Is The Store Associate a Dead Job?

For a very long time the store associate has been at the heart of brick and mortar stores. Store associates would greet customers, respond to queries, help find products and generally help customers with their purchases.

However, the emergence of digital tools and especially smartphones has rendered store associates almost obsolete.

In a recent study by MillwardBrown that focused on customers purchasing athletic footwear we can see just how useful a store associate is these days.

Of those that chose to shop in store, only 12% listed the sales person as one of the reason to purchase offline. Most (88%) chose to try on the product before purchasing.

It’s not just sports shoes. A study by Deloitte Digital shows that customers would rather receive help from an interactive kiosk or their own smartphone rather than a store associate.

As you can see above the willingness to use a smartphone rather than discuss with a sales associate is almost double. Even an impersonal unmanned device such as an interactive kiosk would fare better than a store associate.

So if you were to combine this data with the fact that most of the sales in global retail will be influenced by digital by 2017 the conclusion is simple. The store associate is a soon to be dead job. If you were planning a career in this area, you’d better jump ship.

Digital Influence in Omnichannel Retail

Is Brick and Mortar commerce dead? Absolutely not. Is eCommerce the most important sales channel in the future? Irrelevant. Neither online or offline sales really matter in the big picture. What matters is how customers shop and how much has digital changed the way retailers do business.

recent Deloitte study outlines just how much digital is impacting retail.

Over 36% of 2013 overall sales in US have been influenced by digital and the trend continues to grow. By 2017 over 80% of all retail sales will be influenced by digital.

In terms of cash that places the digital influence in the real of trillions of dollars. In US alone, where the study was performed, that meant $1.1 trillion in sales were influenced by digital. If we were to extend this figure to the global retail sales in 2017 as estimated by eMarketer that amounts to a whoopping … wait for it …

$20 trillion in sales. That’s the amount in sales that may be influenced by digital in 2017.

However debatable this figure may be, the digital influence is something that is truly amazing and outright revolutionary.

But that’s not all. Don’t think digital influence means ecommerce. Definitely not. Two facts stand out in the Deloitte study:

1. The increase in digital influence has been triggered by smartphones

Smartphones are the main cause in the increased digital influence. Mobile phones now account for $593 billion in sales (19% of the 36% of all sales influenced by digital).

What’s even more interesting is that users are not more mobile-savvy. Only 25% of the increase in smartphone usage is caused by an increase in comfort and sophistication in smartphone usage. 75% of the increase in smartphone usage is due to an increased adoption.

Long story short: there are more smartphones, not smarter users.

2. Brick and mortar shopping is definitely not dying. Unless it has to.

94% of all retail sales still happen in the confines of a physical store. Wait, what?

It seems that what’s causing retailers problems is failure to engage customers on all channels. Customers are pre-buying (shopping) on ecommerce sites but they pick-up, try on and eventually buy a lot of things in the physical store.

The trick here is getting the big picture right. Use different customer journey points and engage digitally in a relevant way. Customers may shop online and get an assortment ready but they want to get to that assortment in the physical store and than buy. Just placing discounts in the mobile app doesn’t work. Each part in the shopping experience has to be customized to that particular medium and need.

In conclusion: digital is not ecommerce and digital influence is definitely not limited to the online store. Those who fail to connect the dots and engage their customers on all channels will not be a part of tomorrow’s retail.

Is Facebook building a Mega-Bank?

Facebook recently secured a patent for a system that builds credit rating based on social connections. Is this a piece of what could be the Facebook bank?

There are some strong arguments that yes, Facebook is building a peer to peer lending service for its 1.49 billion users.

Here’s the backstory:

PayPal president David Marcus resigned from PayPal and joined Facebook a year ago. Reportedly he joined the company to work on the Messaging products. Quite a big change. So the obvious question was why would the president of the biggest online payments company would quit his job to start working on the messaging app?

But then, in March 2015, Facebook announced a new feature in Facebook Messenger: payments. Basically anyone could send their friends a couple of bucks without having to leave the app. Plus – it charged zero fees. Zero. This sounds great but … how would they monetize it?

The credit scoring patent may be the answer. What if Facebook would roll out a general feature that lets anyone lend anyone in the network based on their credit score? Peer-to-peer lending is one of the biggest and yet most underrated innovations in digital finance.

With a stable payments system, a great credit scoring patent and 1.49 billion lenders and borrowers Facebook may be building the largest bank financial system in the world. All digital, peer to peer, decentralized and ready to come online just as banks are faced with an impending meltdown.

Think that’s crazy? Maybe not. Meet George Soros, “the man who broke the bank of England” when he short-sold $10 billion worth of pounds. He did this during the Black Wednesday Financial Crisis and earned $1 billion in the process.

In 2012, when Facebook stocks were plummeting, Soros bought Facebook stocks. When he bought these stocks, the social network looked like it was in a really bad shape:

Let’s just say things are a bit better now:

But his great investment timing is not what points to Facebook being on the verge of a huge financial change. No. It’s the fact that just as Soros was purchasing his Facebook stocks, he was selling his stakes in financial companies such as Citigroup, JP Morgan, Goldman Sachs and Wells Fargo.

So if it looks like a duck and it quacks like a duck, it’s probably a duck.

Facebook has built a peer-to-peer payment system. It hired the man that helped PayPal grow to its present market share. It secured a credit scoring patent that works within a network. Soros moved his bets from the big banks to the most popular social network. There is a growing need of peer to peer lending across borders and Facebook can deliver.

We’re in for a 1.49 billion customers bank that works across nations and lives inside your mobile phone. I guess this qualifies as a Mega-Bank.

The Death of Small Web Shops

Small Shoe Shop [Source]

We have a growing industry that builds upon the dreams of small web shop owners thinking they can build the next Amazon. That’s about to change.

Services such as Shopify, open source projects such as Magento and Prestashop and a myriad of other tools and would-be digital panacea cater to entrepreneurs trying to build ecommerce businesses.

But the truth is very few of them will ever become self sustainable. Very few will go beyond small web shops. Even well funded startups can crush and burn (Fab for example burned through more than $300 million until calling it quits).

I find it hard to believe that there is a future for the small web shop. Just like web pages today or the Gopher protocol in the past, one day the small web shop will be gone and something else will take its place.

Here are a few things that will be either causes of reactions to this change in digital commerce:

1. There are going to be fewer, but bigger, digital commerce outlets

Think of these increasingly influential outlets as the shopping mall for the next century. The likes of Ebay, Amazon and even Walmart will become larger marketplaces catering for both more consumers AND more suppliers / vendors.

In the (near) future ecommerce entrepreneurs will find that the window of opportunity previously open will close and consumers will increasingly rely on larger marketplaces for better prices and more diversity.

Think of it in offline terms. There are little if any incentives in opening a small store in a mostly un-visited area. A better approach is to open your store in an already trafficked shopping mall. Amazon for example caters to sellers and offers a marketplace, fulfillment services and marketing options.

The takeaway is simple: if you can’t build your shop into a shopping mall, you’d better join one or do something else.

2. There is a bubble of marketing tools, experts and know-how that is soon going to burst.

We live in a time where a more educated consumer switched from “buy more” to “buy better” and the advertising agency was replaced by Google and Facebook. Creatives are now replaced by algorithms and data.

There is an abundance of digital tools, digital experts, digital know-how (maybe some can be found on this blog also) providing “support” to small web shop owners. The fact is, very few shops are really going to make it to an actual profitable business. Along the way, however, they will pay developers, designers, marketers, ads, copywriters, SEO experts, content experts, photographers. They will buy subscriptions to dozens of cloud applications that brag about the latest success story and they will try to figure out what the hell the numbers in their analytics app are saying.

In the end they will see the problem and the solution lies within one aspect. Size. You may write the best content, have the best designed Magento or Shopify theme. In the end you can’t compete with Amazon. Size does matter.

3. We will see an increase in manufacturing entrepreneurship

As the small web shop will start fading away, a new breed of entrepreneurs will show up. The manufacturers. With so many options for cheap production, distribution and marketing the only thing that’s missing is but the great product one passionate entrepreneur can come up with.

There will be little place for small commerce entrepreneurship. But that doesn’t mean consumers will buy less. They will buy better and they will buy from more. We are witnessing a rising trend of small manufacturers popping up with amazing models. A very fun example is the the Dollar Shave Club, a startup that’s manufacturing personal care products for men. The Dollar Shave Club takes on the large companies such as Gillette in a very straightforward way.

So about the death of the small web shop… It’s coming but don’t hold your breath. There are many vested interests in the small webshop industry.

First there are the startup owners that still believe their small web shop has a future in its present form. Then there are the billions of dollars that have been poured by VC’s in web shop apps and marketing tools.

Plus there is a (still) growing literature that tells anyone with a few bucks and a dream that they can be the next Jeff Bezos. What they don’t tell them is that the world has place for only one Jeff Bezos but plenty of open slots for other success stories. Just not one involving a small web shop.

The need for Object Oriented Organizations

We are at the peak of our civilization in terms of economic development, social cooperation and global communication. Though conflicts still arise and will probably exist for the foreseeable future, we are witnessing a historic moment: for good and for bad we are on top of our game.

This change has been made possible by a lot of factors including recent destructive conflicts and potential conflicts (nuclear destruction), improvements in communication technology, improvements in transportation and more.

But if we were to point out a specific factor in the emergence of this globalized society, that must be the fast evolution of organizational management tools and techniques.

Whether we are talking about multinational corporations, governmental or military organizations, they have all evolved due to technological and know-how management advancements.

Companies can now grow bigger than ever and governments extend their influence farther. Military organizations are now stronger and can perform better than ever in terms of logistics and operational management. According to prof. J. Bradford DeLong from UC Berkley, the estimated GWP (Gross World Product) is at its highest and growing the fastest:

Annual GWP

So basically we are working better, faster, more productive and yet it seems the world stumbles from one financial crisis to another. Many theories have been put forward regarding as why this happens. These theories range from pure economic theory to sociology, psychology, geopolitics and more. Don’t be fooled – we don’t for sure know why this happens. It’s a paradox that we are more productive, fare better in terms of conflicts and have a more connected world and still we deal with inequity and financial strains in the form of huge debt.

But there is hope. Whenever humankind dealt with seemingly insurmountably issues, we appealed to metaphors to change our perspective. The metaphor I’m proposing today is the computer hardware – software ensemble as a way of thinking of human organizations.

How do organizations work now?

In this metaphor we have the human nature and human nature as the hardware and management acting as the software. With a combination of these two we were able to reach our present position.

Most of management theory and lingo are adapted from military procedures. As the military has been the single most enduring form of human organization throughout history (seconded only by religious organizations), it seemed logical to approach civil management in a similar way. The largest companies known are organized and behave just like armies. Top down command with intel going upstream and orders going downstream. The multinational companies “conquer” markets, “target” customers and “secure” market share.

As companies need effectiveness to stay profitable, strategy is designed by a small group of people (the board of directors) and implemented top-down by an executive staff. To do so – the executive staff uses company process design and procedures that are followed by those lower on the hierarchy.

This same principle was also used in the beginnings of computer programming. Programs were fed into computers to compute differential equations for things such as the trajectory of a shell, a blast radius or weather predictions. These programs were fed into a general purpose machinery (the computer) and based on these instructions computations would be made.

But as the computer industry grew, so did the computers’ capacity to run programs. With the digital revolution computers became more than simplistic machinery built to output specific data. Programs could be now written to answer mathematical questions but also to output imagery, sounds, allow users to play games and more.

To make this possible, a new paradigm in computer programming changed the way programs were written. Instead of the previous functional (procedural) programming, the concept of building a program started working with the concept of “objects”.

Technically, objects are a collection of data and functions. Conceptually they are the bridge between machine processing and human conceptual thinking. We are able to tell a fork from a spoon and still see the resemblance between those because we think in terms of “objects”. Previously programs were working mostly on concepts of functions. Simply put: If this, than that.

That made writing complex programs extremely hard. It also made maintenance even harder. Without becoming too technical, OOP (object oriented programming) allowed for even more complex programs to appear and made it easier for software teams to build, update and maintain these programs.

The difference, if you will, for those programs is the difference between the old DOS versions and today’s Windows OS or Apple’s iOS. It’s worlds apart and today we are in a DOS world trying to build video games.

The need for Object Oriented Organizations

Though it may seem strange to use software development lingo when it comes to managing organizations – it makes sense in the metaphor proposed earlier. Human organizations (the hardware) may yield a lot more than they do today. As robotics may soon take over menial jobs, they have to.

The problem does not lie in the hardware (human intellect, creativity and production) but rather in software (the ability to manage this creativity and productivity).

We are not fit to deal with this level of complexity in the way we do today. Think about the basic organizational challenges. They are not production or infrastructure related, but rather human complexity related. Someone from the headquarters of Uber may devise an absolutely brilliant software and business model, but they still have to deal in terms of organizational management with the fact that Paris taxi drivers hate competition. And the fact that the french government will not allow the company to function without the right permits.

To make such a global organization work, there have to be some type of new management technique in place. One that can use the managerial basics but still be able to develop specific procedures to handle cultural differences.

That’s exactly what OOP (object oriented programming) works for. Handling complexity through object manipulation.

So how would such an organization look like?

How to build an Object Oriented Organization?

To help you glimpse into the structure of a potential OOO (Object Oriented Organization) I will use the basic characteristics of a software object and translate those into organizational concepts:

1. Encapsulation

The term (data) encapsulation points to objects being self-contained in terms of both data and functions. The object keeps the data and functions protected from outside (potentially harmful) interventions.

If you’d like to think of objects in terms of organizational objects I’d advise you to look beyond the usual “department” paradigm and rather into specific teams. Think of the product design team at Apple. That is an organizational object, that stores both specific data (things such as product specifications and test results) and functions (builds product demos, designs usable products etc.).

The organizational object could, in theory be self sufficient and usable in any part of the organization or even within external organizations.

2. Polymorphism

The idea of polymorphism may seem complicated but it actually solves a lot of complexity issues. Simply put, it allows for contextual responses.

Take the previous Apple design team for example. If the iPhone development team were to ask it for a design it would probably forward the team the specs they are working on and receive a few sets of product designs. If the iMac team would ask for a new design, they would also forward the iMac specs. They will however, receive another type of design, one fit for their product.

The idea of polymorphism, in the organizational sense is that decisions based on context would happen within the design team object. Both the iPhone and the iMac team, or any other product design team could ask for a product design and receive something that’s fit for that specific product.

But let’s take that a little further: what happens if the marketing team needs a specific page covering the new iPhone. Wouldn’t the product design team be the one best fit to output such a page? Probably so, but some upgrades may be needed and this is where the third object oriented organization principle comes in:

3. Inheritance

This term shows that one object can be the prototype for another object. In our example we need Apple’s product design team “upgraded”. So far they have been doing product design so they may not be able to output iPhone’s webpage so well.

By building on their expertise, we may assign a new member to the team, a member that is specialized in designing web pages. By working with his or her team peers we will have built a new organizational object on top of the previous one. The marketing team will request a specific design, by forwarding some specifications. At this point all three external teams (iPhone product development, iMac product development and marketing) have basically done the same thing: asked for design-related work, by forwarding specifications to the the design organizational object. The work was done within the object and results were output successfully.

Notice also that there is no absolute need for management. Objects interact with one another thus leaving management in charge of developing these organizational objects and the overall purpose of the company.

Why build object oriented organizations?

The one big reason is complexity management. We have not put a man on the moon using the abacus. We have upgraded our tools to reach further. Object oriented organizations can be a new breed of organizations in different sectors where effectiveness rather than hierarchy is important. These areas can range from business to NGO’s to governmental agencies to banking and more.

Basically each organization that deals in large numbers of either employees or “customers” can benefit from a networked object oriented organization approach.

Source

Why do that? Think about how today’s concept of having a job feels. Most employees report their bosses are awful. But it’s not that simple – it’s not that the boss just wakes up one day and thinks … “hey, I’m going to act terrible to my fellow colleagues”. Today’s managerial concepts and techniques are outdated and provide managers with poor tools.

This results in “less than perfect” working conditions, poor performance, organizational ineffectiveness and overall social tensions. With our current management system the world has grown more productive yet more indebted. Productivity has risen yet poverty stayed the same or increased.

The fact is we need a new type of leadership and chances are this too is a human problem with a software solution.

What is Omnichannel Retail? Past, present and future.

I’ve put together a slideshare presentation regarding omnichannel retail. It focuses on the events that lead to the adoption of omnichannel, the challenges and several ideas that will help you understand the concept.

DHL, FedEx and UPS Provide Support Following Nepal Earthquake

As you know, a disastrous 7.8 magnitude earthquake has hit Nepal. The earthquake claimed the lives of thousands and left many more wounded or without shelter. In an effort to bring relief to the area many nations, individuals and global companies joined hands.

Nepal Rescue Efforts. Source.

Among these were global logistics companies DHL, FedEx and UPS. Since disaster hit, they have been providing logistics support, know-how and even funds.

Their humanitarian efforts are worth recognition and their philanthropic commitments need to be known:

DHL Group responded in just 48 hours after the tragedy. Their Disaster Response Team was deployed on the scenes to help with incoming international aid and provide logistics support in distributing goods.

FedEx was also among the first to provide support to disaster relief agencies. Their efforts included assessing needs, shipping water treatment systems from Water Missions, water chlorinators and large water tanks, thus providing fresh water for up to 70,000 people per day. FedEx soon followed with logistics support for medical treatment, serving 10 000 people per day.

Last but certainly not least, The UPS Foundation committed to providing both logistics support and $500 000 in funds to aid recovery efforts. The foundation, acting as the philanthropic arm of UPS, provided these funds to “United Nations High Commissioner for Refugees (UNHCR) to secure shelter supplies and solar lanterns as well as to The World Food Programme for emergency food assistance such as high energy biscuits, and to CARE for the purchase of supply kits including tarps, blankets, jerry cans and toiletries.”

These efforts show just how important logistics support can be in helping those in suffering, especially in such times of distress.

Three Robots that will Change Ecommerce

The term “robot” essentially means “worker”. It was coined by Czech author Karel Čapek in his science fiction work R.U.R. and since then it has become the standard term to define semi-autonomous machines.

It really is hard to define what we actually think of when we say robot. It may be an anthropomorphic fun figure such as Honda’s Asimo or a somewhat creepier animal version of it, such as Boston Dynamics’ Big Dog.

Fetch Robotics. Now reporting to Skynet.

But it can also be a simpler and more applied machinery. Robots can be built to handle some of the most menial and repetitive tasks, including those that have to do with ecommerce fulfillment.

In terms of operations, fulfillment means everything that has to do with getting ordered merchandise to the customer. It includes picking and packing and let’s face it – it’s boring and repetitive. The robots below do just these things. Robots, unlike people, require no pay and are available 24/7. Whether using robots is effective or not, moral or not, it’s up to you to decide. But no matter your view on the subject, you have to admit they look awesome.

1. Fetch and Freight from Fetch Robotics

Not longer than two months ago, Fetch Robotics was non-existent as a company. Than they’ve got $3 million in founding and started working on a mysterious warehouse robotics project.

Today they’ve unveiled not one, but two robots aimed at helping warehouse staff make it through the long corridors. Their names are Fetch and Freight. Below is Freight, my favorite, a little guy following around picking staff and going back to base when orders are finished picking:

Fetch & Freight from Fetch Robotics on Vimeo.

2. Omniveyor from Harvest Automation

You would think that farming and ecommerce fulfillment don’t have too much in common. Maybe they don’t but they do have the Omniveyor robots from Harvest. The company was founded by former iRobot executives, the company that brought you house cleaning wonder-robot Rumba.

The company developed a fulfillment robot, called TM-100, which will be available spring 2016. Here’s TM-100 in action:

3. 15 000 Kiva Robots fulfill Amazon orders

In 2012 Amazon paid $775 million for Kiva Systems, a Seattle based company manufacturing warehouse robots.

In just two years Amazon has fully digested the technology and now has 15 000 Kiva robots doing the picking and packing job twice as fast as humans could. Inventory moves twice as fast and products are delivered to packing stations in just under 15 minutes, faster than any human could.

Here are the little Kiva robots plotting to take over the world, while picking orders:

Omnichannel retail will transform distribution

A very important part of retailing is pricing and the most important part of pricing is the cost. To get a complete view of how much a product would cost, retailers think in terms of net landed cost.

The net landed cost is the sum of costs associated with manufacturing and distribution. When thinking in terms of net landed cost you have a better chance of understanding your total cost.

A common fallacy is thinking of costs just in terms of manufacturing, either from a purchase only point of view (how much you pay your supplier for a given product) or a more inclusive manufacturing point of view. The manufacturing point of view assumes that even if you are not manufacturing the product yourself, you still have the liberty to choose another supplier or change merchandising altogether.

The most important advancements in retail, in terms of supply and cost effectiveness, have focused largely on manufacturing costs in the past decades. This has lead to increasingly efficient production lines, a more competitive manufacturing market, shifting manufacturing overseas and many others.

A key to Walmart’s success is selecting suppliers with an optimum manufacturing cost / quality

This manufacturing improvement trend has had beneficial results on the customers life through more accessible, more diversified merchandise. It also meant companies managed to sell more, to more people. Companies such as Walmart have grown to their existing magnitude thanks to a wide network of suppliers, providing them with products manufactured at the best possible cost.

Distribution lagged behind

As retailers improved on the manufacturing, there was one part that has been left mostly untouched. That was the distribution. Distribution costs have decreased but not dropped.

To get a better view of why, get a glimpse of what are the factors that weigh in the distribution costs basket. Here you have costs associated with getting a product from the manufacturer to the customer. This includes freight, stocking, customs, costs associated with store development and maintenance, marketing costs, customer support and others. This is a very large area and a lot of work to be done.

Distribution is changed by technology, data and omnichannel retailing

Today, distribution is changing, and it’s changing fast. As a result, the associated costs will follow.

At the forefront of this change we have several factors, one of which is omnichannel, another being technology and the third being data. This is how they weigh in and these are the areas that will be soon transformed:

Improved logistics

Logistics have not been fully transformed by technology. For example, freight has been virtually unchanged in the past decades. Think about it this way: cargo ships are still loaded after excel files are checked, faxes are sent and handshakes seal deals. For a large part, the industry is archaic and it’s but a question of time until it will be transformed. There is a lot of room for disruption and companies such as Freightos have challenged the status-quo and promise 10-17x ROI. In weeks.

And it’s not just freight. Fleets of small vans contractors have taken up the Uber model and are now roaming the streets of Hong Kong to deliver goods the likes of DHL and UPS can’t.

GoGoVan is a Smart Logistics company, connecting individual contractors to larger companies in need of their services

Omnichannel retail decreases distribution costs

Omnichannel makes possible and desirable a few things the previous retail models couldn’t. First of all it allows for a better inventory transparency and improved shipping effectiveness.

Customers that would otherwise expect orders placed online to be shipped at home with the respective costs and operational challenges, can now just pick up orders in store. Or better yet, they can have the closest store ship these items at home, instead of mixing the order in a large, central warehouse.

Omnichannel also makes possible having just a limited number of products in store and keep the most either in the warehouse to be shipped when convenient or with a supplier. By reducing store footprint companies can reduce fixed costs associated with marketing and distribution of products, thus decreasing costs.

And it’s not just these, the many aspects of omnichannel retail all converge to a decrease in distribution costs and more efficient ways to handle product demand.

Macy’s growth versus JC Penney and Sears.

Improving marketing and advertising with data

John Wanamaker was a retail innovator. He is credited with the fixed price and money back guarantee marketing concepts. Wanamaker was one of the pioneers of the department store and loved advertising. He is also credited with the famous saying :

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”

Good thing that was more than a century ago.

“Show me your budget.”

Marketing is now changing rapidly and unfortunately for some advertising agencies, long gone are the days when the Mad Men of advertising charged millions for concepts that could or could not work.

With the rise of digital commerce and omnichannel retail and the smartphone to bridge the gaps, data is all around. Marketing is now data driven and the half of budget Wanamaker complained about can now be easily tracked. Companies such as Macy’s are investing heavily in omnichannel policies and marketing. The results are clear. While their competition is diving, Macy’s business is on the rise.

Advertising is data driven and marketing costs are constantly improving.

By improving distribution and decreasing distribution costs we have two very important things happening. The first is that companies engaged in improving this area will be more profitable and more inclined to continue on this path.

The second thing is that lower distribution costs mean better prices for the consumers, therefore an improved appetite for consumption. Improved profitability and decreased prices – these are two very strong forces that will shape tomorrow’s retail. And it’s happening today.

How to Start an Online Store: Part 2 – Business and Suppliers

Last week we’ve covered the basics of starting your online store. We’ve talked about choosing your market and your particular niche, We’ve covered the main questions you need to figure out before you start building your actual store. Finally we went through the main business models and scanned some of the most innovative and interesting implementations in B2C (business to consumer) ecommerce.

Now that we’ve covered the basics, let’s turn your idea into a real store. This part of the “Starting an Online Store” guide will show you how to register your business and how to build the operational basics for your store. At the end of part two of this guide you’ll know how to find the right ecommerce suppliers, integrate your business with said suppliers and set the prices for your products.

How do I register my online store as a business in the US?

Note: This part of the guide is intended to work as a guide mainly for readers in the US. That’s why some of the acronyms and type of companies you’ll find in here are going to be aimed at those of you registering your business in the US. If you are registering your business elsewhere please leave a comment as to where you intend to register your business and I will try to get back to you with more info.

That being set, most of the information you’ll be reading here is in essence applicable in other countries or regions. Even though business structures may have different names and have slightly different usage in different parts of the world, their purpose remains pretty much the same, as globalization tends to level the playing field.

So let’s get started with why you would want to register your store as a business?

Sure, planning and building your business is a great way to spend your time and effort. But you also need to work as a legal entity.

There are basically two ways you can register your business:

  • as an un-incorporated business (solely owned or owned by a partnership) or …
  • an incorporated business.

You can start as a Sole Proprietorship (the most popular type of business for ecommerce entrepreneurs) and move to other forms of businesses as your chances of success increase.

If you are the sole owner of an online business, the Sole Proprietorship (also known as DBA – “Doing Business As“) is the easiest form to register and manage your business. It actually works as an alias for the individual doing the business. Because of this, the owner is personally liable for the company. That means that all debt is imputable to the owner. However, as Sole Proprietorships are usually low-liability businesses, a lot of startups work under this type of legal entity.

The second big option in starting an un-incorporated business is the General Partnership. In Partnerships, more individuals get together to start some kind of business. Just like the Sole Proprietorship, Partnerships are easy to set up and manage and because partners share equal control on the company, the liability and profits are also shared.

Incorporating your company

Like I’ve mentioned above, the second category of companies falls under the “corporate” model. When you’re incorporating your company you don’t become a corporate behomoth and you don’t automatically get billions in revenue, as you’d expect. It just means you’re operating under a different set of rules. Plus you get to do a lot more paperwork and pay some extra taxes.

Pros of incorporating the business

The most important reasons to incorporate your company as an entrepreneur are liability protection and documenting deals with partners.

By far liability protection is the most important reason to incorporate your company. Under a corporate structure, your business is treated as a separate legal entity. If things go awry in your business (and sometimes they do) the company is liable for paying all debtors, not you. That, of course, if you have been operating your business in a legal manner.

Basically, registering as a corporation will keep your assets (house, car, golf clubs) protected from any issue that might arise operating the business.

The second important reason to incorporate your company is documenting a business deal with partners. Whether you are raising money from investors or selling shares in your company, you need a corporate structure to do this.

Cons of incorporating the business

You may hear other reasons why you should incorporate your company, things such as tax benefits, business credit and transferable ownership. But don’t rush to register your corporation just yet. Most entrepreneurs are doing just great running un-incorporated business in the beginning. Tax benefits are usually tangible when your company is already successful enough. So if you are just a startup, you can probably forget about tax benefits.

Building business credit means companies are evaluated independently from their owners but that doesn’t necessarily have to be a good thing. If you are a startup with no cash in the bank, no sales and no clear plan, that fresh business credit won’t be of help much.

Finally, saying an incorporated company is a lot easier to transfer to other individuals or companies leaves out a very important aspect. Before transfering your company (hopefully selling it for lots of cash) you need to build this company. So again – this won’t help you that much either.

But the biggest disadvantage small businesses that incorporate have to face is paperwork. Lots of paperwork. You will have to fill in state reports, organize annual meeting and deal with involved bureaucracy.

Then there’s the fees. You’ll be paying fees for legal council, tax filling and others. Professional help is not cheap. Plus you get the minimum franchise taxes and others. These amount to thousands of dollars in fees, which is a bit much for small business owners.

So incorporating a company is no easy feat. Or better said – it’s not easy to manage an incorporated company if you are a small business owner.

But if you do find yourself in need of incorporating the business, here are the most important type of corporations you can choose:

LLC – Limited Liability Company

You have probably heard one thing or two about LLC (Limited Liability Company). It’s the most popular form of business among small and medium businesses, including online store owners. It combines what is called pass-through taxationfor its members with the limited liability corporations provide.

Although not technically a corporation, it is a great choice for those that want to join a limited liability partnership. It basically works as partnership or sole proprietorship in terms of taxation. This means the owners (called members) pay taxes on the LLC’s profit directly. The company doesn’t fill taxes separately, which makes things a lot easier to manage.

This types of businesses are actually pretty young as a commercial concept. The LLC structure was first formed in 1977 and now it’s accepted in all US states and a throughout most of the world.

At the heart of LLC stands the “Operating Agreement“, a document signed by all members, setting the rules under which the company will be managed. It covers things such as profits sharing, company management, adding or removing members and more.

The LLC is the most popular choice in the world right now for forming partnership, usually chosen by groups of up to 5 members.

Although starting and managing a LLC is less complicated than a corporation, it is still more complicated than starting and managing a sole proprietorship or a partnership. You will probably have to hire a legal counselor to help you with the set up and operating the company.

The Regular Corporation (C-Corporation)

The Regular Corporation is … well … the corporation. A company organized as a corporation is a separate legal entity from its owners (called shareholders). The company can thus protect owners from liability issues or company debt.

The corporation provides advantages such as:

  • easier capital inflow (through stock sales),
  • ownership can easily be transferred through stock transfer
  • being a separate entity it can and will act independently from its owners. This means it can sue and get sued, it can own property and it will be taxed independently from its owners
  • tax advantages can be substantial (a lot more business expenses can be deducted)

Once the corporation is set up, it will pay taxes separately from its owners. This can lead to double taxation as companies are taxed on profits and once those profits are distributed, shareholders will also have to pay income taxes. The double taxation problem is solved by incorporating as a S Corporation (see below).

Corporations are not necessarily ran by its owners. The shareholders own company stock. This gives them the ability to elect Directors, organized under a board of directors. Once this board of directors is set up, they appoint Officers (CEO – Chief Executive Office, CFO – Chief Financial Officer etc.), which are the people that actually run the company on a daily baisis. Of course, if you own 100% of stock, you can appoint yourself as the one and only director, be the officer and run the company.

On the other hand, if your company will be owned by more individuals, the Board of Directors and the Officers will run the company. Both the Board of Directors and The Officers have to abide to an internal company document called “Corporate Bylaws“. This document sets the rules on operating the company and can be extended or modified as the company evolves.

The Corporation is a lot more formal than the LLC and of course, the Partnership or the Sole Proprietorship. The records have to be carefully maintained, there is a mandatory yearly Directors and Shareholders meeting and every decision has to be documented and reported.

Although the corporation is harder to form and maintain, it is the oldest and most reputable form of business organization.

Registering as a S-Corporation

When registering as a corporation, you should take into account the S-Corporation. By filling in the appropriate tax election form to the Internal Revenue Service, the company will be taxed as a Sole Proprietorship or a Partnership.

The main advantage for you and your partners is that income and profit is passed through to the shareholders, thus solving the double taxation problem mentioned above.

Even though you’ve solved the double taxation issue – you’re still stuck with the paperwork and specific regulation, which can be a burden for online retail startups.

To wrap things up, here is a rundown of the main types of incorporated business structure you can choose, each with its own pros and cons:

Once you have decided on whether you’re registering your business as a sole proprietorship or incorporating it you can check the specific regulations for your state here and start the registration process.

Integrating suppliers with my online store

You’ve figured out your market, planned on how you’ll build and run your store and what your business model is. You’ve registered your business and you are ready to go. Or are you?

Well hold on there, you still need to have those products you’re selling. That means you need to source your merchandise from suppliers.

Generally speaking, suppliers are those businesses or individuals that are willing to supply you with products priced below end consumer value. Still a bit unclear? Well say you will be selling plain t-shirts. You know you can buy those t-shirts for $20 at the closest store. If you do buy t-shirts in that store, you will be buying them at end consumer value. You are the end consumer. Because you cannot price them at a higher level you are basically stuck with them – hence the “end” in end consumer.

What you need to do is go find yourself some suppliers that are willing to sell you those t-shirts for less than $20. Why would they do that, you say?

Remember the whole B2B business model? Some companies just work this way. They manufacture the products or sell them in bulk and let other companies sell directly to the end consumer.

( The basic operations needed to run your store )

When dealing with suppliers you have to be ready to make a commitment before they agree to do business with you. This commitment can come in many forms but usually it’s one of the following:

  1. buy products in bulk: say you are willing to buy 50 of those plain t-shirts. You can negotiate your purchase price down to $15. Willing to buy another 50? Maybe the price can go even lower, to $10 and so on. The thing you have to remember here is that although bulk buying can be a potentially great deal in terms of price discounts, you also have to sell those products. If you get stuck with $500 worth of t-shirts that you are not able to sell, you have just wasted your money. It doesn’t matter how much you saved purchasing said products. What matters is making a profit and making your customers happy.
  2. commit to a target: maybe you are not willing to buy 50 plain t-shirts, because you don’t know what your potential customers are willing to buy. You are, however, confident they are willing to buy something. So you commit to a monthly, quarterly or yearly sales target. The supplier will than give you a startup discount for purchased products. This discount can increase as you sell more and more merchandise. You can list the products on your online store, stock as little inventory as possible and ship and restock when orders arrive.

 

Once you’ve made a deal with one or more suppliers you will be selling your products right on your store. When the orders start pouring in (or maybe just trickle in the beginning) you have to make sure customers receive the products they’ve paid for. This part is called “fulfillment” as in fulfilling your promise to send the product to the customer in exchange for the payment you have received.

Fulfillment means any task done inside or outside the company that assures the right products are shipped to the customer. Usually this means:

  1. order management: checking order information (customer info, address, number of products etc) and forwarding order details to the right fulfillment center to be completed. If you are a startup this may mean you will be checking the customer details, maybe confirming the order and then planning on where to get the products from.
  2. pick and pack: this is the usual term for picking products from the warehouse shelf and packing them to make sure they are ready for shipment
  3. shipping the products: once products are picked, packed and ready to go, they have to actually leave your warehouse. When this happens you will either bring them yourself to your customer’s address (highly unlikely) or commission a company specialized in shipping (such as FedEx or UPS) to do so.

 

We will talk a lot more about fulfillment later on in this guide but for now I just wanted to give you an overview on the usual processes in handling orders and shipping products to the end consumer.

Fulfillment can be done either within your company, by the supplier or as a mix between the two. Let’s have a look at these scenarios:

  1. fulfill orders within the company: this is the way most medium to large companies fulfill their orders. They build inventory for most of the products they’re selling (especially popular items), stock them in warehouses and when orders arrive, employees in the warehouses fulfill these orders. This process implies a rather large inventory and it can be an ineffective way to handle orders for startups. That’s why most ecommerce startups require another form of collaboration with suppliers:
  2. fulfillment is externalized as suppliers “dropship” orders:  this means you can just showcase products on your store and orders are shipped by your supply partner. Rather than stock on products, you can just forward orders to your product supplier and that company will take care of the shipment. The individual product is then shipped to the end consumer and you are invoiced for said product. You profit from the difference between the retail price (the price you posted on your website) and the price you’re paying to the supplier.

 

Usually, most online retailers (such as yourself) choose a combination between the two and maybe some other processes.

( The example below is illustrated in the figure above. Combining basic operatiosn with supplier drop-shipping. )

For example, let’s say you partnered with two suppliers (see figure above). Supplier A will provide you with plain t-shirts. Supplier B brings in sneakers. After you start your store you receive two orders. Customer X is asking for 2 plain t-shirts. Customer Y is asking for a plain t-shirt and a pair of sneakers.

You will have to treat these orders differently. Order number one, the one where customer X paid for 2 plain t-shirts is forwarded to Supplier A and he will dropship these items and then invoice you for the products.

Order number two is a bit more complicated. You will have to ask supplier A to send you one plain t-shirt (if you don’t already have it on your inventory) and Supplier B will send you a pair of sneakers. You will be invoiced on those products and once you have them in your warehouse you can pack and ship them to the customer.

You can also choose to work with external fulfillment services, such as Fulfillment by Amazon. These services relieve you of the burden of picking, packing and shipping your orders. For a cost.

By building and interlinking separate operations such as those mentioned above, you are actually building what is called a supply chain. The supply chain means any interlinked process that enables you to move products from the manufacturers or wholesalers to the consumer.

The supply chain is not a static structure. It can and it will change as your online store evolves. As you add new suppliers to your supply chain, your ability to distribute products to consumers will increase and so will your revenue. But speaking of adding suppliers to the supply chain …

How do I find Ecommerce Suppliers for my Store?

Yeah, how DO you find suppliers for the online store? Now that you’ve got a sense of why you need suppliers, how to negotiate and deal with them, let’s have a look at how to actually find them. When you’re looking for merchandise suppliers you’ll see that you have two big options when choosing, each with its pros and cons. These two options are domestic suppliers and overseas suppliers.

Assuming you are in the US, using domestic suppliers will be a very viable option but you should also consider the second. Overseas suppliers can be a great addition to your supply chain. They can be used when in need of additional product options or lower prices. Let’s have a look at the pros and cons of using these two types of suppliers.

Domestic Suppliers

Pros:

  • (usually) higher manufacturing standards
  • improved shipping time
  • intellectual property protection (might be really important if you design your own products)
  • no cultural or communication barriers
  • no import taxes
  • safer business relationship
  • easier to check references for reputable manufacturers or wholesalers
  • lower minimum level ordered quantities

Cons:

  • higher prices
  • less products to choose from (not few, just less)

( Directories providing links to domestic US suppliers )

Overseas suppliers

The most important thing you need to remember when dealing with overseas suppliers is that you have to be very, very careful. If you are inexperienced, you should ask for professional advice on how to get the best deals and protect yourself from fraud. Also – if you do find yourself in need of doing business with overseas suppliers, choose to contact those that provide a local sales office or agent or order using established marketplaces that provide escrow payment options.

Pros:

  • (usually) lower prices
  • ability to deliver unique items to your customers
  • a wide array of suppliers you can choose from
  • established online marketplaces provide an one-stop shop for retailers

Cons:

  • you will have to deal with customs, local taxes and special conditions when importing
  • low or zero ability to dropship to your customers
  • must buy larger quantities to actually get said lower prices
  • inability to change or customize orders
  • inability to reorder popular items – usually stocks ran out and without a preexistent order, the supplier will probably not sell the goods you’ve purchased last time.
  • cultural and communication problems
  • longer shipping time
  • harder to check for supplier references

( The most reliable services that connect you to B2B suppliers overseas )

Although the services mentioned above are a great way to find the right suppliers, you can also do your own digging and search for independent manufacturers or wholesalers.

There is no standard way of doing this but some tips may help you get closer to your ideal suppliers:

  1. Contact the manufacturer directly: saw some product you’d like to have? Probably your customers would also. Have a look at the label and contact the manufacturer. They must at least have a name and using that, you can use Google to find out more about them.
  2. Speaking of Google: try going deeper in your search results. B2B traders and manufacturers are not really great at marketing (that is the retailer’s job) so their websites scream “so 90’s” and they are not really optimized for search engines. That’s why you should click further than you’re usually used to in order to find a hidden gem.
  3. Trade fairs: yeah, people still do that. Especially in the B2B trading world. You can find a list that might interest you here and here.

 

So hopefully you now know a thing or two about finding suppliers and you’re going to get the best deal possible. Great! What’s next? Oh, yeah, prices:

How do I set the Price for My Online Store’s Products?

When it comes to pricing, you have two rather simple concepts to always keep in mind:

  1. Cost of goods sold (COGS): this is the cost you have paid for the goods plus any costs associated to getting the goods in your inventory and ready for sale. This includes, but is not limited to: shipping, handling or customs taxes.
  2. Operating expenses: this is the total cost associated with running your business. This includes rent, utilities, wages, marketing costs and others.

Basically, the prices of sold products have to cover the sum of these expenses. The bottom line is always the same: Profit = Revenue – Costs.

Your company will report a gross revenue by selling products. Profits come when you are selling enough merchandise, at the right price, to cover your costs.

Of course, it’s a bit more complicated than this but you get the picture. You have to price your sold products where you can be profitable. However, prices need to stay competitive to the market. This means that there’s a balance you have to keep. Prices should be big enough to keep you in business but small enough to be competitive with other online retailers.

Pricing strategies

1. Markup on cost means you add a certain percentage to he cost associated with the product. It is usually a standard percentage somewhere between 15% and 40%, enough to keep you profitable and your prices competitive.

The formula works like this:

Item cost + (Item cost x Markup Percentage) = Price

Say for example we are selling plain t-shirts, with a cost of $20. We’ve set the markup at 30%. The the price would be:

$20 (Item cost) + ($20 x 30%) = $26

2. Manufacturer suggested retail price (MSRP) is another way small businesses can set their prices in such a way that they are profitable but not too expensive. MSRP is the price the manufacturer recommends to resellers so they don’t start price wars that can benefit no one. This type of price setting leaves out a lot of options for the online store owner and should not be a general rule in the long run.

Above are just two of the simpler ways prices can be set to attract the consumers. We will get into a lot more details in the “Marketing your store” part of this guide so stay tuned.

For now, this concludes part two of the “How to Start an Online Store” Complete Guide. Part three will focus on building your fulfillment operation (picking, packing, shipping and returns) and how to build a brand identity and the actual store front. See you soon!

See part 3 of “How to start an online store”: Fulfillment >>

Featured image source: https://www.flickr.com/photos/27017674@N06/8915361750