Learn and (you hope) Earn

E-retailing entrepreneurs talk about what they’ve learned from the Internet school of hard knocks

If I had only known then what I know now.

It’s a common expression and it may be especially relevant in e-commerce. Retailers who have opened online stores often learn within months, maybe even weeks or days, after their grand opening of all the things they should have done differently.

Lillie McDowell, president of Afriel.com, an online seller of housewares and home furnishings, sums it up: “When you start, it is just you and an idea,” she says. “But then you find there is so much more to selling over the Internet than you ever expected. You really need to plan everything out in detail because making a mistake is very expensive.”

Among common mistakes new e-retailers often make:

—Not having a clear vision of what products Internet customers will want and then getting access to those items.

—Not planning for scale or advanced functionality from the beginning.

—Under-estimating marketing, customer service and product fulfillment requirements.

Before they do anything else, new retailers need to give a lot of thought to product—not just have a vague idea of stuff they want to sell, but a detailed plan of what particular products they want to sell and how that product line will be different from what is already available in the market and from others on the Internet. “You have to come to the market with something different,” says Chuck Hansen, chairman and CEO of TheTrackShack.com. “You won’t make it with a me-too product.”

TheTrackShack sells music tracks online. Its approach is different from what other online music sites sell—and is radically different from anything that an offline retailer could sell. Rather than selling entire songs or albums, as many online music sites do, TheTrackShack.com allows customers to purchase individual tracks, the background music or even specific instruments of a song. For example, a drummer can purchase a song without the drums to practice playing along. Or the drummer could purchase just the drum portion to analyze it.

“We knew we could not just sell music,” Hansen says. “ITunes.com and others have already locked up that market and we knew we had to offer something different.”

No going back

Not only is a well defined product important to creating a strategy, but it’s also important to creating the site itself. “Be sure you have a good idea of what your customers want before you create your platform,” says Afriel.com’s McDowell. “It is often hard to know what the customer is going to want, but it is very expensive to make a lot of changes to your product line later.” Afriel, launched in August 2007, sells such high-tech devices as household motion sensors, automatic light dimmers, robotic vacuums and in-wall monitors.

TheTrackShack’s Hansen agrees that knowing what consumers are likely to buy is necessary before going too far into the process. “A venture capitalist once told me, ‘Make sure the dog will eat it.’ Before you do anything else, make sure you have a product that people are going to want,” he says.

Getting products

The Internet itself offers an easy way to survey consumers’ interests and product needs. “We use the Internet several ways to survey consumer interest in products before making a decision to add the product to our site,” McDowell says. “To name a few, we use consumer reports, forums and product review sites. Knowing what our customers want and researching products before we sell them will always be a top priority.”

Once a new retailer has conducted studies to find out what consumers want to buy, making sure that product is available is the next challenge. New entrepreneurs need to be willing to spend time courting the right vendors. While established retailers understand the importance of product sourcing, entrepreneurs who have an idea of selling something online—and who might not even have any retail experience, which is often the case with online start-ups—may not understand the challenges.

“Getting product was a huge obstacle for us in getting started,” says Tony Quinn, founder of Goballzout.com, a site that sells skating, skateboarding and skiing equipment. “A lot of the small ski shops are putting pressure on the top manufacturers not to sell to online merchants. And the manufacturers themselves are concerned that their products will be represented by the wrong people. The first time through, I sent 50 e-mails to manufacturers whose product we wanted to represent and I got only one response.”

Quinn found he had to go directly to these manufacturers and show them he was a legitimate sales outlet. “You have to talk with authority and show them that you are qualified to represent them,” Quinn says. “You have to show them you mean business and are capable of really driving their sales. Then they’ll listen to you.”

For TheTrackShack, which launched its e-commerce operations in February, the musical connections of Hansen’s partner Jeff Tamelier were critical in getting access to the music tracks. Tamelier is a record producer and lead guitarist who has played with a number of top rock bands, including nine years with Tower of Power. He used those connections to set up meetings with top musicians and music executives to persuade them to sell the rights to their music.

Although some artists may not have originally liked the idea of having their creations cut up and sold in pieces, Tamelier showed them the economics of the business plan. Under that plan, musicians would get paid not only when someone purchased a song, but also when someone bought pieces of it. “We showed them how they could sell one song for 99 cents or sell 50 different tracks from that one song for between 99 cents and $12.99 a track,” Hansen says. “They quickly saw there was money to be made for everybody.”

Developing a developer

Once the retailer has finalized the product lineup, finding a web site developer who can produce a simple and inexpensive platform, but one that is capable of adding features in the future, can be tricky. New Internet retailers say there are a number of low-cost service providers that can get a company online and processing orders quickly. The web sites they offer are basically functional and acceptable for a new company. The problem comes as sales grow and the retailer wants to do more with the site.

Goballzout, launched in January, purchased a simple out-of-the-box web site. While he is not completely satisfied with the results for the long haul, Quinn says he probably would not have done it differently today—only because he could not afford a customized site. The platform he purchased had a $99 set-up fee and his web site provider charges him $99 a month to operate it.

“The solution is basic and gets the job done for a small company like ours,” Quinn says. “But it is limited in its interfaces and it is very difficult to add functions. We can see already that once we start to grow, we’re going to have to move to a bigger and more sophisticated platform. We just can’t afford that right now.”

Quinn fears that the Goballzout.com platform prevents him from adding more sophisticated content. “We tried live video, for example, but the site could not support it adequately,” Quinn says. “We couldn’t get it to work right and we did not have anyone to help us. We decided to take it off until we had the resources to do it right.”

Other new retailers have also found getting the right platform to be a challenge. Afriel.com used trial and error to find platform provider Lunar Pages. “We tried a couple of no-name platform providers, but we wanted greater reliability than what many of them offered and we needed a company that could provide us with 24/7 support,” McDowell says. “We finally found a company that was easy to work with and has hardly any downtime.”

And while going the low-cost template route worked for Goballzout.com for now, TheTrackShack’s Hansen wanted a site that from the beginning could handle the scale and sophistication he envisioned his site having later on. “We wanted something that 30,000 people could jump on and start using right way,” he says. He declines to say how many customers are currently using the site.

Security is important

Having rejected the low-cost startup offerings in the market, Hansen, who operated an Internet software business before selling it and going into the online music business, used his former software connections to find low-cost developers. He found software engineers who could build a sophisticated customized e-commerce web site in India.

“We were able to get the latest algorithms in a customized site, but because it was done offshore, it cost us a fraction of what we would have paid U.S. developers,” Hansen says. “And we still have them on retainer so if we need changes, we call them at 9:30 at night and, because of the time differences, the changes are made by the next morning.”

Another thing Hansen does not like about some of the low-cost products is that they don’t always have top-of-the-line encryption and other security features. Hansen says new Internet companies often overlook security, but security is critical to their success. “To be credible in the market, you have to convince the public your site is safe and protected from hackers,” he says. “You pay dearly for the software and firewalls necessary for a higher level of security, but it is important if you want the market to take you seriously.”

In addition to using advanced security software, Hansen recommends that new companies use the services of companies such as Hacker Safe or TRUSTe. These companies charge retailers to routinely inspect the security of their site and certify that it is secure.

Marketing is a big challenge for many new retailers who often are unaware of the complexities associated with finding affiliate partners, optimizing search engine results and trying to figure out how to spend a limited number of dollars dedicated to promotions.

“Marketing was a huge learning experience for us,” says Goballzout’s Quinn. His company has spent a lot of time identifying affiliate partners that could send potential customers to his web site. Magazines and associations that supported skateboarders, in-line skaters and skiers were a big help.

Time-consuming descriptions

And Quinn says his company had to spend more time on product descriptions than he initially thought in order to get picked up by the major search engines such as Google and Yahoo. “Writing these product descriptions takes a lot of time, but it is really important,” he says. “By using the right words, your product will get picked up by the search engines and you’ll get multiple page listings. Using the wrong words can get you ignored.”

Afriel.com’s McDowell also found search engine optimization was a priority. “Getting the right keywords into your product descriptions is important to convert shoppers into buyers,” she says. “You can pay for clicks and it is not too expensive if you do it correctly and conduct your research upfront. But if you don’t do your research, you may be paying for the wrong words and ultimately the wrong customers.”

And Quinn found that when his company pays for clicks, it has to be very specific about what it agrees to pay for. He will pay to get listed only when a customer types in a specific product and brand. “If we paid for clicks every time someone typed in ‘skateboard,’ our money will be gone very quickly,” he says.

For TheTrackShack, the key was finding the right demographic channels on which to promote the site. Hansen’s company also owns 15 Internet radio stations, including a pop station, a country station, a hip hop station and a Christian music station, which promote the TheTrackShack. He also has done promotions on MySpace and participated in Google AdWords in order to reach the desired demographic.

Customer service is always a big challenge for many new retailers. Explaining to customers that a product they want is not available is hard to do, but Quinn says he has learned that customers will be more forgiving if you’re honest. “If there is a delay in shipment, be 100% honest. And we don’t send formulated e-mails. Every e-mail we send is personalized. People want personal interaction and our volume is small enough now that we can give them that.”

Quinn also says having customer service reps that understand and can help customers sort through products is important. “You have to make them feel confident that it is okay to ask a silly question and know that they’ll get help,” he says.

Look for thick skin

Afriel’s McDowell says getting the right customer service staff is critical. “If you hire outside talent, be careful of the type of personality their representatives have,” she says. “You need people with thick skin who won’t be too sensitive to dealing with difficult customers.”

When interviewing agents, look for people who have call center and customer service background, McDowell says. And since being able to understand and explain the company’s product line is essential, she suggests testing their ability in the interview. She suggests describing the product in detail and then question the interviewee in terms of their ability to comprehend what they have been told and spit back pertinent information.

Customer service has not been a big issue for TheTrackShack. Although the retailer uses an outside company to handle customer calls, because its product is instantly downloaded, it does not get the calls from customers wondering where their shipment is. That cuts down on the complaints and calls, Hansen says.

Shipping issues also provide learning opportunities for new companies. Goballzout.com found it was actually losing money on shipping at first because it was not estimating correctly the cost to ship product. The standard chart provided by UPS that lists weight and box size underestimates the actual cost to ship a product, Quinn says. He had to re-adjust all the shipping fees. Quinn suggests talking to retailers that have product of a similar size and weight to find out what they are paying before setting fees.

Afriel had other problems with shipping. While the company does both direct shipment and uses drop shipment, it was often difficult to track the status of product that was being drop shipped by suppliers. And there were other problems. “You need to make sure you have enough product on hand. Often you need multiple distributors for one product so that if one is out, you can call someone else. This is especially important around the holidays,” McDowell says.

A learning experience

Whether the issue is shipping, product availability, security or customer service, the issues are often more complex than what most new retailers realize. A lot of planning, thought and talking to others experienced in setting up e-commerce web sites is required before entrepreneurs can turn their ideas of something they want to sell into a successful business.

“At the beginning, everything appears to be a lot easier than the actual execution turns out to be,” says Goballzout.com’s Quinn. “It’s a huge learning experience.”