Are you thinking about setting up your own online store selling branded products? Great! Have a chat with Itomic! But know what you’re getting into, and how to give yourself the very best of success in an increasingly competitive business environment.
Not so many years ago the idea of being able to have your own retail outlet, selling to an international audience for an initial outlay of as little as a few thousand dollars would have seemed ridiculous. Thank you Internet! But with the ying comes the yang, and so it is that the Internet can be at once the best friend – and the worst enemy – of the online retailer.
So what’s the crux of the issue? In a nutshell: perfect – or near perfect – competition. The term “perfect competition” is straight out of standard textbooks for anyone studying Economics (I did, way back in the Eighties!). It is used to describe a market, industry, or business environment, that is the polar opposite to a monopoly. Wikipedia says that “In neoclassical economics and microeconomics, perfect competition describes a market in which there are many small firms, all producing homogeneous goods…. Because the conditions for perfect competition are very strict, there are few perfectly competitive markets.”
Very strict they may be, but let’s see how well our humble online store, selling branded goods online, fits the definition. Confession: for the purpose of this analysis I’ve allowed our online stores to be “the producer” where in fact they are “the retailer” (i.e. the bridge between producer and consumer), but given that they represent the public face of the producer, I’m confident that this substitution is permissible, derision from my practising Economist friends notwithstanding.
Infinite Buyser/Infinite Sellers
Infinite consumers with the willingness and ability to buy the product at a certain price, Infinite producers with the willingness and ability to supply the product at a certain price.
Infinite is a very big word, but if we’re so bold as to replace “infinite” with “global” (which seems reasonable given that not a lot of interplanetary business goes on just yet), then the ability to shop online is one that can be enjoyed by anyone with an Internet connection of any sort (PC, mobile phone, Xbox, etc.) and not much more than a dollar to spend. So that’s a “yes” to (effectively) infinite potential customers. It’s a “no” to infinite producers, except to say that the chances are good that, on a global scale, you’re not the only one selling that branded product!
Zero Entry/Exit Barriers
It is relatively easy to enter or exit as a business in a perfectly competitive market.
If we examine this condition in terms of the ease with which it’s possible to start and run a business, then conditions are continuing to improve on a global scale. This BBC News article from 2008:
http://news.bbc.co.uk/2/hi/business/8245392.stm.is written in response to the publication of this country-by-country report card from the World Bank:
http://doingbusiness.org/economyrankings/ (Spoiler: Singapore ranks #1 as the ‘easiest’ place to do business, Australia is 9th).
Perfect Information
Prices and quality of products are assumed to be known to all consumers and producers.
*If* you can sort out the guff from the good stuff, then ‘Perfect Information’ is where the Internet excels like no other system before it! Counterfeits aside, the quality of branded goods is relatively well known. If you buy a genuine product with a specific make and model (or the latest book by your favourite author, or a movie on DVD), you know the quality will be the same irrespective of where you buy it from online (or offline, for that matter). But what about the price? How well known is that? Well, even a simple Google search on a particular make and model will start to give you a general idea of typical asking prices. But some online services such as www.shopbot.com.au and www.staticice.com.au go one step further and actively collect prices for the same products within their own databases for easy comparison. Then of course there’s eBay, which will list products by price, starting with the cheapest. In summary: if you’re selling a brand name item and you’re the most expensive, the Internet is not a good place to hide this information!
Transactions are Costless
Buyers and sellers incur no costs in making an exchange.
Study after study has demonstrated that zero (or at least fixed) shipping costs are an excellent way to sell more products. If shipping costs are variable, and are only discovered some way down the checkout procedure, then this is the point most would-be customers stop checking out. Sure, the actual/real cost of shipping is buried in the product price, but the apparent cost (i.e. over and above that of the item being purchased) to the buyer is zero. Our favourite online bookstore www.bookdepository.co.uk states front and centre that they offer “free shipping worldwide on all our books”. If we add digital branded products into the mix, then the Apple iTunes Store (or any site offering digital downloads of any sort) have virtually zero cost of “making an exchange”, i.e. of supplying the file(s). So from the Buyer’s perspective there is no cost for making an exchange (i.e. a purchase) except for your time and access to an Internet-enabled device.
Firms Aim to Maximise Profits
Firms Aim to Maximize Profits – Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
Although we doubt many firms are actively monitoring “where marginal costs meet marginal revenue” (this an outcome of profit maximising behaviour rather than an “in your face” KPI), it’s not unreasonable to assume that most businesses aim to maximise profitability, irrespective of how well they actually achieve this.
Homogeneous Products
The characteristics of any given market good or service do not vary across suppliers.
Already asked and answered in the “Perfect Information” section. But it’s worth re-emphasising that we’re talking about branded goods only. All bets are off if you’re selling a cake you baked this morning!
So we can see that selling branded goods online is very close to the definition of perfect competition. Given that perfect competition is the other end of the spectrum from a monopoly, and given that monopolies generally have a license to print money (stockmarkets love monopolies, consumers tend not to), then it follows that a perfectly competitive market isn’t a place to make mega-profits. This of course doesn’t mean that you can’t make a long-term living – just don’t expect to make a long-term killing.
But wait, there’s more. There’s another ‘gotcha’ to be aware of: the manufacturer/producer deciding to go into retail themselves, i.e. deciding that their long-term viability is better served by cutting out the middle-man (the retail outlet) and selling direct to the public from one or many warehouse locations worldwide. Historically producers have relied on their retail partners (nationally or worldwide) to be their customer-facing sales force, i.e to reach and service customers in ways that couldn’t easily be achieved by the producer. But today, globalisation means that physical location in the world is less and less of a barrier to doing business, and it’s not just the retailers who’ve cottoned on to this.
So what’s an online retailer of branded goods to do (if they want to make more than just ‘a living’)? In short: think and act smarter. Not once, but always. Here are our top tips for success:
- Try to arrange exclusive deals with your suppliers – at least for your country – for as long as possible.
- Live and breath efficiency. Look at every opportunity to get your costs down (e.g. buy in bulk, negotiate better rates with your suppliers). If you’re doing this more effectively than your competitors, then you’ll make better profits if you’re both retailing the same product at the same price.
- Consider selling non-branded goods too, e.g. locally sourced produce that you can ‘rave’ about to your customers as “the best kept secret” or “the next big thing”
- Ensure that you’re the very first to stock new ranges, i.e. make decent profits early before the horde follow your lead and start discounting.
- Shout about what your doing, early and often, and more than the rest. Newsletters, blogs, twitters, facebook, etc.
- Be in touch with your numbers. Know which lines are most profitable and which are selling well. If a sales are falling on a certain line at a certain price, chances are a competitor is selling it for less and/or shouting about it more. It may be time to throw that line in a sale, and re-invest the revenue into hot-off-the-press or non-branded products.
At the end of the day, we’re all consumers, and we all want stuff. So there’ll *always* be demand for people to help sell stuff to other people. So the challenge is to know what you’re getting into, and keep an eye on the wood, not just the trees, once you’re in.