10 observations as I develop an e-commerce site
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An e-commerce project teaches you great lessons. It can also kick you in the genitals.
As mentioned before, I’m developing an e-commerce site focused on pro music gear. Though this isn’t my first e-commerce site, most of the lessons never change. Here’s a few things that I’ve learned:
1. The government doesn’t encourage entrepreneurship
I’ve had to acquire the following licenses/certificates/wastes of paper just to get to the beginning stages:
- Tennessee Sales and Use Tax certificate
- IRS Federal Employer Identification Number
- County Business License
- Blanket Certificate of Resale
Also, I’ll be liable for periodic state sales tax filings, federal withholding, self-employment tax, and the oh-so-helpful county business property tax. Thanks, government.
2. You will not get credit from vendors in your first year
You may never get business credit at all. The best way to stay in business is to get Net 30 terms (you get 30 days to pay for inventory). Otherwise, you operate on a cash-only or credit card basis. Cash basis is dangerous because the business is constantly using cash on hand rather than earning interest on it — or saving it for an emergency. Credit cards are a little better, but any significant sales numbers will max out that Visa on a regular basis. Get ready for a string of over-the-limit fees.
3. Incorporation doesn’t shield you from very much early on
This goes back to the business credit issue. Since a new business has no credit, creditors will require a personal guaranty. Even if the corporation declares bankruptcy, the burden still falls on the guarantor.
4. Many vendors still haven’t figured out this Intarweb thingy
With the ease of integrating databases with websites these days, I’m still amazed at how many vendors don’t have online ordering or real-time inventory counts. I’ve encountered some that don’t even have websites.
5. You will always need fax capabilities
Don’t ask me why so many vendors, government agencies, and manufacturers still require me to fax documents. Usually, they don’t even have a toll-free fax number. Thanks, guys, I really didn’t want that extra $25 that just went toward my long distance bill. I’m sure AT&T needs it much more than I do.
6. The real money is in accessories
Margins on most consumer goods are so thin nowadays, that a new business would be foolish to compete in that market. No one makes money on the iPhone; they make money on the accessories and cell contract. Similarly, in the music gear market, no one makes money selling a Fender Strat at 5 percent markup; the real money is in the guitar case that’s marked-up 50 percent.
7. The USA is not the only market
Ever noticed how eBay has multiple country-specific websites? Amazon does, too. With a bit of research and logistical know-how, it’s likely any e-commerce site can expand its market worldwide.
8. Guerrilla warfare works for rebel forces and small businesses alike
To sum up guerrilla warfare: “hit ‘em where they ain’t.” A small rebel force can paralyze a much larger army by striking at weak points in the army’s structure. Similarly, a small business can profit by occupying market space that has been ignored by larger companies (same goes for bloggers, too).
9. Overhead kills
Expensive office space, massive cell phone bills, huge long distance bills — these are the signs that a startup is in trouble. Why? Because these expenses come out of cash flow, and cash flow is the life of a business. A business can live indefinitely with good cash flow (and maybe a credit card or two). Amazon went years without a profit, but it maintained a good cash flow and stayed afloat. Profit doesn’t necessarily mean cash on hand.
10. Insanity is an entrepreneur’s best friend
Don’t worry if your friends think you’ve lost your marbles; after working 16 hour days for a year, skipping showers, and abandoning any semblance of a social life, you’ll be glad that anyone is paying attention to you.