Strategies that win: How to be successful in e-commerce
16. Jan, 2010 
5 Comments
Starting an ecommerce business can be hard. Since I often get requests about starting ecommerce store, I thought I’d write down what I tell all these prospects.
Before I go in to what you need to be successful, let’s define some terms.
Resources: I’ve defined resources here as the amount of time or money you have. If you are starting a part time business with a few grand in the bank, you’re starting with low resources. The more time you have and the more money/people you have, the higher your resources.
Margins: How much you make per sale. With high margins, you make a high percentage of the sale price, and vice versa for low margins.
Demand: How much pull there is for your product. E.g. The size of the market.
Competition: Who you’re up against.
You’ll notice that the first two are internal (margins are set by the market, but you have control over them), and the second two are external factors.
Combine the first two, and you’ve got your internal limitations. Combine the second two, and you’ve got the “pull” of your product.
Let me explain “pull” a little more. If you were the only outlet that sold Nike shoes in the world, you would have tremendous pull. There’s massive demand, and you would have no competition. If you were to sell no name digital camera’s in the current market, there’s not much pull at all because of the massive competition. You can find this out using the Adwords keyword tool. Be careful to be very very specific.
If you’re starting an ecommerce business, join me in this exercise.
Classify yourself from 1-10 in each one of the metrics above.
Now consider these charts.
margins-resources
demand-competition
To be successful, I believe you need to match up (or better) in both charts.
That is, if you have low resources, you need high margins and low competition.
If you have high resources, you can deal with competition as long as demand is high.
If there’s high competition, you need to have high resources, or target a specific niche of the market.
The idea of the charts is that it lines up your internal situation with your external situation.
And a quick disclaimer: In the words of someone much wiser than me “You can quote me an exception, but I’m giving you the rule”
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I think the 2 x 2 charts are very helpful and make a lot of ense. Perhaps the most difficult part, however, is to determine what qualifies as “high” and “low” to know where you fall on the matrix.
A great follow-up post would be basic step-by-step guides on how to determine the amount of competition and typical margins in a niche.
Hi Emma,
Good point, and I did think about what qualifies high and low while I was drawing the diagrams.
The truth is, it can’t be exactly quantified. Individual markets, circumstances and situations trump any generalizations that can be made.
The main reason I wrote this article and drew these diagrams is that I am contacted by a lot of solo business owners that want to do ecommerce, and don’t understand what’s involved in operating at tiny margins.
To give a few guidelines:
- If you’re packing items yourself
- If you’re doing all the customer service yourself
- If you don’t have lots of cash to invest
You need to be able to sell at high margins.
Cheers,
Luke
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