Mike Duke managed to lure ex-eBay engineer Jeremy King, now CTO of Walmart. Notice how Mike Duke had already decided that although ecommerce is not really the biggest piece of the pie – it is the key to continue Walmart’s development in the future.

After years of seeing his company lag online, Duke swore that digital was now a priority for Walmart. Duke had restructured the company, placing e-commerce on equal footing with Walmart’s other, much larger divisions. He had made serious investments in high-tech talent, acquiring several startups.

Hire experience – any kind of experience.

Remember – what did you do when you first tried to ride a bike? Chances are that unless you were an unusually talented  child or a late learner you got a few bruises out of your first try. However, due to those slightly annoying incidents, you managed to learn what to do and what not to do.

As an online retail business owner or manager you should be looking for experience. Experience doesn’t come easy. As I said earlier in the article – there is no one there to teach young professionals what to do and what not to do. So far, at least. As such you will be dealing with people that failed, struggled, tried again and again and eventually learnt a thing or two about online retail.

In time, education will adapt to this changing landscape and it will offer better suited courses. In the same time online retail will develop into a mature industry and things will start to get rusty again, just as it had happened to classic retail. Then you will be able to hire diplomas again. Until then – keep you eyes open for experience.

The UN hijacks the Internet

Some countries, including Russia, China and Iran, well known for their democratic efforts and respect for civil rights ( 🙂 ), seek more control over the Internet, through the UN International Telecommunications Union (ITU).WCIT logo

As this year’s World Conference on International Telecommunications (WCIT-12) is preparing for its December the 3th opening several documents have leaked on http://wcitleaks.org/  . Although these documents were not actually classified they were never made public. After they leaked the public opinion could see why: countries like China, Russia, Iran, Tadjikistan and Pakistan are asking for a complete change of the Internet as we know it.

What is ITU and what does it do?

The ITU was founded in 1865 to help regulate telegraph communications. Over the years it has evolved into an organization managing international telecommunications regulations (ITRs). As its last signed protocol dates back to 1988, previously to the invention of the Internet, some of the government representatives in the UN thought of how might the Internet be controlled. As a result some preposterous proposals surfaced on wcitleaks.org. Here are some of them:

UN proposals on Internet management

  • China proposed that governments should be in charge of internet traffic nation-wide. Online companies operating inside a given territory should use the Internet in “a rational way” or as WSJ puts it – handle over control and internet traffic information.
  • UN could handle online content however it finds appropriate
  • Russia and some of the Arab countries proposed access to Internet communications (like checking users emails, Facebook accounts etc.)
  • Iran and Russia proposed a charging method similar to international calls (users could be charged more for international traffic). Some European countries backed a similar proposal.

Why the Internet should stay just the way it is ?

putin - internet
Vladimir Putin, a well known civil rights supporter

I find such proposals not only misguided but also economically dangerous and short sighted. For the last 20 years the world benefited greatly from the Internet being a somehow free media. Yes, the Internet is now manged by some US based organizations but this structure brought us a level of information we have never seen. Almost one third of the world is now connected and free to share ideas. Education, economy and general well being – they all improved with the free Internet.

I discussed  the dangers of over-regulating the Internet in a previous article. At the time I had no knowledge of such disturbing news. Even more disturbing is the fact that public media is not yet taking as much interest as it should in this matter. Forget ACTA, SOPA and all the other things the Internet stood against. This conference is a turning point in human history, just like the invention of the Internet was.

Should the proposals discussed above be accepted and enforced we will see a huge set back in economic development, education and civil rights. After all – the Internet is changing the status quo in a civilization that has been so far lead by fear, ignorance and hate. In a world that faces poverty, over population, countries armed with nuclear weapons, can we really accept to bury this diamond in the dirt?

Further reading:

Does internet help education?

“The printing press helped education”. It’s pretty hard to argue with that. When Johannes Gutenberg invented the printing press he had a simple idea in his mind: to help more people read the Bible. Also – make some money out of it (Gutenberg was a goldsmith so we might assume he had some economic motivations).

The printing press helped Europe escape the Dark Ages

 

The printing press

Back then The Church held a monopoly on Bible printing and distribution. Most of the Bibles were hand written in Latin and it was frowned upon, to say the least, to translate or own one. There were few people able to read, let alone read Latin, so the Church held the absolute truth as priests were able to interpret the Bible in any way they found it appropriate.

Johannes Gutenberg changes all that in 1440 with his invention of the printing press. He is credited with having printed the world’s first movable type book, a 42 line Bible.

The context was favorable as Europe was seeing a post-medieval rise in learning, the early notions of capitalism appeared and manifested themselves through a high interest in product efficiency. In just a few decades the printing press spread throughout Europe. This is not as impressive now as we take book publishing  and distribution for granted, we read our books on tablets or the Kindle but back then it was unheard of any technology to spread that fast. In under 4 centuries the book printing output rose from one million to over one billion books.

Soon people began printing more than Bibles. Authorship actually started meaning something. Back when the printing press did not exist the author was not really important. A copy of Platon’s Republic in Paris may have been entirely different from the one in London. Authors where sometimes unknown and most didn’t find any interested in writing something that brought no profit or recognition in return.

The sciences blossomed as people were able to exchange ideas in writing. The arts started blossoming as literature was finding its way to the masses. The first newspaper was printed in 1620, almost 200 years after the invention of the printing press. Illiteracy dropped as educational means were now available and the life quality increased.

We may never know how important the printing press actually was to the evolution of mankind but  we can guess that were it not for the printing press we might still be living in the dark ages.

There was a time when we didn’t have internet access

Imagine the world without internet. It’s pretty hard to do that now as you have probably spent at least an hour today sending and receiving emails, using Google, shopping online or reading the news on your favorite news portal. If you are older than 25 you might remember a time when the Internet was something closer to science-fiction than everyday utility. There was a time when you actually had to wait more then a few days to send a letter to someone across the globe.

How did the Internet came to be?

ARPANET

Back in 1950 a point to point computer communication between mainframe computers and terminals was developed. A decade later this led to the development of several networks and in 1970 one of these networks, the ARPANET, a military developed network, developed the concept of internetworking, basically a network of network. 1982 saw the implementation of TCP/IP, a protocol to allow interconnection. A few years later ARPANET was decommissioned and in 1995 the internet was commercialized.

Bam! Everything exploded! Well – not actually. At that young age the internet was still mainly used for scientific purposes and information exchange.

Soon, though, people started experimenting with email systems, eCommerce, self-publishing, and others such.

A big breakthrough in research and education were the search engines. Before Google there was Altavista and Yahoo. Yahoo was actually a web directory that helped users find websites based on interests. The development of Google meant people didn’t need to browse for hours to find what they were looking for (we might remember the days when a 64kbs dial-up connection was considered a luxury).

The internet and education.

Altavista

Now we can find almost any kind of information online. The search engines crawl billions of webpages on a daily basis, everyone with an access to a computer and  internet can easily publish an article and Amazon is already selling more instant-delivery eBooks everywhere in the world.

Some of the most important universities in the world now have free access to online courses. Have a look at this list to get a glimpse into how much information is available to anyone willing to spend the time to learn.

As  mobile internet consumption rises new education approaches emerge. Apple launched iTunes U, a collection of higher education courses in audio or readable format.  Hard to reach populations are actively taught through mobile internet connections.

Some of the most prestigious universities in the world have online courses that offer a degree with lower education costs for those in less economically stable areas.

The Wikipedia

Yes, “THE” Wikipedia is probably the greatest education feat in the human history. Human knowledge is now accessible for free to those that want to learn more, understand more. It features more than 4 million English articles and is available in 278 languages.

Wikipedia drove the paid print version of Encyclopedia Britannica to extinction as generous article contributors have made Wikipedia the go-to place for fast research.

Internet has changed many things for the better but education is the field that changed most. Never in our history has so much information been available to so many. I believe in a future where individuals are empowered, informed, educated. Internet has mad that possible as education and information became publicly available.