So, You Want to Start a Business II
Contents
Types of Services Businesses. 14
Products
If you are selling products from a physical location, there has to be a local need for the products. Few snow shovels are sold in Miami, Florida. You have to pay rent, unless you plan to sell out of the trunk of the 1958 DeSoto you stole. You have to pay for utilities and may have to hire someone to take care of the store over lunch. The big expense is the inventory of things to sell.
When you buy something to sell, three things can happen: Somebody buys it, somebody steals it, and nobody buys it. Only one of those is good. If your supplier can ship to you quickly, then you don’t need as much inventory. A new furniture manufacturer wanted to offer ten leather color options, and planned to buy a large number of hides directly from a tannery because the volume discount was significant. He had to spend $100,000 at a time, and the tannery couldn’t resupply for two months. A local distributor’s prices were 30% higher, but the distributor could deliver in one day. The new company needed cash for machinery and employees, and made the smart decision. It gets paid for the order in advance, then buys the hides locally.
The carrying cost of inventory is followed closely by manufacturers and large retailers, but rarely by small retailers. The first cost is the cost of money to buy it, usually bank loan costs. Even if you don’t take out a loan, the money still has a cost because you can’t use it for anything else. Figure at least seven percent a year of the inventory’s value. The cost of space to keep the inventory, the cost of security and insurance for it, and the risk of theft, expiration and obsolescence also add up. A low annual carrying cost is about 12% of its value. It’s safer to assume 15% or more.
Internet
Of course, you don’t have to sell only to locals, or even in your own country, if you sell over the internet. Here’s where things get tricky. You can operate with or without inventory. Yes, you can sell things you don’t have. The business model is called Drop-Shipping. A good primer on the basics is at https://ecommerce-platforms.com/ecommerce-selling-advice/setup-drop-shipping-ecommerce-website. Low up-front costs, you get the order and payment, and send the money for someone else to ship the item. What could go wrong? Lots of things.
You have no control over quality, no control over delivery time, and still might have to deal with taking returns and shipping them back. The model is so easy to set up that your great idea to sell memorabilia to Left-Handed Lutheran Bisexual Bowling-Team Captains is probably already taken. The customer still has to find you in the midst of perhaps as many as three million e-commerce websites outside China, and perhaps another three million in China.
Successful e-commerce startups deal in mid-range-profit items, such as vitamins and supplements, or toys, games and baby products. They establish “buzz” by posting in their markets’ social media and forums. They choose whether to differentiate themselves based on price, quality or service. One has to be emphasized, and don’t ever try for all three as a startup. The old engineering adage - Good, Quick, Cheap, pick two – still applies.
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