Jun 24th 2010 Issue
Email:   >

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