Top 8 Online Beauty Shops and the Strategies They Use

The Beauty and Cosmetics category is one of the fastest moving digital commerce areas. It is a highly competitive and innovative market with large brands quickly adopting digital models and challengers innovating their way to the top.

The emergence of the ecommerce sales channel for beauty brands has seen a long wait. The time has come for beauty retailers to align with the customer’s demand and specific requests. For example, a recent AT Kearney study showed 28 percent of online shoppers use the digital media to get informed on products. They carry this information in stores where they are sometimes more knowledgeable than the store assistants, which may pose a real challenge for beauty brands.

The AT Kearney study shows that only 16% of all online shoppers are online enthusiasts. The rest either use the digital media for information or for shopping for products they are already familiar with:

Beauty shoppers split

Online shoppers are more inclined to shop for particular products, such as skin, personal and hair care. Products such as beauty tools and nail care are less likely to be purchased online, unless is a very specific product, one the customer is already familiar with:

In this post we’ll get a glimpse of the eight most important type of beauty brands that engage their users through digital commerce (also). We’ll have a look at a selection of global champions with different backgrounds and different models. From digital pure-plays to established brick and mortar brands, let’s have a look at some of the most interesting approaches to beauty and cosmetics digital retailing:

1. Amazon Beauty

As expected, Amazon leads the way when it comes to online beauty retailing also. Customers are delighted to almost 2 million products, including luxury brands.

Its Beauty category is the go-to place for most of online enthusiastic shoppers, where Amazon is available. And with Amazon’s shipment policies, that’s basically everywhere.

Amazon’s secret weapon lies in its free-shipping policy (for orders above 25$), a great motivator for online shoppers and a better threshold than challengers Sephora and Beauty.com.

Another great asset Amazon will use to gather shoppers around its beauty retailing section is the fact that more customers use Amazon (30%) than Google when doing online product research.

2. Sephora.com

Sephora is generally seen as the actual leader in the digital beauty commerce. Though it lacks Amazon’s ecommerce strength, the company is part of the largest luxury high quality goods (ahem…ahem) group, LVMH, packing a lot of beauty retailing know-how.

The company has developed a great omnichannel model that focuses on mobile as a bridge between online and offline.

One of the best things Sephora.com has implemented in its web store is the content marketing and digital assistance features. I’ve previously covered the subject and praised Sephora’s efforts to offer quality content, as praised are due.

The curated content customers find is a great choice to build loyalty. So is the Community where customers can browse among the knowledge base or post questions and interact with professionals.

As mentioned, one of the greatest assets Sephora has is its focus on digital rich content. Users are treated to:

  1. Sephora TV, the go-to area for video advice, how-to’s and trends
  2. Sephora Glossy – a fashion, beauty and style blog that offers great advice from beauty professionals in a great, visual format.
  3. The Beauty Board – an user generated gallery from customers that upload pictures to showcase how and which products they use.

Some other touches make Sephora a great choice for beauty products customers, not the least of which are the three free samples with each order (a great way to drive future orders) and the mobile apps that make us of barcode scanning to offer price info and customer reviews.

3. Beauty.com

Beauty.com is an online retailer so it has no apparent need or intention to leverage offline or omnichannel sales. It has developed specific filters and features to cater to customers that either know what they want and want the best price or they can quickly decide.

The auto-reorder option seems to be a great first step to a subscription program.

Customers can set an auto-reorder flag for certain products, which can be shipped each 30, 60 or 90 days. Before the order is shipped, customers receive an email notifying them and they can pause, skip or cancel the auto-orders. The customer incentives are savings and free shipping.One of the features that really stands out (they have a pop-up to insure it stands out) is “Auto reorder and save” option. Simply put, the online retailer has noticed the habitual purchase beauty customers take and leveraged it.

Another great feature that lets customers reach the right product is the filtering option which is set not only for product features but also customer concerns and specific needs. In the Make-up section, the eye category, one can find brand and ingredients options, but also filters such as concerns (acne, dryness or oiliness), benefits (curling, hold or smooth) and skin type. Unfortunately, the filters are not usable on the smartphone version of the web store.

Just like its direct online competitor (Sephora.com), Beauty.com offers free samples, free shipping for orders $35 and above, free returns and 5% back through its loyalty program. It also features great content areas, such as its Beauty Blog, with Romy Soleimani, The Latest Trends section reviewing product news and a Beauty Videos section, ranked according to customer reviews. A great no-no on the video section is the fact that videos embedding is restricted to affiliates only, leaving a lot of marketing potential untapped.

Download the rest of the report below:

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.

Demand Sensing is a $1.1 Trillion Opportunity for Retailers

Consumer demand is the one thing that can decide whether a retailer is successful or not. Of course, there is a whole field of marketing studies to determine how we can influence consumers to purchase. But a really important aspect of how good retailers fare in the market is their ability to “sense” demand, not just influence it.

In a recent study, IHL Group claims Overstocks and Out-of-Stocks cost retailers almost $1.1 trillion world-wide. To put it in perspective, that figure is the size of Australia’s GDP.

What that means is that Overstocks and Out-of-stocks, collectively defined as Inventory Distortion, are a problem that cost retailers world-wide 7.5% of their gross revenue.

The most important overstock causes

The figures translate into poor performance, decreased customer satisfaction, decreased sales and increased costs of inventory warehousing and inventory spoilage. Basically there are two really simple outcomes:

  • Either retailers stock up on too much inventory which turns to increased warehousing costs and spoiled products.
  • …Or they don’t and they miss on sales opportunities

Either way, one thing is for sure: Inventory Distortion leads to poor retail performance.

How do you solve Inventory Distortion? (Not exactly) Simple: Demand Sensing

Demand Sensing is a concept and set of technologies that make use of analytical and prediction models to estimate … well … demand. Imagine a retailer that runs a network of 10 stores, one online store and has a mobile app that drives sales also, along side a call center.

Said retailer probably has an inventory management system, an warehouse management system, a sales reporting tool and probably some type of integration with suppliers and manufacturers.

Let’s imagine this retailer selling a type of red shirts that is available in one of the 10 stores and that inventory is not available online. If a customer will visit 3 of the stores in search of that particular red shirt and then search for it online and still not find it, it will probably consider it to be out of stock and the retailer would lose a sale opportunity.

You probably see where the problem lies: even though the product was available, it was not available to the customer and opportunities were lost. The same thing goes for products that are not exposed to the customers, or they are, say, unreachable on the shelf or unfindable on the web store if the search engine is not fit for the job.

The opposite situation, where demand is not correctly estimated and out-of-stocks become a reality, are just as bad as sales opportunities are lost.

The solution lies in gathering enough data across all sales channels, compiling this data and using models to predict demand. That easier said than done because …

To make demand sensing a reality, inventory transparency has to be achieved

As you are reading a blog on omnichannel retail, the term was bound to appear somewhere along the line. So here it is. You can’t have Demand Sensing without a connected sales operation and inventory transparency. All inventory sources have to be connected and data should be generally available. So should sales data across channels.

The picture below shows an example of omnichannel supply chain, one where all the operational pieces work together and share data. When such a structure is implemented, demand is easily “sensed” and estimated and thus inventory distortion can decrease.

So now we have the data. Implementing omnichannel retail can lead do a better demand sensing and therefore improve inventory distortion, a small glitch in the global retail system costing “only” $1.1 trillion.

3 Factors Slowing Down Omnichannel Adoption

Across the globe, retailers have picked up on the omnichannel trend and try to give the customers what they want: the same level of service across all sales channels.

Some are doing better than others but everyone’s trying. Especially for multi-channel retailers, the switch is essential in keeping up with an increasing competition from online pure-plays.

The switch is not easy and certain bottlenecks stand out:

1. Omnichannel is sometimes treated as a marketing or tech buzzword. Hint: it’s not

When you say omnichannel, you have to think of all the sales and distribution channels. Hence the “omni”. That certainly looks like a marketing area and to a certain degree, it is.

But to make omnichannel a reality instead of long consultative talks, you have to go beyond marketing and into the dark woods of technology systems and process management. That’s the hard part. The change comes when companies and especially executives leave aside their differences and interact to connect cross-department processes.

Yes, omnichannel is marketing driven but it needs inventory transparency, it needs technology investment and updating and it needs a change in internal processes and culture.

Yes, culture because…

2. There’s a lot of sales cannibalization between channels

Mid to large retailers that switched from brick and mortar to multi-channel did this by adding silo-ed sales structures one after another. First came the brick and mortar operation, then came the online store, the call-center, the mobile sales and so on.

Each of these channels eventually developed into a full-fledged sub-organization. It is not uncommon to see, for example, ecommerce departments with full operational structures from purchasing, warehouse management, picking and packing, sales, marketing and others.

When such structures emerge, a certain type of independence emerges also and this can lead to channel cannibalization. Simply put it’s one channel stealing sales from another, instead of working together for the customer and the common (company) good.

That’s why a change in culture is much needed when striving to implement omnichannel retail policies. Any customer should be encouraged to buy from any channel, as long as it stays within the retailer’s domain.

3. BAGA is a lot more complicated than it seems

BAGA stands for “Buy Anywhere, Get Anywhere“. Buy online, pick up in store. Or at home. Buy in the physical store and receive at home. Place an order on the phone and pick up in store.

It’s complicated just working with two or three of these scenarios. When you add general inventory transparency, cross-store orders and supplier availability it gets a lot more complicated.

That’s why a BAGA policy should be built after implementing:

  1. inventory transparency policy and technology. This should spread across the full inventory spectrum including warehouses, stores, in-movement goods and suppliers.
  2. customer master-data management. The customer is the same across all channels and should be recognized and its treatment personalized on demand. Think of this area as a CRM on steroids that spreads across all channels.
  3. product master-data management. Product information should be available on all channels, when needed and in the right format.
  4. cross-channel marketing policies. Think marketing independent of channel and at the same time available on all.

These are just three of the most important factors that slow down omnichannel adoption. The fourth is probably the fact that some companies are just so tired of working their way through ecommerce adoption that they are unwilling to move forward.

It takes willingness to discover the benefits and what omnichannel is. For many, the switch is rather simple in terms of technology. It does bare costs in willingness to learn new concepts and implement these concepts within the company.

What is Pretail and How Does It Impact Retail?

Ever thought what happens behind the curtains before a new product hits the shelf? Or what makes customers decide they love product A but definitely hate product B, although they are almost identical? Or what makes great products … well … great?

Many have and there is no clear answer to these questions. What works when Apple launches a music player may not work when Microsoft does it (Remember Zune?). There are many variables involved and no matter the size of your R&D budget, sometimes things are not going to go right.

But there’s only one way to see if the product is really fit for the market. That way used to be simple and a bit risky. Teams including marketing, product development, engineering and manufacturing experts would dream, design and build products. They would test the products on selected customer groups and if the results would look good, they would push the product to the market.

However even involving budgets, experts, consumer insights and marketing bucks, sometimes products flop.

Jamstick is a “portable guitar that teaches you to play”. It asked for $50.000 in crowd-funding. It received $792.000. Jamstick is a pretail success.

Two things changed this: crowd-sourcing and crowd-founding. Together they’ve formed a type of customer experience previously unknown: the pretail.

Testing the waters with crowd-sourcing and crowd-founding

In the past, teams were involved in trying to guess what customers would want. Now we can just go ahead and ask the them.

Pretailing is a term describing any activity introducing customers to brands or products, before the retail process. It assumes that using crowd-founding sites such as Kickstarter, inventors and innovators can test their concept before involving big budgets. Essentially they are asking potential buyers to invest their dollar-power in their product.

This, in turn, creates an experience previously unknown to the consumer. The consumer is effectively buying into a vision. Pretailing creates a new type of sales channel that works before the product is even manufactured. Unlike traditional retail, this type of commerce can shed light on what the market wants at any given time.

Pluck is a simple egg-separator and it was invented by Mark Fusco, a Quirky member.

Online stores such as QuirkyThreadless or Japan-based Muji have one thing in common. They use their communities to find the right ideas and products to design and develop. Quirky is focused on inventing cool gadgets, Threadless leverages its designer community to create t-shirts and Muji sells home&deco products designed by the consumers.

They all engage in pretailing. By tapping into the collective minds of their communities they can ask for the type of products most customers would purchase. Before they manufacture and sell, they ask what to manufacture and sell. This in turn creates a sense of belonging to the community for the customer. For the retailer, it decreases the risk of manufacturing and stocking up on lousy products.

Crowd-founding is another way of tapping into the market and pretailing. We all know Kickstarter but other, more product-oriented crowd founding platforms fare even better for this concept.

CrowdSupply and OutGrow.me are just two places where you can see what customers have backed before manufacturing. The products we can see there range from open source toothbrushes to one-wheel skateboards.

The results are amazing. With unlimited creativity comes an unlimited supply of innovation. And by tapping into a large market of early-adopters, only the products that are really fit for distribution get funded and survive.

Crowdfunding exploded after 2011.

Big retailers have picked up on the trend and are now using pretailing to test new products and improve their logistics to fit the estimated demand. Apple, for example is one of the companies that showcases products before they are available in retail stores, interacting with developers and customers to improve the experience.

Pretailing is a thing of the crowds

Beyond the crowd-founding and crowd-sourcing, pretailing can come from anything involving large numbers of potential customers. By tapping into online traces, retailers can get insights on potentially succesful products.

Pretailing can start with a simple research with Google Trends. It can be an analysis on the search trends on your own web store.

Who would have known? Apparently there is a growing demand for egg separators.

It can just as well be an overview of the most popular trends on Instagram. For example Crane & Canopy releases new high quality duvets basing their decisions on Pinterest and social media trends.

The conclusion is that in this highly competitive market, retailers need to engage their customers before they start the retail process. Pretailing means tapping into the wisdom of the crowds and extracting the perfect products before competitors do. It is not only a matter of product development but a matter of understanding the customer and providing the best experience on the market.

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!

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

How To Start an Online Store: The Complete Guide

If you are here you’re probably thinking about opening an online store and you need some help to get your business up and running. The good news is you’ve come to the right place. This guide contains all the information you need to get your business started.

I’ll guide you through the most important steps in starting an online store. You’ll notice that, just like a car, the things that make an online store are usually under the hood. Of course, an efficient web store and a carefully crafted logo are important but even more important are the products you sell, where do you get them from and how you fulfill your promise of sending them to your customer.

Basically there are ten main areas you need to focus on when starting your online retail business. These are:

  1. Finding your niche and understanding your market. Building The Plan;
  2. Finding the right business model;
  3. Registering your business;
  4. Finding suppliers, developing a supply chain, pricing the products;
  5. Developing a fulfillment operation (pick, pack, ship and handling returns) and preparing for customer care;
  6. Building a brand identity and building your web store;
  7. Posting products and adding relevant content;
  8. Adding sales channels to your business;
  9. Marketing your store;
  10. Testing and fine tuning;

 

That’s a whole lot of bullet points. Of course: an online store is still a business and businesses are not simple. If you’re trying to build a business because you need money fast or because you’re tired of your day to day job, you should stop reading this post right now.

The truth is building your store or any other type of business is hard work. Seems obvious, right? If it were easy, everyone would be running their own business. It’s hard but if you are ready to take on this challenge, prepare yourself with grits and start chewing as much info as you possibly can. The more information you have and the more data you gather, the more likely you are to succeed.

This guide will work as a framework, an outlook on what you have to do to maximize your chances for success. Depending on your current location and specific market factors, you may need to adapt as you go but you can rely on this framework to guide you through.

So let’s dive in:

1. Finding a niche for my web store. Building The Plan.

There are three very important things to take into account when starting your online store and looking for your niche:

  1. provide value for other people
  2. provide the type of value that other companies don’t
  3. provide value for lots of people

The first thing you have to understand is that your business has to provide value for other people.  Just as people do, businesses strive for purpose. Without providing value in a clear and straightforward way, you cannot expect your business to be successful.

Find out what people need or want. A combination of both is great but if you have to choose, go for need – it is way better in the long run. Find out how you can supply these products or services. This is the value.

The second thing you have to take into account is that other online stores may provide the same kind of value. Do your research. Google the type of products you want to sell. Check Google Trends to see how the terms for your products have evolved throughout the years. Compare the number of product searches with the number of companies providing the same type of value you’re planning on offering.

There is a dynamic between demand and supply that you cannot ignore. You are looking for a market that is booming but there are not many competitors. And that’s were the third point comes in: you have to provide value for lots of people. You may like hoodies for cats very much. But it is probably not such a great idea. You are addressing people in your country (don’t think you’re going international just yet), who own cats, who think that dressing up cats is a good idea and who like hoodies. A pretty small market, don’t you think?

The lower the market size, the lower your chances for success. The higher the market size, the higher are your chances at building a great business.

See the graph below on where you’d want to place your business in:

So there are two great combinations that you can choose. Both need as many customers as possible. You should strive for a market where there are plenty of people ready to buy your product.

The ideal situation is the one in the lower right corner. That’s where few companies will compete with you and there are plenty of customers willing to buy your products. But to position your online shop there, you need to identify a need before the competition and quickly get as much market share as possible. However, in this situation, you’ll need to market your products and your brand, advocate product usage and purchase. That means actually building a market. This is no easy feat for a startup.

The upper right area shows a combination of many competitors and many customers. This means this is an established market and you’re more likely to succeed if you prove yoruself better than (part of) the competition. With slight adjusments to the business model, you can compete to established leaders (see below for innovative ecommerce models).

The Plan

Once you have discovered the kind of product(s) you will be selling it’s time to start building The Plan. You will notice that I’m using the term “the plan” and not business plan. That is because this is your plan. It has to come as a natural idea and set of targets you want to acomplish in the future with the business you’re building.

There are nine big questions you need to answer here. You have to be as pragmatic as possible when answering these questions because when you start building your online store there won’t be any place for wishful thinking.

These questions are simple but the answers are usually not:

  1. What are you selling?
  2. Who are the competitors?
  3. Who is the customer?
  4. How do you get the customer to buy your products?
  5. Who supplies the merchandise?
  6. How much will the products cost and what is the proffit?
  7. What are the costs you expect?
  8. How are you going to cover the costs?
  9. How much revenue are you expecting in the first 3-5 years?

 

Answering these questions will get you thinking and preparing for the future. You will notice that these are actually the questions you need to figure out the answers to when building a business plan.

However, take your time to think through these questions. Find information to support your expectations. Question your own assumptions because the market will surely do so. If you’ve taken into account all these questions you are likely better prepared to starting yoru online shop. Remember, “failing to plan is planning to fail”.

 

2. Finding the right business model for my online shop

You’re probably thinking the ecommerce business model is pretty straight forward. You post some goods online, someone orders them and then you ship them and collect the big bucks.

Well, that is why you need to know that even if the logistics and operations may look the same in all ecommerce business, the differences can have a huge impact on how you’re building yours.

I’ll walk you through the 4+1 main segments of ecommerce business model. Than we’ll look through different implementations of the B2C model (business to consumer), the one you’re probably aiming for.

B2C eCommerce

B2C Ecommerce is the most popular form of commerce online. The B2C stands for Business to Consumer and that’s exactly what it means.

Online retailers (aka “The Business”) will stock goods, post them online and sell directly to the customer (“The Consumer“). The Consumer will reach the web shop, browse and hopefully buy the items posted online. When this happens, the operational team will be notified. They will pick the merchandise from the warehouse shelf, pack it and ship it to the consumer.

Most of the online shops you are familiar with are focused on this type of ecommerce business model. Some examples you might be familiar with are Walmart.comTarget.com or HomeDepot.com.

But B2C is not just for the big players. Many ecommerce startups employ this type of business model. For example Bonobos.com and WarbyParker.com are doing just great selling directly to the consumer.

Bonobos is a fashion ecommerce retailer for men. The company manufactures and sells its own line of men wear and its main selling point is it makes shopping easier. How it does that? You’ll find out later in this guide.

WarbyParker.com sells stylish eyeglasses and sunglasses directly to the consumer. It is a great example of finding the right type of product at the right time and packaging it with the right type of social activism twist. When you buy a pair of glasses from them, a social mechanism makes sure that part of the money you’ve paid go to those in need of eyewear in the developing world.

But wait, isn’t Amazon a B2C ecommerce site, you might ask? Glad that came up. See, Amazon has started as a B2C online shop but since then it evolved past a single model. Most of its sales are still directed at the end consumer but Amazon also ships items to businesses (B2B ecommerce) through its Amazon Supply outlet. It also brings other sellers (businesses and consumers) in contact with its own customer database. This means Amazon is indeed the largest online retailer in the world, but it’s not just a B2C ecommerce website.

B2B eCommerce

Another business model that works great is the B2B Ecommerce model. In this model Businesses sell merchandise to other Businesses through an online shop.

You might wonder why even mention this model. I mean, couldn’t those listed above just allow businesses to buy from their shops? Of course they could and most do. But here, I’m talking about a different type of companies, different type of products and most of all – different number of items purchased and different pricing.

(B2B model illustration)

Say you’re a company manufacturing hoodies for cats. Supposedly your market is not as popular as the smartphone market and your factory can ship 1000 beautiful cat hoodies every year. You could, of course, open an online shop and ship these hoodies directly to the consumer. But you’ll find out that it implies development costs, marketing costs, customer service costs and you just want to be in the factory all day, trying to finally manufacture the perfect cat hoodie.

Along come Business A and Business B. These companies are probably retailers and have an established commerce operation, with a huge database of customers and they think they can sell 500 hoodies this year. And they want everything you manufacture.

Before these companies came along you’ve done the math and thought: “My cost for each manufactured hoodie is 10$. I’ll sell these hoodies for 20$ and make a nice proffit.” But then you went on and started selling on your own and saw that including marketing, shipping and other expenses your cost rose up to 18$ and you’re actually making only 2$. Not that much, is it?

But now both Business A and Business B decide they can offer you 15$ for each hoodie and they are going to buy everything you manufacture. On one hand they are offering you less than your asking price but in the end your earning 5$ instead of 2$ so you decide you’re better off selling directly to Businesses.

This simplified scenario is the basis of the B2B ecommerce business model. It means that businesses (either manufacturers or wholesalers) sell directly to businesses and offer incentives to those that buy in bulk. The usual incentives are lower prices, extended payment conditions, free shipping or custom manufacturing.

Some of the most popular B2B ecommerce sites are Quill.com, AmazonSupply.com and of course AliBaba.com, the largest B2B marketplace, connecting businesses in China to buyers all over the world.

B2B2C eCommerce

(Business to Business to Consumer business model graph)

This is a rather new type of ecommerce business model. It stands for Business To Business To Consumer.

How does it work? Say you have your own stocks and you’re selling your cat hoodies through your very own ecommerce website and it works pretty well. But you’re thinking – why not sell more?

So you think of new sales channels, the type of opportunities where your cat hoodies can sell even better if exposed to a larger number of customers. Kinda like Amazon or eBay.

Larger retailers, such as Amazon, offer you the possibility of selling on their own website. You supply the goods and post them on the Amazon Marketplace, for example, and next thing you know -bam! – your cat hoodies can be purchased by Amazon’s customers. Depending on your decision you can either fulfill orders on your own (receive orders from Amazon, pick, pack and ship yourself) or just let them handle the logistics, through their Fulfillment by Amazon program.

C2C eCommerce

So we’ve covered businesses selling to customers and other businesses. Shouldn’t consumers sell to other consumers too? But they do and this area is actually booming.

Consumers usually meet other consumers through online marketplaces. By far, the most popular is eBay.com, the place where anyone can sell and buy anything. Even though eBay hosts businesses also, we will focus on the individuals selling their items through these type of systems.

The online marketplaces enabling C2C ecommerce help sellers post their goods online and buyers to find them.

There are many mechanisms in place to handle these transactions, things such as product showcasing, selling, payment and feedback. But if we were to look at what makes C2C marketplaces work this has to be the network effect and peer review. The network effect means that the more people engage in trading goods in a marketplace, the more people will come and more successful the marketplace will be. This effect also ensures seller and buyer lock-in: the more people are buying or selling, the harder it is for someone to leave the marketplace. The reason – where else will this person find so many customers or merchants?

The second big feature that defines C2C marketplaces is peer review. When you’re buying or selling through this type of systems, you really don’t know who’s on the other end. And because relying on luck and having faith in the good character of people is not the most efficient solution, marketplaces introduced peer review.

When someone buys from a merchant and they get what they asked for, they offer a positive review. When they don’t, and things take a turn for the worse, they slap the merchant with a negative review so others know the merchant is not to be trusted.

The same goes for the merchant. If the customer doesn’t pay up or somehow tricks the merchant – there’s always a bad review at hand to get things leveled.

Once these reviews start pilling up, they start working as a certificate of good standing (or bad standing). If you are a honest merchant or customer, you won’t leave the marketplace that stores this certificate. That’s because reviews are a valuable asset that help members trade in better conditions.

Why mention all these? Because building a C2C marketplace is really, really hard and expensive. For example eBay lost$100 million trying to enter the Chinese market before giving up to AliBaba. It’s that kind of expensive so I would rather advise against building a general C2C marketplace if you’re a startup.

You could, however find a niche where individuals are willing to trade with one another and cater to that specific niche.

For example: Etsy.com is famous for building the biggest handcrafted C2C ecommerce community. Uber and Lyft bring individuals in need of transportation in contact with those able to provide these type of services. In fact, Andreessen Horowitz, one of the leading Venture Capital firms lists Online Marketplaces as one of the most promissing directions for startups.

C2B Ecommerce

Yes, C2B (Consumer to Business) eCommerce is a thing. It might look a little off but there are great ways to start an C2B ecommerce business. There are also some great established services that help connect individuals to the businesses in need of their products or service.

(Consumer to Business Ecommerce Business Model)

Take this blog for example. You see those banners posted on the side? These ads are served through AdSense (a Google program that connects advertisers and website owners). What AdSense does is connect the individual (in this case a blogger) to those businesses in need of relevant advertising. In return for posting these ads, the blogger gets paid everytime someone clicks an ad.

Reverse auctions are a great way for individuals to post how much are they willing to pay for a certain product or service. A C2B Ecommerce site can collect these auctions and forward them to companies willing to fulfill them. For example – the basic model behind the likes of Groupon.com or LivingSocial.com is a combination between B2C and C2B. Companies post their offers but the consumers have to vote by purchasing these offers. If the minimal number of offers is not met, the offers are not activated.

Another great example of the C2B ecommerce model is Elance.com. The website is one of the first businesses that connected freelancers to potential contractors (usually businesses). Freelancers would go online, post their capabilities and those in need of their services would hire them for a limited time or project based.

Monster.com is another great C2B example. Yes, people posting their resumes and getting recruited is a type of commerce where The Individual is pitching The Business to buy his services (aka hiring).

If you’re an one-man startup, this can be a great way to setup something quickly. In fact, most freelance developers or graphic designers practice this type of commerce. Either through large marketplaces such as Elance.com or just by posting their resume and portfolio online and getting orders through a simple contact page.

Other business models for ecommerce

These are the four most popular and used business models but they are not all. There is a separate class of ecommerce business models that has to do with the government. When the government wants to buy products or services from businesses it will post the tenders on a G2B (Government to Business) portal that handles auctions and offers.

If the businesses want to market their their offers to the government, they will employ a B2G business model. See that? G2B vs B2G – pretty simple stuff.

A final model is G2C – government to citizen. Using this model, government authorities can auction goods directly to the consumer. It also works as a way of connecting citizens directly to the authorities and decrease bureaucracy when issuing documents or collecting taxes.

Six innovative B2C ecommerce business models

So you’ve glanced through all these great ways of starting an ecommerce business and you finally decided on one of them. The vast majority of online shop startups are built on top of the B2C business model so the next part of this guide will focus on a few innovative ways of implementing an online shop.

The basics all stay the same. You are still an online shop owner trying to attract the right kind of consumers and provide them with products they will love. But how about some inspiration from the most innovative business models out there?

1. The right fit

Remember Bonobos.com we’ve talked about earlier? Well their whole selling point goes something like this: most men don’t really like shopping. They like to wear clothes that make them look good, without spending too much time choosing. We can make this happen.

That is especially hard when you’re an online store and your customer can’t see, touch or try on the product your selling. But it can be done. To make it happen, Bonobos mixed its great designs with few things to keep the customers happy and relaxed:

  • Ninjas. What? Well, not real ninjas but some pretty great customer service representatives that are willing and happy to walk customers through buying the right piece of clothing.
  • 365 days return. Not the right fit? Maybe the customer is too busy to return the merchandise within the standard 30 days. Why not extend that to  365 days?
  • Free shipping and free returns. This means the customer has no reason to drive up to a brick and mortar store to try on the products. Shipping and returns are free so basically everyone can try on their new chinos at home. If they don’t like them, they send them back.
  • Try on everything. Bonobos has a special kind of store – the one that lets customers schedule a “try on everything and if you are happy with what you find, you get your stuff shipped home” session. Also – preferences are saved so next time the customers wants to click-shop, he knows exactly what’s the right size.

The key take away is if you’re building an online store, it has to solve a problem. Bonobos solves the “shopping for clothes is boring” men problem and promises the right fit without the headaches of chasing a pair of pants all day.

2. Flash Sales

There’s a whole post on Netonomy dedicated to Flash Sales. Basically, these type of online shops sell discounted merchandise to registered members.

Take for example Ruelala (pic above). Customers have to provide the shop with their email address to register as a member. This means that basically anyone who enters the website is also subscribing to an email newsletter.

In exchange customers get discounted, usually designer or brand name products. If you like to know more about this ecommerce model, please click here.

3. The subscription pack

Most online shops have thousands of products listed. This is a great advantage over brick and mortar stores which have to actually stock on all those products. Online shops can stock on the minimal amount and later on deal with orders through supplier dropshipping but more on that later.

A new trend emerged that deals with showing just the right amount of products customers need in a given period and ship those products in a subscription based model.

Take Manpacks.com for example:

What Manpacks does is list just the minimum amount of products men need in any given month. Customers setup their pack and receive it every month, based on a subscription.

There are many advantage in starting such an online shop:

  • Predictability: because your revenue is subscription based, you can estimate your monthly, quarterly and annual revenue accurately. This way you can plan for the future and balance your company.
  • Economy of scales: having few products on sale and lots of customers means you can negotiate with suppliers better prices for the products you’re selling. This means you can also profit more and sell your products cheaper.
  • Marketing is easier: with few products in your offer you can simplify your marketing and communication and improve your customer acquisition (again – more on this later).

4. Community designed products

Are you familiar with the term crowd sourcing? It basically means asking lots of people to do something for you or your company. In this case, we’re talking about designing products.

What Threadless.com did was build a community around the concept of designing t-shirts. Designers would submit their designs and the community would choose what t-shirts were sold. In exchange, the website shared revenue with said designers.

Of course, going against Threadless now is probably not a great idea but you can always build a business by channeling people’s passion towards a commercial goal.

Key takeaways:

  • Community: build and stand by your community. It is the key to creating a lasting brand.
  • Share and save: hiring designers is a costly thing but if you can take independent designers’ ideas and turn them into products you can save a lot on fixed costs. But you have to be willing to share.

5. Customizing for the masses

Mass customization is an ecommerce segment that’s growing really fast. Customers want to express their creativity and they are ready to pay for this.

This type of online sales are technologically advanced and need three really important things to function:

  • a store that can handle customization input for the customers
  • a system that transforms this input to a set of instructions to a production line
  • a operational structure that can customize products in an automated manner so costs are kept in check

For example Nike launched NikeID, a great way to customize their products. After a successful trial period, the program extended to many of the company’s products.

If you’d like to find out more about mass customization, you can get more info at “Is Mass Customization the Future of eCommerce?

6. 3D printing

The final innovation I think you should take into account is 3D printing. Using specially designed machines you can build 3D objects and sell them to customers.

3D printing is a technology that is actually yet to take off but it sounds really promissing. For certain products it can mean a reinvention of manufacturing and commerce. Imagine having your customers build the product in your store and having this product instantly printed and shipped. Imagination is the only thing that could limit what can be done with such technology.

Shapeways for example, started in 2007 as a marketplace for 3D Designers willing to design and sell their ideas. In 2012 it has passed the 1 million products sold threshold so there really is a market out there.

Because it is connecting designers to buyers, Shapeways is a C2C marketplace but probably the future will show 3D printing is not restricted to individual designers so B2C online shops might also leverage the trend.

This was the last of the six innovative ecommerce trends you could use to spark the right idea for your future shop. This ends part one of this guide. To wrap things up let’s walk through what you’ve learned here. First – the importance of finding the right niche and how you cult do that. Next, you’ve learned about the necessity of building your Plan when starting an online shop and the questions you need to answer when building said plan.

Last but certainly not least, you’ve discovered the main business models you can use to build your shop and six of the most innovative B2C ecommerce models. Pretty good for a day’s work.

See Part 2 of “How To Start an Online Store“: Registering your business, finding suppliers, integrating suppliers in your business and choosing the right product prices >>

Featured image source.

The Top 5 Solution Vendors in Omnichannel Retail

Achieving clarity in Omnichannel Retail is no easy task. Retailers, especially large ones, need to get all departments, all sales channels, suppliers and fulfillment operations on the same page.

And that’s just the first step. Then comes the IT integration where legacy systems are connected to a central management tool that handles at least inventory transparency, CRM and order management across channels.

Omnichannel Retail is not mainstream right now. It is still in its infancy. Sure, some are more advanced than others and some companies are building the future faster than others. But the truth is omnichannel is a need to be fulfilled for most retailers.

And here come the knights in shiny digital armor to rescue the day. The following 5 vendors have built omnichannel retail capabilities ready to be plugged into existing retail ecosystems. They are now the go-to elite for large retailers in need of upgrading their IT infrastructure.

5. Shopatron

Shopatron was founded in September 2000 by Ed Stevens and Sean Collier. Since then, it has evolved into an integrated SaaS platform that connects offline and online orders management, making it easier for customers to purchase from retailers.

shopatron

The company offers specific omnichannel solutions, most important being:

  1. in-store pick-up
  2. ship from store
  3. inventory lookup
  4. vendor dropship

Shopatron targets midsize retailers and its main benefit is the advanced order routing. The platform combines online and offline sales and claims inventory visibility across channels.

Pros:

  • great fit for midsize companies
  • regular updates without setup costs (the platform runs as SaaS)
  • good fit for larger retailers that look for a quick roll-out for the solutions listed above
  • can connect multiple sales channels and direct orders to the right fulfillment point
  • works with both retailers and brand manufacturers
  • reduced costs and quick roll out

Cons:

  • the company is not known for its transparency in terms of product road map
  • smallest entry on this list, making it a target for future acquisitions
  • no clear option of on-premise setup

4. NetSuite

NetSuite was already rocking a great SaaS ERP product and a fully flavored ecommerce solution when it acquired OrderMotion in 2013. Now the company can provide inventory management across channels, a single customer view, business intelligence data and omnichannel order management.

netsuite

The company, among the first to bet on SaaS platforms, is now one of the fastest growing companies in the field, closing 2013 with $414 million in revenue. The revenue is up 34%, which is a big win for the company initially backed by Larry Ellison.

NetSuite started as NetLedger, envisioned as an online accounting tool, that later turned to an wider array of company management tools.

The past two years have been very active for NetSuite in terms of omnichannel related acquisitions. In 2013 it acquired Retail Anywhere, a POS solutions company. In 2014 it acquired both Venda, an ecommerce SaaS company, and eBizNet Solutions, a company focused on WMS (warehouse management system) solutions.

Netsuite has decided omnichannel is a perfect mix when it connects companies focused o separate blocks in the retail chain.

Pros:

  • extensive know how of retail operations management
  • integrated SaaS solutions
  • great record of acquisitions
  • single view of customer
  • cross channel inventory view and order management
  • extensive list of customers
  • great uptime

Cons:

  • NetSuite is “broadly focused”: its solutions work with healthcare, finance, manufacturing and many, many others. That leaves little room for actual retail innovation
  • the recent acquisition will probably work together but many steps have to be taken until full integration is achieved
  • implementations aren’t always all that seamless
  • complex pricing and licensing structure

3. eBay Enterprise

PayPal is not the only jewel in eBay’s pocket as it seems. eBay Enterprise (formerly known as GSI Commerce) is one of the fastest growing and biggest companies providing technology and consultancy for omnichannel retail.

ebay-enterprise

eBay Enterprise interfaces and tools
eBay Enterprise interfaces and tools

The company delivers four big solutions to its customer base:

  • commerce technologies
  • retail order management
  • operations
  • marketing solutions

Unlike the other companies on the list, eBay Enterprise goes beyond software integration and into marketing and operations. In terms of retail solutions, eBay Enterprise provides support for commerce integration across channels. The company integrates the main sales touch points, with the help of its omnichannel tools:

  1. web
  2. smartphones and tablets
  3. store associates
  4. interactive kiosks
  5. customer service

The omnichannel operations tools cover a lot of ground and can be used in fulfillment operations, customer care and store based fulfillment.

Pros:

  • provides great tools for online retail, offline retail, fulfillment as well as cross-channel operations
  • best-of-breed order management solutions
  • strong fulfillment and customer care solutions
  • multiple sales interfaces to channels
  • wide array of large retailers and vast experience
  • flexible pricing structure, based on sales commission

Cons:

  • eBay Enterprise is pretty picky when it comes to customers. So unless you’re not a large retailer, chances are you won’t be working with their tools

2. IBM

ibm-commerce

IBM stands for a lot of things and among them it had to be omnichannel retail also. The tech giant offers technology to retailers in need of:

  • content management,
  • supply chain management,
  • order management,
  • inventory management,
  • business intelligence,
  • CRM and
  • interactive kiosks.

Its Websphere Commerce solution connects both online and offline sales through its different versions. It handles cross-channels inventory visibility, distributed order management and scales as you would expect from IBM.

At the core of IBM’s order management and inventory tools you’ll find components IBM acquired in 2010, when it purchased Sterling commerce. The transaction cost IBM $1.4 billion but brought in 18.000 global customers.

The Websphere commerce is a great fit for large companies and powers some very well known brands, but it is somewhat a not so great fit or  midsize retailers.

Pros

  • scalable solution
  • works across channels
  • integrates all retail chain components
  • great omnichannel inventory and order management
  • large user base

Cons

  • expensive setup
  • complex setup process
  • outdated interface controls and architecture
  • hard to implement by midsize retailers

1. Hybris

Hybris, now a part of SAP, is probably the best fit for omnichannel retailing. Hybris is a dynamic company focused on growth and delivers constantly on market needs.

hybris

The omnichannel solution is scalable and built on a modern and flexible architecture, that allows interaction with all interfaces. Its order management solution, inventory and commerce application are built to work together seamless and easily connect with other systems.

Hybris’ solutions work both B2B and B2C and can handle inputs from multiple inventory sources and outputs on multiple sales channels. Moreover, the solution features a central content management system that enables retailers to push content across a multitude of interfaces.

As of 2013, Hybris is a part of SAP, making it a global powerhouse connected to the world’s most popular (well, at least used) ERP.

Pros

  • scalable solution
  • feature packed
  • fully integrated solutions
  • works B2B and B2C
  • modern architecture
  • supports multiple interfaces
  • works online, offline and on multiple other channels
  • flexible enough to work with open source technologies

Cons

  • training may be expensive
  • professionals able to implement and train are hard to find, due to an increase of platform demand
  • customization and setup can be time and resource consuming

So that’s it – these are the best of breed. Of course, there are more out there that deliver great products and I could name Intershop, Demandware or even Oracle. They, however are less inclined to omnichannel or have a really new found love for omnichannel retail. The vendors mentioned above are leading the pack in omnichannel retail implementation, especially for large customers.

Driverless Trucks Will Change Logistics

Amazon is testing drones and Google is building self-driving cars. At the same time Mercedes and Volvo are each developing its own solution for moving goods by truck in a driver-less manner.

Daimler's Future Truck 2025
Daimler’s Future Truck 2025

Building driver-less trucks or at least improving the truck’s autonomy in a way to improve the driver’s performance could be huge for logistics.

How big? Well, in 2012, the US logistics industry totaled $1.33 trillion, 8.5% of national GDP. In that year, truckers moved 9.4 billion tones of freight, 68.5% of all freight transported in the US (source). To say that trucking is big is really an understatement. The trucking industry is backbone of global logistics. Without it, there would be no retail as we know it.

But moving billions of tones of freight is no easy task. To do so, truckers need to eat, rest and be alert during the whole trip. The trip itself has to be as fast and as cheap as possible. Otherwise, logistics would become useless or too dangerous to drivers.

Volvo, Mercedes and others are tackling a very difficult task: how could one improve the trucking industry in a way that can replace drivers in the future, but be met with joy by said drivers. Technology may replace truckers one day but today, they are the one in charge so truck makers need to make their job as easy as possible without making it useless.

The road train

Volvo has joined European backed project SARTRE that aims to make highway driving safer with the help of road trains. Simply put, car and truck drivers can join a group lead by a professional driver. While in this highway group they can relax and the cars will do most of the work by just mimicking the leader car.

This will mean fuel efficiency, safer roads and of course longer trips which logistics companies could really use. The video below shows a demonstration on how cars can connect through wireless technology and copy the leader car movements. The technology could hit the roads as soon as 2020, if legislation is in place.

[youtube https://www.youtube.com/watch?v=tQnVGOoVvVk?rel=0]

The self driving truck from Daimler

It never gets tired. It’s always 100 percent and sharp. It’s never angry; it’s never distracted” said Dr. Wolfgang Bernhard, the Daimler board member for trucks and buses.

This year Daimler launched a truck prototype dubbed “The Future Truck 2025”. The truck can accelerate, steer and stop by itself. It can also go up to 85 km/hour (52 miles/hour), it navigates with the help of a built in GPS system and looks a bit like a starship. The driver needs to get the truck on the highway, merge with incoming traffic and hit the “Highway Pilot” setting. From that point on, the truck driver can recline in his comfortable chair and take a break. At any point, the system can be overridden by the driver.

However, The Future Truck 2025 won’t be joining our highways for a few years from now. Legislation for self-driving cars or trucks is not yet in place but Daimler is patient enough to get us and legislators prepared for it.

[youtube https://www.youtube.com/watch?v=7bFc0rBoFY8?rel=0]

Once these trucks will hit the market, drivers will be ready to carry more freight, ship orders safer and farther. Logistics companies will improve costs and will be able to increase their reach. In the end – technology will do what it has always done: make everything faster, better and cheaper.