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Getting Started: E-Commerce

Charles Cain - Jun 24th 2010

Budgeting for success online

Making the most of your capital

What does it take to "make it rain"?

This year’s World Tea Expo was awash in entrepreneurs planning new tea business ventures. I had the privilege of presenting to about 200 of them, and talking on the show floor with many more. The simple truth is that there is A LOT of money to be made in tea, but if it were easy to find the perfect path, everyone would be doing it. All of these conversations showed me the need for a series of articles on how to get started in the business. This second installment covers launching an E-Commerce website. (The first installment was Packaging Strategy.)

Let me preface by saying that these are simply my opinions. Before joining the tea industry I was responsible for the strategic design and technical development of a number of E-Commerce websites ranging from small-business sites on a shoestring budget up to enterprise-class portals costing hundreds of thousands of dollars. While I’ve played this game for years, there is much I don’t know. As importantly, while I can give you some advice on best practices, sometimes forging a new path entirely is the best way to succeed. But for all of you that are looking for a little guidance on where I would start were I to launch an E-Commerce website; this is for you.

Whether you consider E-Commerce to be your core business or simply a side offering to a tea shop, every tea business SHOULD have a website. If your core business is not the internet, at least make a small investment so that as you land customers who are visiting from across the country you can continue serving them after they’ve gone home. Also, consider all the people who receive your teas as gifts but don’t live near your shop. A simple website won’t let you take over the tea world, but it will help you keep the customers you earn.

If I were starting a company with a focus on E-Commerce, I wouldn’t want to do it without at least $125,000 in capital and the ability to work without paying myself for six months or more. In round numbers, I’d budget $50,000 for the initial website, $50,000 for operations (overhead, product and administrative costs) and $25,000 for keyword advertising. More money is always better, but I’d feel reasonably confident going to market with this kind of war chest.

At this point many of you will insist that an E-Commerce website can be created for a fraction of $50,000. This is very true. A bicycle will get you from point A to point B. A scooter is motorized and therefore faster. An economy car offers all of the core functionality that anyone really needs. Why is the average car in the US a four dour mid-sized sedan sold for $28,400? Why do many Americans choose to pay more than $50,000 for transportation? Customers don’t choose products or services that offer only the minimum functionality. We like luxury hotel rooms, stores that are beautifully decorated and merchandised, and E-Commerce sites that are beautiful, functional, and easy to use.

The big-boys wouldn’t invest hundreds of thousands in ongoing web design and functionality improvements if a five or ten thousand dollar site would deliver just as many sales. If the leading tea websites would cost six figures to replicate (and most of them would), do you really think you can beat them at their own game for 10% of that?

OK, so the reason for having a big budget is pretty obvious, but what if you don’t? That doesn’t mean you should give up. The more money you have, the better your odds of success. Give me a million dollars and I’m 95% sure I can give you the highest grossing tea website in a couple years. Give me $25,000 and I’m 20% sure I can do it. It’s not impossible; you just have to nail the design and user interface on the first try.

Before I explain that, let me make a couple statements. The time when a new website would attract customers just by existing is LONG GONE. If all you do is launch a new E-Commerce site into cyberspace you’ll be lucky to make one sale a week even after six months in business. The most effective way to drive traffic is keyword advertising. Google’s AdWords is the king of this industry. Your advertisement will appear to customers who search for related terms like "Sencha", "Green Tea" or "Glass Teapot". You bid how much you are willing to pay for each person that clicks the link to your website. The beauty is that each customer is searching for a product that you sell, and you only pay if they actually click to your website.

Here’s how it would work: Let’s say you spend $25,000 to launch your website (including everything from shopping cart to graphic design, inventory, pictures, and hosting). You then invest $1,000 in keyword advertising and buy 2,000 targeted visitors to your website. If you’ve nailed the experience on the first try, and 10% of those visitors spend $30, then you’re good to go and can grow organically.

The math works out like this: Suppose you choose the keyword "Sencha" and pay $0.50 per click to your website. 2,000 prospective customers click the link costing you $1,000. If 10% purchase, then you’re paying $10 per paying customer. Suppose the average customer spends $30. If the product costs you $10, and your cost of fulfilling the order (labor, packaging, overhead, etc) is $10, then you broke even on that order. Now you have a new customer, and when they re-order you make a $10 profit.

If, on the other hand, only 5% of the visitors to your website choose to purchase, then you cost of new customer acquisition doubles to $20 and you loose $10 on each purchase. You then need to invest a couple thousand dollars to improve the design and functionality of your website and another $1,000 in keyword advertising to bring more customers. The process repeats until your conversion rate (the percentage of unique website visitors that actually makes a purchase) is high enough to cover your cost of product, fulfillment, and customer acquisition.

How do you know what to improve in order to increase your conversion rate? My first suggestion would be to study successful websites like Adagio.com. Adagio has over 150,000 unique visitors per month and is one of the highest rated E-Commerce sites on the web, much less the tea business. Take a look at the simplicity and ease of use of the interface, as well as customer service offerings like customer reviews, live chat, and same day shipping.

In addition to studying the competition, you NEED to have comprehensive traffic reporting. The best solution on the market is offered by Omniture, and is very expensive. Google’s free offering, Google Analytics, probably has enough to get you started. You need to know where your customers are coming from and what they do when they get to your site. A good reporting package will tell you which links are clicked most often on each page of your site, where the customers are spending most of their time, and which pages the customers are most likely to leave on. If most customers are leaving when they see the cost of shipping, you need to raise your product cost and offer free shipping. If most customers leave on the credit card page, maybe your site doesn’t appear secure enough and you need to contract with MacAfee Secure or another verification service. The traffic reporting is only interesting if you have a decent amount of traffic, but it will tell you EXACTLY where your strengths and weaknesses are.

That’s the process. The exact recipe for success depends on your brand, your target customer, and you. For more information on creating a strategy that will succeed in a sea of competition, read “So you want to sell tea online”. Be innovative. Be creative. Good luck!

For a continuation of the discussion, read E-commerce Q&A Part 1 and E-commerce Q&A Part 2: Launching for under $10K.

Adagio Teas
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Voice your opinion about this article on TeaChat!
Jun 24th '10 8:36
"E-Commerce" is the second installment in a series of articles on getting started in the tea business on a shoestring budget.http://www.tearetailer.com/article_70.html

"E-commerce Q&A" is the first in a series of articles answering common questions regarding selling tea online. http://www.tearetailer.com/article_105.html

"Launching for $10K or less" covers how to get started on a shoestring budget and what you'll find when you get there. http://www.tearetailer.com/article_106.html

Would love to hear your thoughts, and especially any stories of success or failure creating and implementing E-Commerce strategies.
Charles
Chicago, IL
Jun 24th '10 19:14
Some good advice and a pretty fair assessment of the subject.
I have to preface my comment saying that when I don't drink tea I do websites for a living, including e-commerce. Here are my 2 cents:

• Service wise "good" "fast" and "cheap" and you can only pick 2 is very true.
• you might want to read my article "What determines the cost of the website" http://www.antemeridiemdesign.com/blog/ ... a-website/ or look into other client advisory articles.

• familiarize yourself how web looks in 2010 Your site might not win design awards but is has to look professional. CartedUp gallery features some of the best e-commerce sites. And there are of course others.

• What if you are a small vendor don't have a large budget? The first thing you should have is a marketing plan. Do not think that your cousin's friend who took some classes in a community college can make you a fine website. And no, you can't do it yourself either. Think of your website as an investment as opposed to an expense. Look carefully at portfolios of different companies, hire people you like working with!

And finally if you have a question feel free to pm me.
jazz88
Nov 11th '10 5:39
Start up costs- after reading your article i have to say i am glad i jumped into the website before reading it.

I would have had a heart attack reading the numbers. I do agree with most of what you are saying, especially the "you better have enough money for 6 months part".

In my opinion that is the biggest commitment that a person makes. At that point you have put all of your eggs in one basket but it will take months for traffic to build and to find those magic AdSense words.

With little or no orders to fill you are stuck blogging, posting on FB, Twitter, etc. but the stress would drive anyone insane.

My family and i just launched our online tea store (a long time dream of mine) and although i wanted to quit my job and focus on tea 24/7 i decided to stick with my job (flexible hours, great pay) and at least wait until we made some sales and gained some traction.

Initially i wanted an interactive "Second Life" type of website and when i found out the price tag i almost fell off my chair. It was more expensive than opening a brick and mortar shop!

Right now i am banking on making a great first impression, giving out samples and counting on word of mouth. At this stage thee is no way i can compete with the big boys. I just need to find my niche and focus on developing loyal customers.

Thank you for sharing all of your insights.
SkiboTeaHouse
Nov 12th '10 10:55
Great article! I can't say I can afford following all the advice, but I've learned a lot from Charles' article and it's good to be aware of a lot of things mentioned in the article. I have a couple of tea friends who once got into tea business but then backed out soon. Soon after they started it, they realized loving tea doesn't always make it easier for them to do tea business.

My stand is somewhat similar to that of Skiboteahouse (but I think Skibo does much better on website than I've done :D ). I run my tea business on part-time basis and very small set-up, because I don't want to carry much stress of having to make certain profits or paying back a loan. At initial stage, not suffering much from financial loss already means success to me. Besides, I love my day job too and don't think it's totally irrelevant to tea :D Like Skiboteahouse, I mainly rely on giving samples and word of mouth and I agree that finding a niche and gaining returning customers are very important. There are so many different types of tea and tea wares. Most tea drinkers shop at multiple stores and each store has a unique collection of tea.
gingkoseto
Boston, MA
Nov 12th '10 12:44
As a tea drinker I would like to support smaller online vendors and try their product but in reality I have never actually done it (so far). Mostly because when I come to such low budget websites they look very generic and as a tea lover I don't see why exactly I should buy from them and why they are different/better than anybody else.

In my experience many startups come to designers/developers utterly unprepared: they don't know their budget, # of products they will be selling, have not thought about shipping, taxes, etc. Instead they often have a huge wish list of fancy interactive features and when they find out the price tag they sometimes "fall from the chair".

Before you ask a design/development company for an e-commerce site estimate you should:
• know how many products/product groups you will be selling
• have a reasonable/realistic budget (if you want to know specific numbers feel free to pm me)
• understand that any additional interactivity = more expensive
• text/copy (such as product descriptions), taxes, shipping, return policy - is your responsibility.
jazz88
Dec 17th '10 15:59
GingKoseto- Thank you for the compliment, my sister will appreciate it.

I believe that anything is possible and being an entrepreneur requires the ability and skill to come up with solutions given a set of limitations. With a website the biggest limitation is knowledge of what it takes to set up and run a website.

As with any business venture despite the best research there will always be "surprises" that you did not read or hear about from experts or friends.

Jazz shares some basic information needed to get a realistic quote, while that is a good rule of thumb it still does not prepare you for what it really means.

While i searched for a potential web designer i had all of the info needed (how many products, categories, info pages, etc.) and it was still a hurdle to convey my vision of what i wanted my website to be (not for lack of communication skills or inability to put to words what i want). Bottom line was that i needed my designer to understand my product to truly create what i envisioned.

Ultimately, people need to find a way to do it so that the final product is something that you can work with. If that means sketching each page then so be it. Otherwise you WILL end up with a generic website that lacks warmth and your personal stamp and it will make it very hard to get that "niche" that we are seeking.

What i really wanted to share is that we should not dismiss our own abilities to create what we want.

Jazz warns against using a friend who took some community college classes because he/she will not make the cut. I have to respectfully disagree, especially amongst tea drinkers.

I am biased but i do believe tea drinkers are intelligent and have greater skills than the average person. I decided that i would rather have my sister who has ZERO web design experience (she is a genius- literally) take ONE class and create our website than spend 3 thousand on an average designer.

As i said before she re did the design 3-4 times until we were happy with it and she continues to make small improvements. More importantly because she is part owner and understands the product it has allowed me to focus on the product, shopping cart, customers and marketing.

I just want those of you out there who have a dream to know that it IS possible. I am very possessive and would not have wanted to raise capital and allow others to have control over the business. I also did not want to wait yet another year to sell tea.

This is how we do it for now and each week we grow a little more and introduce someone else to our tea. Everyone who tries our tea loves it and wants to start their tea love affair right away.

As always, i welcome your ideas and comments because i know it will help SkiboTeaHouse.com to improve and provide better service to customers.

I love introducing people to high quality tea and educating them so that in the future they appreciate a good cup of tea.
SkiboTeaHouse
Jan 24th '11 11:38
Sorry for joining the discussion this late.

Although I'm at the beginning of the process of setting up my own online tea shop, I immediately learned something invaluable: never be afraid to ask for help. At worst, people will ignore you. And at best, people like Charles Cain, Jazz88 and others will offer generous advice fueled solely by their passion for tea. So first off I would like to say thank you all for your time.

When I initially wrote Charles for advice, I made one thing clear: I want to start with my two feet planted firmly on the ground. Although I do have grand ambitions, there's simply no way to know whether your vision will win your target demographic over. As such, here is a general outline of my vision:

What: limited qty, designer tea tins
Value proposition: without forsaking quality, main focus is on design (packaging, wording, website)
Customer Segment: 18-35 yrs old demographic.
Channel: web store
How: 2 blends sold initially, moving with future iterations when/if the limited quantity is sold off

I welcome any feedback/criticism, and have a follow-up question of my own:
1- In speaking with another tea entrepreneur, he mentioned the importance of packaging your tea in a restaurant-grade kitchen that is inspected. Charles, are there any official rules/laws that smaller vendors should abide by concerning this?
Tien
Jan 25th '11 19:55
Tien, as general feedback to your strategy, let me play devil's advocate. If I'm a tea drinker and I come across a website that offers two teas, what are the odds one of those will appeal to me? And if they don't, what are the odds I'll EVER check back to see if you're offering something new? My time is valuable and my attention span is short. With hundreds of tea websites to choose from, why shop on a site with such a limited selection. Aside from the narrow appeal, that doesn't convey credibility.

On your question about packaging: if you are opening and blending or packaging food product it is SUPPOSED to be done in a facility approved for handling food by your local health department (at least this is true in the US). The truth is that I know quite a few small tea businesses that break this rule and just assume no one will ever come after them.

The solution is pretty easy. Make friends with a restaurant, bakery, or even a local church. Chances are there are "off hours" when you can borrow space for a few hours every so often. It's probably a good idea to set this relationship up whether you use it every time or not. Of course my advise is to play by the rules at all times. :)
Charles
Chicago, IL
Jan 26th '11 11:34
Thanks for the feedback Charles.

What mostly motivates my decision to start with 2 products are the financial constraints. A good online storefront, relevant brand, solid design and quality of teas. These are the basic criterion I want to reach and they all require proper allocation of investments. Starting out with a limited offering is also a way for me to test the waters and see if the market within my target demographic is viable. I remember an earlier post of yours that warned that with fewer $ at your disposal, things need to be done right very early on. Starting with fewer offerings allows me better control over the end product. Your advice doesn't fall on deaf ears however and I'm currently revising plans to maybe push that number up to 5. Your thoughts?

Would you also be able to give examples of your early days dealing with online issues at adagio? Namely, how did you decide which products to offer and how did you determine your target demographic?
Tien
Jan 26th '11 12:18
Tien, I'd refer you for starters to one of the first articles I wrote for TeaRetailer: So you want to sell tea online http://www.tearetailer.com/article_4.html. My question is, what is your hook? What would make the customer choose you over Adagio, Rishi, and others online. The flip side that you have to consider is what might make someone AVOID you. What would cause them to question your credibility?

As for the number of teas as it relates to your investment, inventory is a pretty small piece of the total investment puzzle. This is not a recommendation, just an example... Let's say, for argument sake, that you're paying $10 to $15 per pound for tea. Buy 10 teas total. Eight single estate teas: 2 white, 2 green, 2 oolong, 2 black. Then buy two tea bases for blending, one black and one green, and a handful of different inclusions for creating blends. For $250 you should be able to come up with a collection of 20 teas without much difficulty. All you need is 3-4 2oz packages of each to get started.

But seriously, if you can't afford more than $250 worth of inventory you should probably not get started yet. A $1,000 budget for inventory would be plenty to offer a collection of 50 teas. Heck, you could just buy 50 existing and proven teas/blends from a wholesaler. All you need is a bag to put them in and some stock labels from an office supply store.

A decent wholesaler can tell you what the best selling teas are. From there, it depends on your niche. There is no right answer to target demographic. If you go after the same exact demographic that works for an existing retailer you'll probably have some trouble gaining traction. :)
Charles
Chicago, IL
Jan 30th '11 15:13
Charles, thanks for the insight.

To be perfectly honest, I've had a hard time answering your latest question concerning differentiation in a satisfying manner. What would make my offering differentiate itself from existing and thriving retailers like Adagio and Rishi? An obvious but often underestimated question for most tea startups, I realize.

My initial reflex was to fall back on design (brand, tin, marketing msg), which I've already stated was an aspect of my startup I intend to emphasize. Indeed, I think that this is something my target demographic (18-35, affluent, narrative inclined) is sensitive to. I haven't based this on any solid empirical research. This choice mostly comes from the fact that I belong to this demographic and that I am filling a gap undeserved by most larger retailers. In other words, a boutique destination with a curated set of teas.

But I also have doubts about whether this is strong enough an offering to answer the need of this targeted segment. My goal is not to compete with larger retailers through quantity, though I may emulate quality. Rather, It's to reach that smaller group that is interested in a tea experience from the inside out.

Let me also attempt to describe the group towards whom my effort is not directed to: Connoisseurs. Best left to the Adagios of the industry. I deeply respect this segment's commitment to tea and do not entertain any illusions that I could win them over with any particular story. One of your articles on high-end packaging stated that for this particular group, one should skip the marketing part and just describe the tea and its origin. I agree.

I may be wrong but I would argue that differentiation is always found in the details. What makes an a shoe purveyor different than another? Adagio different from Rishi? The basic, logical answers would be quality, selection, etc. but these are claims that can be made by either side.

It's a long post for which I have lots to say but little to show, unfortunately. But I'm working hard to come up with an initial set. In the meantime, I am very grateful for all the support I am getting.

P.S. Where can one purchase bulk flavoring agents (oil) for blends?

Cheers!
Tien
Feb 4th '11 13:25
Tien,

I believe if you look closely at the brand position of prominent online companies like Adagio, Rishi, Teavana and Harney & Sons you will see pretty dramatic differences. Those differences are reflected in the core customer bases of those companies.

A customer standing in the tea aisle of a grocery store - even a premium grocery store like Whole Foods - purchases primarily on price point and packaging. On these aisles, marketing presentation is king. Online, brand presentation is critical, but is secondary to credibility. Credibility can come from story (Rishi's site is covered with pictures of the owners working with the tea in the origin countries), size (Teavana and their 160+ stores), customer service (Adagio's 50,000+ product reviews and industry leading service ratings), etc.

The biggest question for you and anyone else looking to get into the game... why should/would the customer buy from you?

A quick search online will yield quite a few companies that sell flavoring agents.
Charles
Chicago, IL
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