All posts by Tao Roung

It’s Not All About Price

I recently had a discussion with another redditor about pricing.  Specifically, someone asked what kind of margins other e-commerce owners had and what their markup should be. Instead of answering, the redditor posted that they should stop focusing on price as a number and the only way to compete and as a reflection of their brand.

I don’t disagree with that – it’s actually a decent way of looking at it.  However, it’s also worthwhile understanding that when you develop your business model, it’s not just about deciding on where you want to position yourself (and thus the price) but also the underlying business industry you are working in.

It’s even more important to understand this and your business resources when developing your business.

Let’s give an example – you sell Widget A. If you and your competitors are all selling Widget A, then you cannot afford to price yourself too far off from your online competitors. If they sell it for $10, it’s really, really difficult for you to sell it for $50 or $30. You might be able to pull off $20. Part of how much you can afford to price yourself away from them is based off how knowledgeable / fractured your market is. For example, if a significant portion of your market reads 2 magazines, and your competitors all advertise there, you can’t be too far off. If, however, your market is extremely fractured, then you can afford to price yourself at a higher rate.

Developing a brand will allow you to price at the $20 range and get customers – the number of customers really depends on the demand curve.  How brand (in)sensitive are your customers? How brand loyal?  If you sell sugar – the answer is almost negligible.   If you sell high end clothing, the answer is extremely high.

In addition, you need to take into account the various services and your resources – a high price generally requires a high level of service.  That level of service generally dictates a higher cost in time and money.  If you are a one man show with very little money, you might not be able to handle a lot of business – so your markup better be really, really good.  Again, at the higher ends it’s viable at the few hundred dollars and more range. If your product is only selling at $30 but that’s a 300% markup, things might get tricky.

In addition, there’s also the question on time.  Getting a $50 customer will likely take longer than getting the $10 customer.  In e-commerce terms, it might be the difference between a 1% conversion rate and a 0.01% conversion rate.   When traffic is hard to get, that 0.01% conversion rate might be a killer.

Business Valuation

For a number of reasons I’ve had to discuss / review business values.   Based on that, I thought I’d discuss business valuation in more detail.  Let’s start with the most common valuation method which is the earnings valuation method.

The Basic Calculation

The basic calculation was calculated as follows – net assets multiplied by the earnings multiplier. Or written out:

(Assets – Liabilities) + (Profit  x Earnings Multiplier) = Business Value

Things however get complicated for a number of reasons.

Assets

Assets for most e-commerce businesses include the stock, furniture, website and the accounts receivable amounts.

Note, however that things can get complicated if the company has decided to purchase assets like furniture outright or has already applied depreciation.  In addition, you’ve got t o assess the value of a website which can be tricky.

Goodwill theoretically should be there. but Goodwill is often disregarded in cases like this.

Liabilities

Liabilities are generally easier to do.  You have Loans and Accounts Payable to worry about, but not much else..  Shareholder loans can be tricky as you need to assess what the loan requirements are – many companies have a substantial shareholder loan but no documentation attached to it.

Profits

Profits at first seem pretty simple – just take the Net Profit right? However, it’s more complicated than that.  When selling, you want to include things like the Owner’s draw and discretionary expenses (Add Backs) that might have been taken out of the Net Profit that are not necessary to the running of the business.

Often, especially with smaller companies; a number of discretionary expenses are added to lower the tax burden.  These costs shouldn’t be part of the actual profit and thus, the sale price.

Profit Multiplier

How about the profit multiplier? Well, this is tricky.  The multiplier can be as low as 1 and as high as 10 depending on the industry and the growth (expected or historical) of the company.  This is a harder number to find though business brokers or business sites like BizBuySell, etc can be a good place to start.  Generally, multipliers of 2 to 3 are quite common for profitable businesses.

Other Factors

Are there other factors to take into account? Yes, a ton.

  • Growth potential of the company can drive up the profit multiplier
  • A history of profitable earnings can increase you general profit, not to mention your profit multiplier (if it’s shown to continually increase as well)
  • Documentation and processes – a well documented business with policies & procedures that make it turnkey can significantly increase the value of a company
  • Seller financing (i.e. you being willing to be paid out from the profits) can increase the value of the company
  • Market share / ease of entrance into marketplace.  If you are in an industry that is hard to enter and/or have a substantial market share (i.e. market leader); you can often command a higher premium for the company

Other Valuation Methods

Lastly, let’s talk other valuation methods:

  • Book value (what’s it worth on paper?)
  • Liquidation value (great if the company is liquidated and/or not an on-going concern)
  • Debt-paying ability / Free cash flow (how much free cash does the company provide, thus allowing the business to be bought for that value)
  • Capitilzation of earnings (basically, figuring out the return the buyer can expect)
  • Revenue multiple (for high growth companies, this could be viable if they are not making any profits).

At the end of the day, there are a ton of methods of valuing a company.  It’s worth noting why a company is being sold too – if you approach a company ‘blind’; unless the owner was intending to sell the company; you are likely to pay a premium compared to one that is actively looking for a buyer.

Crowdfunding, Shareholders and Oculus Rift

So, this is going to be a somewhat meandering post about branding and managing expectations, especially dealing with things like Kickstarter and ownership.

Oculus Rift

Let’s summarise this quickly – Oculus Rift is a tech company that is building a VR interface which from all reports is really good.  Oculus Rift went to Kickstarter to get further funding and they received a ton of cash – nearly a million I believe compared to their $100k ask.

This means they had a lot of stakeholders (i.e. people who have an interest in the company) but not a lot of shareholders (i.e. people who own a part of their company). They recently sold the company to Facebook for a cool billion.  Yeah, b not m.  The shareholders made a lot of money this way, but the stakeholders didn’t.

Since then, a lot of people have grown angry with them – going as far as threats on the owner and his family.

Shareholders & Stakeholders

Shareholders have a tangible stake in your company.  They physically own a part of your company.

Stakeholders on the other hand just have an interest in your company – emotional or contractual (e.g. suppliers); they have an interest in your company but don’t have a say in how it’s run (technically).  You can ignore your stakeholders, but as per Oculus Rift, there will be lashback.

Branding & Public Relations

Your job as the marketer in the company (and you could be CEO too for all I care, you are still doing marketing); your job is to manage perceptions.  Much of the anger that has been directed at Oculus Rift is because they  never attempted to manage perceptions beforehand – the news was rather startling and made many of the stakeholders feel betrayed.

In addition, you should understand that crowd-funding systems like Kickstarter are still new in execution.  Few people who take part in the system have an understanding of what is required in terms of communication and branding.  The closest relation that I can think of is the way non-profits manage donations from their supporters.  They don’t control the non-profit, but without the donations the non-profits are nothing.

Manage expectations, manage the idea of what say people have and can have, where you might be going (the vision / the brand!) and you can avoid or at least decrease the issues you might have in terms of the backlash.  Don’t and well… you have another Oculus Rift.

 

More than SEO

When you are building out an e-commerce site, you need to work on more than just SEO.  When you are building out a site, you need to look at not just traffic generation but traffic conversion.

So, let’s talk about the various ways to deal with traffic generation:

  • Search Engine Optimisation
  • Search Marketing
  • Banner Advertising
  • Paid Traffic via social media
  • Social Media generation (organic)
  • Public Relations
  • Blogging & Guest Posting

Lots of options.  Here’s some basic areas to look at for traffic conversion:

  • Design
  • Usability
  • Reviews
  • Trust signals
  • Peer validation / social signals
  • Shipping options / lack-of
  • Payment Options
  • Guest checkout

 

Magento Developers – Module Reviews

Continuing onwards, I’m going to discuss the modules I’ve used and the developers involved in it:

Aheadworks:  Very, very good modules.  I haven’t actually contacted them for help because their modules just work.  That simple.  My go to guys if I have to buy / get a module because their modules just work.

Fishpig: I’ve only used their WordPress module.  IT works most of the time till it didn’t.  Then I paid for support – and got very little.  Weeks before they replied to try to fix it, when they ‘fixed it’, they broke the production site and never sent what files they fixed.  HORRIBLE support – stay away.

ManaDev: Decent modules, code is a bit sloppy though.  Support is pretty good, though when conflicts happen they will stop providing support, so expect to have to use your main developer to find the problem.  Overall, okay.

Mageworx: Their tweaks module is good.  Overall support isn’t bad,  though I wish they’d help out a bit more when there are conflicts.

OneStepCheckout:  Good checkout, but has a lot of conflicts that happen.  However, they are generally very good with support and will help out with conflicts if it has to do with their module (and sometimes outside of it).  Still the best OneStepCheckout option there is out there though.

Sweet Tooth: I got in when they were selling the module at a fixed price.  Support is decent, though every upgrade means a ton of bugs.  Their go-to support request is ‘update to latest module’; which then creates even more bugs so be careful.  The module itself is decent.

TinyBrick: Another system that just works.  No comment on their support because I haven’t needed it.

Webtex: Great support, love their gift card module.  Works very well though occasional checkout conflicts.

Magento Developers – A Review

Running a webstore on Magento, we’ve had to develop quite a bit of custom code as well as using various modules.  I’m going to tackle the custom developers first, then go on to module developers next:

Collins Harper –  these are my main developers.  I use them on a very regular basis.

Pros: Some great modules that just work (their local pickup, Canada Post Pro and gateway modules).  Coding is good, fast and reliable when custom development is required.  Generally, they solve issues even other developers have problems with.

Cons: More complicated modules like the CP 2.0 modules have occasional bugs and require more maintenance.  Can be slow in getting to you due to high demand for services.  Also, their hourly rate is up there – though it’s often balanced out by efficiency of work done.

Hatimeria: I used them to do the redesign of the website as well as providing some basic coding services during the site redesign.

Pros: Cheaper than CH.  Coding is generally okay, not great but serviceable.  They have a good designer they work with.

Cons: Very busy – I haven’t been able to get onto their docket for more work in a while.

Morality and business

One of the things that you need to consider when you are a business owner or  entrepreneur is deciding how far you’ll go.  Where is your line? Don’t think it matters?

Illegal Businesses

Would you take part in illegal businesses? Say selling drugs? For the vast majority, that’s a huge no.   For that reason, and because frankly I know little about this side of the world; I’m just going to stop here.

Grey Businesses

How about those that are arguably illegal.  Or mildly illegal.  For example, would you sell alcohol online? How about drop-shipping it? What about products that might be illegal in another country?

For example, the Canadian pharmaceautical business does a lot of sales into the US – even though it’s technically illegal to do so.  Except, the legality is in the US – it’s illegal for you to sell to them, but if you are Canadian, it’s perfectly legal here…

You probably are asking yourself, why bother? But the grey market businesses are incredibly profitable – because few people get involved in them, the markups and demand i often unmet.  You could make a lot of money that way – and I know a number of people in Vancouver who have.

There are obvious consequences to all this – for e.g. if the US got really annoyed with you, you might have to avoid traveling to the US at all.  See Mark Emery for one.

Legal Businesses

It’s all good right, no considerations on morality there? However, there’s something to think about when you deal with returns, refunds, shipments.   When do you stop being nice and when should you hold the line?

What if it’s an innocent mistake on the customer’s part?

On top of that, there are things that are legal but might not be moral.  If someone doesn’t defend their trademark, is it wrong to use it? What about buying products and re-selling them; even against the manufacturer’s wishes?

Decidng where your line is can be difficult, since often wherever you draw the line; there’s going to be money on the  other side of it, but it will help.

Choosing the right product

Now that I’ve been in this business for a while, I’m realising more and more how important it is to choose the type and kind of product you sell carefully.  There are a few reasons for that, but here are the major factors that will affect your performance:

Market Size – how many people demand the product

Fragmentation of market – how easy is it to get hold of these people? A market may be huge, but if your market is highly fragmented, it’ll be much harder to market to and devleop

Average Order Value (Product Value) – all things being equal, a higher value / priced product will generate more revenue than a lower priced / value product.  Go too high though and you’ll see conversion rates drop, but within the $100 – 200 range seems to be pretty good from hearsay.  Our experience has shown that if your products average around $40 – 50; you’ll almost double your average cart value compared to products in the $25 – 50 range.

Competition – not much required to discuss here

Uniqueness – if you have a product that others can’t find / locate / buy anywhere else, you have a much higher conversion rate than others.  This is great when you can manufacture or otherwise sole-source a product which has high demand and often the reason for breakout successes fir small companies.