E-commerce for Dummies Part 3: The Good, The Bad, and The Ugly of Self Employment

When you think of online stores, you think of huge companies like Amazon and Overstock.com. If smaller stores come to mind at all, you probably assume that they want to grow into retail superpowers…and most do. But in fact e-commerce empowers businesses of all sizes, right down to one-man home-based companies like Curio City Online. If starting a cottage industry has ever enticed you, here’s what it’s like to work by yourself, for yourself.

 

The Good

Being your own boss is generally as good as it sounds. You don’t answer to anyone. Your word is law. You can set your own schedule, within the demands of your workload, you never have to do pointless busy-work, nobody ever yells at you, and you don’t have to yell at anyone else.

Job security: I can never be fired or laid off unless my company fails.

The commute is really, really short.

Seeing results from your work is especially rewarding when the credit is yours alone. If your company is very successful, it will enrich you – not somebody else.

Quality standards are whatever you say they are. The company culture is an expression of your personality.

Other people are often very impressed that you're a President and CEO.

The Bad

Sure you’re your own boss…but you’re also your own employee. Nothing gets done unless you do it, and nobody except you knows or cares about anything that you do.

Income insecurity: I pay myself a percentage of net sales, so when I have an especially bad week I get an especially bad paycheck. Because retail’s highly seasonal, I make fully half of my annual income in November and December, which stretches the other 10 months awfully thin. I could annualize my salary – take a standard paycheck based on the previous year’s sales – but I’ve come to like the immediate, direct link between sales and pay.

Working alone is isolating. I have no casual social interaction, nor can I float ideas and hash out problems with other interested persons. I get some virtual human contact in various web forums, but a very social person would quickly go mad.

When you work at home, you can never go home from work. You can never call in sick. You don’t get defined vacations or holidays; in fact, holidays are mostly just extra work. If you ever do take a day off, everything stops because nobody’s working. And “day off” is a stretch; I haven’t gone more than one day without at least checking my email in nearly seven years.

Just as you deserve all the credit for your company’s successes, you’re also wholly to blame for its failures. Your personal weaknesses are your company’s weaknesses. I suck at marketing. I have no interest in it. But a business can’t survive without it, and it's too expensive to outsource, and so I do what I must…and I do it poorly.

Sometimes you need to hire experts to handle things that are simply beyond your abilities, like tax accounting and web programming. It’s difficult to find people who will work reliably for reasonable fees, and depending upon outsiders for vital functions might be repugnant if you’re the self-sufficient type. You don’t have much leverage over independent contractors, and you will sometimes find yourself at the mercy of their schedules.

   
 

The Ugly

Personal grooming and presentable attire sort of drop off your radar when you seldom leave the house. It’s not too unusual to work in your pajamas or underwear. Unless you make some effort to keep up professional appearances, you might be surprised one day to see a hermit in the mirror. 

E-Commerce for Dummies Part 2: The Buck Doesn't Stop Here

This is the second of three ideas for my online e-commerce “lecture” (about 700 words).

Curio City’s gross sales look like a decent living wage. Alas, I can only pocket a fraction of them; most of my revenue enriches other people. (Regular readers might recognize this topic from when I rejected becoming an Amazon seller.) So who got how much of every dollar that came in last year?

$0.495 buys the stock, including inbound freight and some other fiddly little things that constitute “Cost of Goods Sold”, or COGS. “Keystone” is the rule in retail, and it simply means doubling your cost: Paying more than 50% of retail is bad and paying less than 50% is good. Some things (like clothing) are marked up by as much as 400% to a benchmark price that only the ignorant and affluent ever really pay, then sold at semi-permanent discounts that still deliver bloated margins (the difference between cost and selling price). This deceptive pricing technique is so common that Massachusetts requires retailers to occasionally display clothing at its nominal retail price to justify calling it “regular price.” Other things (like books) deliver margins as low as 20%. Retailers can affect this cost by sourcing their merchandise and setting prices…but 50% is the general goal.

Rent would typically be a merchant's second-largest expense. As a home business, I only have to rent a UPS Store box and web server space, which fit comfortably into "miscellaneous". One could ascribe a percentage of our mortgage payment to a business expense – that is, if Curio City takes up 25% of our house, then 25% of our mortgage could be considered business rent. But for this discussion let’s just simplify “rent” to zero.

$0.20 goes into my pocket and another $0.032 goes to federal and state payroll taxes. If I had to offer basic employee benefits, payroll and associated expenses would rise to about 30 cents from each dollar.

Shipping costs would come next if shipping fees didn't cancel them out. Small shippers (fewer than 200,000 parcels a year; Curio City ships about 1,500) pay the same retail rates to UPS and USPS that you pay. Medium-sized shippers hire freight consolidators who pass along their volume discounts but charge their clients for warehousing and labor; ideally, the discounted postage plus service fees are roughly the same as small shippers pay to do it ourselves. The biggest players, of course, get very attractive bulk rates that enable them to offer free shipping. Anyway, Curio City spends almost exactly 14 cents per dollar on postage, but I’m treating it as another zero for this expense breakdown.

$0.119 goes to advertising. It would be nice if sales rose and fell predictably with advertising outlays, but they do not. This line item is chronically over budget, and cutting it without harming sales is an ongoing challenge -- I’d like it to run under 10%. Google AdWords gets about three quarters of this money, with Microsoft AdSense taking the rest.

Debt payments are another potential budget-buster that varies according to each company's circumstances. I started Curio City with my own money and then grew it slowly from its own revenues (called "bootstrapping"). Being debt-free is obviously good from a cash flow standpoint -- and remember from my previous post that cash flow miscalculations are the most frequent cause of business failure. Loan payments are non-negotiable costs that (along with rent) often kill companies whose revenues don't meet expectations. I could easily invest $10,000 or $15,000 in improvements (a website redesign, new merchandise, and some contracted marketing services) that would probably kick sales up by five or 10 percent. I could borrow that much from the credit cards that cover my operating expenses. But if the additional revenue that I project doesn't materialize, or if sales fizzle from uncontrollable circumstances like another global recession, I'd have a new monthly demand on my already-fragile cash flow. Being a debt-averse person by nature, I've kept debt to zero. The tradeoff for staying debt-free, of course, is lack of capital for expansion. Most companies borrow enough money to reach their expected potential all at once. The impact of debt service on their balance sheets depends on how much they borrowed as a percentage of their income. Listing it here, after advertising, is arbitrary, but probably accurate for most small businesses.     

 
$0.063 goes into discounting – markdowns, coupons, quantity discounts, and Customer Rewards. This is one cost over which I have almost complete control. 

Bricks-and-mortar retailers have to budget 2-5% to cover shoplifting and damages (“shrink”). That’s another expense that e-tailers escape almost entirely. The lost and damaged shipments that impart a small amount of shrink fit within "miscellaneous".

$0.042 goes to PayPal, Google Checkout, and credit card processing. Large enterprises pay lower rates, and the largest of all do their own in-house payment processing. But for the small players, bankers take a cut right off the top of every dollar.

 
That leaves $0.055 to cover everything else – office supplies, shipping supplies, licenses, taxes and fees, professional services, Internet access, telephone, etc. Last year those miscellaneous expenses ate up $0.013, leaving 4.2 cents for profit. An S Corporation’s profit is owned entirely by its shareholders, who pay the income taxes on it. As the sole shareholder, I pay myself 75% of it as a year-end bonus and let the company keep the rest, but I have to pay taxes on the whole thing.

 
To summarize, one dollar breaks down like this:

•    0.495 to vendors
•    0.232 to me and the government
•    0.119 to marketing, mostly Google
•    0.057 to discounts
•    0.042 to banks
•    0.013 for miscellaneous
•    0.042 for profit (shareholders, a.k.a. me)

E-commerce for Dummies, Part 1: What Is an Internet Store?

This is my 300th post. There are 299 others like it. I’ll wait here while you go back and read them all.

Throwing my wife’s thoughtful suggestions for my “guest lecturer” gig to the winds, I decided to write about something interesting instead. I think her e-commerce grad students will find these three topics entertaining:

1.    What is an Internet store?
2.    Where does a dollar go?
3.    Self-employment: The good, the bad, and the ugly

My only payoff for doing this is the blog posts that I can get from publishing the first drafts. Here’s the first one (865 words): 

 

What is an Internet store?  

 
Besides being a state of mind, it’s mostly ones and zeroes. The muscle and guts of Curio City Online are:

•    Shopping cart software on a rented server;
•    The MySQL database that the shopping cart creates;
•    A Quickbooks company file;
•    A couple of Excel workbooks;
•    A checking account and two credit cards;
•    A Google AdWords account;
•    A UPS box (address) and a cell phone number; and
•    400 square feet of cellar space, more or less, devoted to merchandise and shipping supplies.

But first, the bones: Every business starts as a concept. Unless you have a specific passion, that’s harder to nail down than you might think. Curio City’s concept didn’t come into focus until I’d been in business for several years, and it is still evolving. Read my blog posts tagged “early history” from the bottom up if you want the full story.

Three layoffs in two years persuaded me to make a career change, and a small inheritance made starting a business feasible. My background in writing and editing, bookselling, and computer game development led to retail as the easiest and potentially most lucrative path.

After ruling out opening a bookstore, a game store, or a hobby shop, my search for a niche that wasn’t already owned by either a mass market retail chain or a category-killer web store settled on the vague label of “gift shop”. Keeping the store’s name non-specific would give me flexibility, and I could use the store’s website to test merchandise before making big inventory commitments.

Researching my business plan convinced me that brick-and-mortar stores can’t possibly make money. Rent, loan payments, and payroll (in that order) consume all the revenue. All of the desirable locations that I scouted were far too expensive, and all of the affordable leases were undesirable. I refused to go deeply into debt unless I was sure that it would pay off, and my spreadsheets were adament that it would not.

My wife’s suggestion that I start with the website first and worry about the store later broke the stalemate and led to Curio City Online as a home-based, one-man business. It took the Great Recession to finally kill the idea of opening a physical store (again, read from the bottom up if you want the full story).

Now to put some flesh on those bones.

The skin that Curio City shows the world is a licensed software program called Sunshop. There are a lot of competing shopping carts on the market (wiki has a good list) ranging from free up to $800 or more. The shopping cart’s front end displays products and enables checkout. Its back end is the interface that I use to manage my products, transactions, and customer accounts.

A MySQL database forms the guts under that skin. A web store is essentially a huge collection of data tables that one only need deal with directly when something goes wrong. The shopping cart manages that database.

Quickbooks is the desktop accounting software that organizes all of that MySQL data into a business. Although far from beloved by its users, Quickbooks has owned at least 75% of the small business accounting software market since the 1980s.

The Excel workbooks that I had used for research evolved into inventory and sales tracking tools that I find more useful than QuickBooks. I’d be lost without my Excel files, but this is a personal quirk. Most businesses get by just fine without them.

Cash is the life blood of any business, and that involves banks. Money arrives through a credit card processor, PayPal, or Google Checkout (all of whom take a cut off the top), rests briefly in a checking account, and quickly departs through Mastercard and Amex cards. When small businesses fail, it’s almost always because they lost control of their cash flow.

Google AdWords (and Microsoft AdSense) sell advertising on search engines. I pay a small charge (typically around 25 cents) every time someone clicks one of my ads. “Paid search” drives more than 80% of my traffic so maximizing the bang for those bucks is crucial.

My UPS box and cell phone are the closest thing Curio City has to a physical presence. Every retailer needs a physical address and a place to receive shipments, and a telephone number is just as mandatory, even if you seldom use it.

Most home-based retailers use dropshippers. These vendors (manufacturers, wholesalers, and importers) ship products directly to your customers without you ever seeing them, usually in exchange for a cut of the sale. Dropshippers free you from the need to buy and warehouse merchandise and from the effort of shipping it. But they also limit you to products from dropship vendors, which is why so many small online retailers sell the same stuff. Investing several thousand dollars and half of my cellar in actual, physical inventory gives me the freedom to carry whatever I want, quality control, and all of the revenue. Eventually (I hope) my sales will outgrow my ability to handle them and I’ll have to outsource warehousing and shipping. I’ve blogged about strategies for kicking it out more than once, although the Great Recession put the kibosh on those plans.   

That's essentially all there is to it. I'll be happy to answer your questions about the specifics.

Leading the Googlebot

I expected to slip another $800 behind LY because a big lighted cap sale had set this week’s bar ridiculously high, so I flogged Mothers Day to cushion the damage. My first newsletter and coupon in four months turned out pretty well. 271 emails got two bounces, two opt-outs, 58 opens (which is below my usual 74; mentioning “Mothers Day” in the subject line probably made some recipients ignore the email), 19 clicks (33% of opens is considered very good), and two sales. That’s two more than usual, and enough to justify keeping my Constant Contact account open.

The related Facebook post supposedly reached 104 of my 159 followers. It drew 2 “likes” from the usual suspects (and I don’t mean to sound ungrateful for those charity clicks; please keep ‘em coming!) and two new ones. None of my personal FB friends answered my plea to share Curio City’s coupon. Oh well; with FB you get what you paid for.

Decent Mothers Day traffic narrowed this week’s anticipated $800 slippage to just $500 -- it turned to crap yesterday after a very encouraging start. The intermittent web-hosting woes that started to plague me at this time last year depressed my sales targets over the next several weeks, creating an opening to catch up.

**************

I finally figured out how to do the “301 redirect” that a couple of Ess-Eee-Oh experts told me I needed. Search engines see a URL with and without the “www” as two separate sites. The redirect tells Google that they are one and the same and will supposedly boost my esteem. It felt good to take that silly little chore off my nag list.

**************

My wife slotted me in as a "guest lecturer" for her online e-commerce class. Yup, I’m going to teach some grad students the secrets of wealth and success. I’ll use next week’s post – which, incidentally, will be my 300th – to outline some ideas for these youngsters. At least it won't be more boring trivia about the ups and downs of weekly sales.