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December 29, 2018

Online selling - Expensive Pitfalls to Avoid and Possibly Some Valuable Advice

Andy Ahart

Andy Ahart
General Manager/Metalskill

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Online selling

Expensive pitfalls to avoid and possibly some valuable advice

If you are an expert at selling online or work for a fortune 1,000 company stop reading here, this is not an article for you. However, if you work for one of the other 27 million small businesses in the U.S. you might find useful information in this article. Most articles about selling online talk about success and how to achieve it. Very few folks who have made major mistakes in online selling are willing to relive and share the painful and expensive lessons they learned.

Background

In 2015 I managed a product line with online sales of $0.00 and by the end of 2017, we sold roughly $2.5 million worth of merchandise online which represented 50% of the annual sales volume for our company.  The online sales were a mix of Amazon, Groupon, The Home Depot, and several other smaller online reseller sites.  There were only 3 of us managing online sales in a small business attempting to grow product sales quickly.  None of us were experts at selling online and we had to learn as we sold.  Some of our efforts were successful and profitable while others were spectacularly terrible and unprofitable. 

By no means do I consider myself an expert at online selling, and at the current rate of change I cannot imagine anyone will ever truly master all aspects of it.  What you think you know today will be re-written tomorrow.  If you happen to find a policy or specification for ‘how’ an online reseller operates, you should copy and save the page immediately as you may only find it only once before it disappears or changes ‘without notice’, just like the fine print said it could/would/will. My advice is quite simple, if you do not have to sell online through 3rd party sites then do not do it.  Use the internet to grow interest and drive customers to your site or store.  If you feel there is no other option for growth, tread very, very carefully. There is no sales volume requirement with most 3rd party selling sites. You can use them for free advertising by pricing your products higher than market value.

Consultants & Sales Agents

Consultants vs. Agents.  Consultants want to sell you services to increase your online selling success.  This can take the form of guidance or directly taking control of product listings.  Agents are 3rd party sales companies.  They desire to be paid commission for selling your product into online selling sites or retail locations.

Many consultants and agents truly believe the manufacturer/producer makes HUGE margins (selling products for 2-10x cost) and that you can magically afford to give an agent 20% commission based on the sale price while dropping your prices to be more ‘competitive’ and giving away freight to sell online.  These companies have no clue that with many commoditized product lines the manufacturers/producers struggle to get 10-15% net profit from their sales before paying third-party agents or consultants.

There are many online selling consultants out there and I imagine that some of them are worth the money to help navigate online selling and help you stay out of the pitfalls on Amazon and other sites. For small companies, it may be more cost effective to hire an employee or learn it yourself.  Unless a consultant really adds value and helps your bottom line… get as much education as you can and get out.

Regarding agents, fit depends on the product and volume potential in the market the agent serves.  Agents only care about you if they can easily make high sales volume/commissions from your products by plugging your product into their existing customer base. Watch your margins!  Agents can be very insistent and convincing that your product packaging or pricing needs to be completely revamped in order to be successful which can send you spinning in circles with no success in sight.

If you have slim margins before working with a consultant or agent, you may not have anything left after you pay their retainer or commissions.  Steer clear of 2-year contracts, and push for a trial period if you are new to this game.  Make sure you have a 6-month to 1-year exit clause if they don’t deliver you must be able to terminate them and move on.

Amazon, the billion-pound gorilla

You can buy books about how to sell on Amazon, and I highly suggest you do.  Amazon is so massive and sprawling that I am only going to offer a brief warning here.  Fees, fees, more fees, and the labyrinth of policies. First and foremost, you have to go into Amazon knowing that the game is rigged in Amazon’s favor.  All the best benefits of selling on Amazon are set up to tempt you into letting Amazon control the selling price of your product. This is absolutely the worst thing a small business can do to their product.  As a small company, you should never ever give up control of your sell price online.  It may ruin all other sales channels for that SKU. 

Amazon is the master of charging you for things you had no idea you agreed to. Once you add up the fees for ‘damages/returns/co-op/promotions/lighting deals/etc…’ are you really making any money?  I once found that Amazon was liquidating my ‘returns’ to a wholesale company that was selling my product marked as ‘used’ against my new product listing (yes, there is a way to prevent this but what you don’t know may be very expensive to correct). Amazon is, in my opinion, the largest charity in the world.  Millions of companies are basically giving their products away, lining Amazon’s pockets with money while making pennies per sale.  From a consumer perspective, Amazon is a dream come true, for many small businesses Amazon is a complete nightmare and a fantastic way to ruin your existing business by ruining your product margins.

Speed of Growth & Sales Channel Disruption

There are many challenges to selling online profitably and in a manner that does not disrupt existing sales channels. If you decide to sell online through 3rd party sites you may seriously consider creating a brand-new SKU to do so.  Creating a variant of an existing product can provide a layer of insulation to prevent existing sales channel disruption.  Otherwise, if you take a product that your current customers purchase and stick it on Amazon/Groupon/Others you may alienate your existing customer base or erode your sale prices.  The way you go about selling online is very important.  Being mindful of each sales channel and preventing conflict between each is especially important to manage market prices for your products.

Grow each online sales channel slowly and give each new channel time to be effective. Adding a new online seller may quickly pit one website against another which can create a ‘bot’ bidding war.  This means that one website’s automated pricing system works against the other which will force the sale prices down.  Once this happens your market value disappears, your ability to provide meaningful discounts disappears, and you may have to pull the SKU or cut a seller off to fix it.  This may be prevented with a packaging change to create SKU differentiation between online selling sites.  Missteps in pricing or sales channel growth can take many months (3-6) to fix.

Ultimately, the best-case scenario for selling online is to supplement an existing business with an existing customer base.  Venturing online to keep a company afloat or grow a new business is very difficult, expensive, and potentially volatile.  A product that sells well online today may not sell for a profit in six months due to decreasing market prices and increasing demand for advertising.  Tread carefully and Godspeed.

Comments? You can contact me directly via my AdvisoryCloud profile.

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