Episode 2: Shipping, Shipping, Shipping
On today’s podcast we talk about SHIPPING! It’s the first thing we look at when we are seeking out online businesses to buy and own. E-commerce operates on a whole other level that involves storage and shipping since you may not always have a brick-and-mortar storefront to hold your goods. You need to know the size and weight of the items you plan on selling so that you can organize your shipping logistics accordingly and affordably.
Shipping is very important, and knowing the weight, the size, and the fragility of each of your items will save you a lot of stress when it comes to finding the right shipping team. Logistics is a tricky realm to balance, and many people overlook it and focus more on other elements of businesses ownership, like marketing, sales, and conversion.
That’s why, on today’s cast, we cover the most important aspects of logistics, including:
- Stocking items that can utilize the USPS flat-rate boxes (pro-tip: USPS is much, much cheaper than UPS)
- Researching and investing in products that won’t become obsolete after 6 months
- Paying attention to your margin and be sure your shipping doesn’t cut into your profit
- Recognizing that the industry is always in flux and you will have to change your model numbers
Realizing early on how important shipping is will save you the headache later. It will influence which online businesses you choose to invest in, and it will help you maintain your success as a business owner. Shipping your products the right way proves to your clients and your manufacturers that you care about each and every item you are selling. Because if you don’t care, why should they?
And because shipping plays such a huge role in buying and selling domains and e-commerce websites, we offer up even more tips and tricks in this episode so you know what to look out for as you start shopping around, including:
- Evaluation: How much are you willing to pay?
- Risk Management: What do you have to lose?
- Staff and Salary: Who is taking care of the backend of your site?
- Customer Service: What are your customers asking you?
Tune in today and find out how you can ship affordably and invest wisely in your next online business venture!
Don’t forget to leave us a review on iTunes and sign up for our newsletter at www.ecomcrew.com if you haven’t already. Enjoy the show!
Full Audio Transcript
Mike: Hi! This is Mike Jackness and I'm with my co-host Grant Yuan, welcome to Ecommerce Crew Podcast number 2. We're really excited to get our second episode on the way here. This week we're going to be talking about buying ecommerce, buying existing ecommerce business which is kind of a niche in itself.
It's something that we have experience with earlier this year, we purchased icewraps.com and have turned that around and since really blown it out of the water and done a great job taking a site that was losing money and turning it into a profitable venture.
This week we are going to try talk about specifically what to look for when buying an ecommerce business and we're actually going to make this a recurring segment on the show where each week or every other week we'll talk about a specific business and this week we're going to be talking about a business as well at the end of the show stay tuned for that.
But first we're going to kind of dig in to things you should be thinking about when buying an existing e-commerce business or starting an e-commerce business.
With them we'll kind of kick it off with the first topic and like branch off in here real quick but the first thing I look for after owning treadmill.com and we also own cuttingboard.com and dealing with … first with a really big product that had to go LTL less than truckload shipping and cutting boards which are 20 pounds and are expensive and (inaudible 0:02:02.1) to ship. The first criteria that I always look for nowadays is the size and weight of the item and that way it's easy to store, it's cheap to ship it and it's not easy to break. Any thoughts on that Grant?
Grant: Yes, I think we really learned from probably the worst possible starting location that you can go with which is being on the West Coast for one and then having just very heavy products that we have to drop-ship and with Treadmill it was like you said a logistical nightmare just not really having a lot of dedicated people that take care of that and really just being at the mercy of other people that handle a lot of the shipping that happened on our behalf and with Cutting Boards, the logistical problem over there is that being on the West Coast as well and having the most of your population centers out on the East Coast we are just eating a lot of shipping costs; that's kind of been one of the big reasons that we've started the whole 3PL over on the East Coast and that way we've got product that we can store over there.
Now you've run into an issue where you've got to start paying more money for warehousing and storage you've really got two things like in a race against each other one of them is increased shipping costs and the other one is increased storage. There's really a jump-off point at some part where you can start expanding for most people that's not really an option when you're starting off. I think logistics is really the most important part of any e-commerce business I think for most people out there short of maybe people that are selling just very, very light product; kind of like of what you are doing on Icewraps.
Mike: Yes. On the shipping thing, I mean, I specifically look now for products and businesses that can utilize USPS priority mail, flat rate and regional rate boxes that's kind of my criteria. If the thing’s bigger than a medium flat-rate box or a large flat-rate box, I just don't really want deal with it. You know the post office rates are so much cheaper than UPS and what I would say 99.5% of our stuff goes USPS in some sort of a flat-rate box; there's the occasional really large order that we get that will go UPS because UPS does a great job but bigger, heavier stuff but for me that first criteria is really … does it fit in a USPS box? Basically, is kind of what it comes down to.
The next thing I look for is products that don't become obsolete. I think it's really important to not get into some sort of business that is technology driven or trendy where it's constantly being revised and that's another pitfall that we fell into with treadmill.com. I mean every year there was a new model and if you were picking on inventory of this year's model and next year they came out with a new whiz-bang feature, the crimp model that you have is completely obsolete so with cutting boards or ice wraps et cetera those models just never change. Any thoughts or more input on that Grant?
Grant: Yes, I think that is one of the scariest parts about buying into a business is that trends change and in certain industries trends don't really change that fast and that's one of the good parts about our businesses that we have which is that ice wraps don't really change and neither do cutting boards and in fact they're probably two things that I can reliably say in about a hundred years they will probably remain the same. Ice wraps might change maybe in like 50 years with some kind of new chemical gel or Nano technology but who knows but the concept is essentially still going to be there.
On the other hand, I can't reliably say if cardigan sweaters are going to be a thing or even polo shirts and you can say, “Well, Polo shirts have been have been a standard forever but things definitely change in terms of clothing, in terms of like kitchen products. A lot of things that are really things that kind of show up and get very popular such as like jewelry and very pop culture type things like t-shirts ,those to me are always like high, high risk businesses because you're very likely by the time you hear about them and by the time the owners try to sell them it's either peaked or just has peaked so you're really going to be the one holding the bag at the end of it. It's almost like trying to time the top of the stock market and that always kind of a like a disaster waiting to happen or a knife catching as it's kind of known in the industry.
Mike: Yes, definitely. The next thing that I kind of look for is the price point. I found that things that sell somewhere between 25 and a hundred dollars are a really good price point. Things that are under 25 dollars it's hard to get pass the cost of just running business and pick-pack fees and everything , these cheaper items, the cost of managing the business on a per transaction basis is just higher getting above that 25 dollar price point allows you to make a better margin but anything over that hundred dollar price point, price sensitivity really starts to become a factor for people.
People will buy a 25 dollar item or 50 dollar item without really thinking about it without doing a lot of price comparison but when you start getting up above a 100 dollars, people will get on your site, find a product and then go do price shopping, price matching or whatever and that's really difficult when you are in that situation on the internet because it's so easy to price compare. I find that in that 25 to a hundred dollar price range is a sweet spot.
Grant: And I really agree with Cuttingboard, we're right up the cusp of that and I see it happen a lot we have an average order that's just shy of a hundred dollars and I can definitely notice that when we put our coupons out, orders really pick up and that's not something that should be terribly surprising but it really does show that there's really a magical bridge and I think that's really anything over 50 dollars and people start hemming and hawing when it comes down to opening up their wallet.
And in the direct marketing kind of line of work or infomercials and stuff like that you always notice that everything is priced at nineteen ninety-nine or nineteen ninety-five just anything under 20 dollars and that's because they've done the market research that shows that people are very willing to buy anything for 20 dollars because it's really one bill in your wallet.
Most people don't carry hundred dollar bills and when they do, they don't want to get rid of them easily but a 20 dollar bill everyone's kind of used to like “Yes, I'm just going to pay that with a 20.” Yes, you find the gadget, you're pretty sure never really works like it's supposed to on TV and you go, “Well, it's only 20 dollars I'm just going to buy it.” And if doesn't work, whatever, it’s 20 dollars, what was I expecting?”
But if you buy a 200 dollar item or in my case a 200 dollar cutting board and if there is like a 2 millimeter wobble on your board, you suddenly bought a 200 dollar cutting board and you expect it to be perfect. It doesn't matter if there is like a 100 dollars of wood that went into that cutting board plus labor and then it costs us 30 dollars to ship and another 30 dollars in marketing fees and merchant fees and everything and I'm only making 40 dollars after that cutting board but if a guy is paying 200, he expects it like to be a very elite type of product.
A lot of it is really managing your customer expectation and not just your profit margin because the reality is a lot of those like low-cost products like the 20 dollar products you see on TV, I mean, they're probably paying, I don't know Mike what do you think like probably at least 30 to 40 percent of like a marketing budget possibly and the products are just most likely dirt-cheap. You probably have just insane margins on those items yet people are generally a lot more, a lot less inclined to complain or really return those items just because of the cost.
Mike: Yes, I mean that’s another thing when you have something that's that cheap, the chance of returns coming back are much lower and who's going to spend 8 dollars to ship back a 20 dollar item. I mean it definitely happens for us sometimes it crazy I can't believe that people are willing to do that but they do and actually what you are saying is a great transition into the next topic I want to bring up when you mention margins and to me this is more than most important things.
Again, just another lesson from Treadmill where our margins were in the 10 to 20 percent range and at first when we first got into that, that business and industry were like, “Oh well, it's a 3 thousand dollar machine and even if you're only making 10 percent, it's still a 300 dollar profit per item but that was … that didn't work out at the end of the day I mean when you start factoring credit card fees and overhead and et cetera. For me it has to be really in a minimum of 58 percent that's kind of the minimum I talk to anything to any vendor about these days. Sometimes, we'll get towards that 40 percent number but really it starts at 50 percent and works its way from there.
I've been developing a lot of white label products as a grant and you're targeting more in the hundred percent range there and as you run an e-commerce business, the longer you kind of get into it. The more you realize that margin's just everything for me it's 50 percent is the baseline. What do you think on that Grant?
Grant: I think that 50 percent is the absolute minimum and I think a lot of people that are wet under, right behind the ears I should say, they really think I'm going to break the model and I'm going to cut out the middle man and I'm going to undercut everybody and I'm just going to be the low-cost leader because it doesn't take any skill to be the low-cost leader you just have to survive on less but the reality is that the low-cost leader is really a business model that is almost too doomed unless you already have the assets and the infrastructure on place. And the way I really look at that is because if you've got low margins like 150 percent you can't really offer good service and nowadays everybody expects good service. Mike was just talking about Amazon and White Lape Lane(0:12:43)(unintelligible).
Amazon has essentially killed the idea of giving bad service to a customer because it's in their right no matter what even if you're making 50 cents on the item or 20 cents as is the case of a lot of Amazon products, if your competitor's selling it for a hundred and you're selling it for 20 and magically yours isn't as good as the other guy, you're going to get a 1-star review or you're going to get a 2-star review.In a perfect world you would say, “Well, that doesn't make any sense, I'm obviously undercutting this other guy by a huge, huge percentage. You can't expect the same quality.”
But somebody doesn't think about it that way. Somebody thinks about it as, “I'm getting this product. I've paid for it. It should work the way that I want it to or it should work on the way it's described.” And the reality is that’s, not a , not unwarranted way of thinking.
If you have very little margins and the guy wants to return their item, you're just going to eat the cost or you're just going to not ever be able to discount and there's like a really huge psychological reason why you should always be running some kind of discount because even if you start off at a low cost, people always think that you're margins are great and JC Penney kind of had that recent thing with like their last year where JC Penney used to always have sales and coupons and people were very trained at walking at JC Penney's this armful of coupons and buy a hundred bucks worth of product and get 30 dollars off but then this new CEO came in and then said, “We’re just going to do away with that, and we're going to have discounts everyday so you're just going to save 30 percent no matter what and like let's get rid of the coupons and then they had a ghost town afterward. Perception is a huge amount of that and by getting your margins that low you essentially tie your hands from the get-go and you're just stuck, there's nowhere to go.
Mike: Yes, exactly, yes. You kind of mentioned it's another good segue, thank you for helping me with each one of these … you mentioned white label products I’m just transitioning to that and that's another really important thing I look at now when evaluating e-commerce businesses which is –is the business I'm looking at a good fit for white label products?
And using treadmill.com as an example again, no, I mean, we're not going to go out develop our own treadmill which is there's too much into risk and too much capital involved with developing your own treadmill, importing it from China having to bring in 2 million dollars’ worth of product to just get broken into that industry where in Cuttingboard or Icewraps and the other things, the other brands we're working on right now, they're perfect candidates for white label products.
You can make your own ice wrap really easily or ice packs, it's really easy to make a cutting board or a cutting board accessory and I think it's really important in long term in e-commerce to have your own products not just be selling other manufacturer's stuff. We can talk about maybe in another episode of why there are so many pitfalls on dealing with the other manufacturers. I actually had this happen recently and again I do not want to get off in too much attention but I do think that developing your own products helps secure your future and your revenue stream.
Moving forward and I think it's tricky as you are developing white label products to not have a conflict of interest with your existing vendors, what I've been doing is developing products that compliment things and don't compete directly with the products that I'm already selling and I certainly would never take a product that I'm selling and send it off to China and say replicate this with my name on it.
What I have done is gone to existing manufacturers and ask if they would white label a product that I'm already selling with my name on it. Going directly to that manufacturer where in what's in their best interest to do that but in again without getting off too much of an attention to me like having a website that compliments well with white label products I think is incredibly important.
Grant: Yes and I think the big thing is having the ability to control your destiny is really what white label is all about and for those of you that are kind of wondering what white label means it is essentially just having an existing design that you can brand under your own name and a very common family just be like a generic product such as tissues or A.K.A. Kleenex.
That's kind of a funny story there and me and Mike are best go on (unintelligible)(0:17:22.4) but like everyone calls it like Kleenex right now but I used to … Kleenex is actually the brand but it's been so ubiquitous that people essentially refer to tissue as Kleenex. And what essentially white label is that you're taking an existing brand and then trying to or an existing generic kind of product and rebranding it to your own.
The biggest problem with not having a white label is that you're going to run into situations where you might not be able to sell the product anymore. A lot of times like with the competitiveness of the internet you've got so many people that might be wanting to sell a popular hot product and you might be on a waiting list or you might have a vendor that decides, “Hey, maybe they just want to sell on their own website, they're doing a lot of marketing and why should you get the benefits of that?”
There's a lot of the order industries where they simply don't sell and don't compete against you but we kind of read the writing on the wall. We see most industries as wanting to start competing with their own distributors, their own retailers and you'll notice a lot of big stores are selling directly now and big brands are selling directly on their own website and lot of them, they might hold you to MAP which is the minimum advertised price and for example if I sold let's say again just using like let's say Kleenex as an example. Let's say I run a store and I’ve got to sell a box of Kleenex for two ninety-nine and not allowed to sell it any lower but then Kleenex on their website sells it for two fifty. Is that fair? No, but can they do anything about it? Legally, no but they could stop selling to you. And there's all sorts of way you can say, “Well, I'll just buy from somebody else blah, blah, blah,” but you're not even in that situation if you made your own tissue and if you had Mike's tissue or Grant's tissue you could sell it at two ninety-nine and try to have a great margins or most likely you'd probably sell it for like two thirty and make more money than you would selling it for two ninety-nine.
Are some people always going to buy Kleenex? Yes, they are and there's nothing you can do about it and that's kudos to Kleenex for making such a powerful brand but that's the thing about white label. It really is kind of the entrepreneur’s MO . You're building it out for yourself. Why bother building out somebody else's brand if you don't have to. And obviously, me and Mike are selling other brands on our website and that's just kind of the way it is but if we had it our way, I'd think we'd love to be able to make it just selling our own brand and that's really the long term goal for I think most e-commerce owners.
Mike: I'm trying to make a push more to not even represent manufacturers that sell direct. We have a few manufacturers on our side on Icewraps that when someone calls the manufacturer looking to buy the product you like sorry we don't sell directly to consumers, here's a place you can buy them from and they send them to icewraps.com, I mean, to me that's a true partnership in retail whereas a lot of other manufacturers are like, “Oh, I'd be happy to sell that you at full retail right here on my site,” and we get cut out. That's your having white label products definitely helps mitigate that as well.
Grant: Yes, that's one of the top vendors that we have on cuttingboard.com they, they're really, really great partner and they, they see the force from the trees they know that a good manufacturing partner doesn't try to compete against your marketing arms out there and it makes a good synergy. It makes me believe that I don't need to be afraid of my own manufacturer which is the new thing that you have to fear nowadays like what point in the future does your manufacturer decide that they want to compete against you and that's always never a good thing, having that relationship matters so, so much.
Mike: Exactly, exactly. Moving on let's go on the next thing on my list here which is products that don't have a significant shelf life. Certainly not a problem with any things that we sell but in this wasn't an issue with Treadmill either but it's just something also that I consider. Example, I'd be like I don't want to get into things like food that expires after a month or something. You don't want the added pressure, I mean, it's already tough enough having inventory as it is, there's a carrying cost to that. You certainly don't want to have products that have the potential to have to be literally thrown in the trash can if they expire, that's something else that that I look at.
Grant: Yes
Mike: Probably not too much more to say on that. The next thing is I look for things where the model numbers don't change off and we kind of talked about this in the obsolescence thing but it's another important thing just to mention real quick with SEO and the way that we run the e-commerce site which is a take-all all-original photography and write really detailed original descriptions. There's a pretty expensive cost to making that type of content. I mean, taking digital photos or all original photos in different angles is got a cost to it and the same thing with writing descriptions. Again, I don't want products that the model numbers changing to where I have to go out and make another listing and retake pictures and stuff I want that content to be seasoned on my site a year or two, 3 years from now be ranking really well and not have to be continuously going through making new listings which was like a huge problem with Treadmill. Any other thoughts on that Grant?
Grant: Yes, I would say that a lot of that is kind of in the same vein. If the models are changing that also means that the manufacturers are turning over products and that says a little bit about the viability of the product and the type of industry that you're in because a nice recurring, a recurring revenue stream is what the product that isn't necessarily changing all that often and if the product changes a lot then it's really up to you to have the brand to be able to withstand the marketing like ebb in flow because for example industries where the product's always changes is closing for example and like what we talked earlier if you've got a really hot trend one year … let's say it's for I'm going to go back to cardigans let's say it's orange cardigans and everyone wants an orange cardigan and you spent all this effort trying to rank for orange cardigan.
Maybe you do some PPC for it and like you do all this writing and photos and you do all this stuff and then next year nobody wants cardigans, everyone wants Uggs or they want green boots or whatever so you're never ever just able to really relax or breathe or not stand still without worrying about who's over your shoulder so constantly changing model numbers essentially means that the industry's always in flux and you're going to have to just be able to toll your gram (0:24:40.8)(unintelligible) and rank high for the generic industry that you're in as supposed to kind of particular products or anything which it's a very high, very high bar to be able to keep out of your competition and that kind of competitive atmosphere.
Mike: Alright, the next thing I have on my list does kind of going of going to shipping related thing again but w I look for things that are very hard to damage in shipping. For instance, I wouldn't want to be selling wine glasses which are incredibly delicate and can break really easily and looking at something like an ice wrap or a cutting board and some of the other brands we are working on what we're shipping out books now, these are basically things that are indestructible and things that can ship well again and it is flat-rate packages and the flat-rate boxes that the post office uses are relatively flimsy and when we get returns back every now and then and in the original box that went out, by the time it gets back to us the box is pretty mutilated and then if whatever inside is delicate it just doesn't stand a chance.
And our favourite way to ship is actually in a flat-rate padded envelope, it's 5 dollars and 35 cents two, three day mail gets there really quickly anywhere in the country so the most we send out more packages in that than anything else and those are really products that are in there that are delicate or going to be really sensitive and broken because there's no actual box, it’s just basically an envelope with some bubble wrap inside of it so I really look for things that are pretty durable in shipping.
Grant: Yes and I think that most people don't realize of how kind of true it is of how common it is for your biz(?)(0:26:22) to get trashed on the way from one side of the country to another and really a lot of the boxes that you buy when you start getting into e-commerce you'll see like box ratings on them like 200 pound or like 150 pound and you’re going to be tempted to want to buy like a cheaper box a lot of the time and you'll say, “Well I don't need a really big sidewall rating or I don't need it to be double-reinforced or anything like that.” And depending on the product, if you've got clothing, yes you could drop a dump truck on it and it's going to be fine but we often see like when we get returns in Cuttingboard, the box looks like it's been like put through like a grinding stone and it's been kicked by an elephant and then driven over by a tank. And when I actually had a Amazon issue I had a bunch of cutting boards that arrived there split in half and it kind of led to a bunch of jokes like apparently like there are some very, very frustrated FPA workers with like a pitchfork or a like an Abrams tank or they're just shooting at cutting boards because I mean, it's a block of wood, it's like a one and a half inch thick ingrained wood. I mean, in order to crack that I mean thousands of pounds of pressure so I can't even begin to explain like what happens there. I still can't, I really don't know how that, it was 8 of them at once too, that was the great part …
Mike: I just have this vision of like Ace Ventura and that scene where's he's like kicked in the butt — he's like the UPS driver kicking the box down the curb …
Grant: Ha! ha! That's right. Man, that’s …I have not remembered that scene in all (inaudible 0:28:02)
Mike: Okay, moving onto the next item and I think it's actually the last thing on my list here and it's actually something that I added to my list recently. This list I've been kind of refining over the last couple of years that we've been on e-commerce and one thing that I've come to realize what’s important is getting into a niche that offers recurring transactional opportunities. It's one thing that we struggle with in both Cuttingboard and Icewraps, I mean they're both situational things where I need this product today and I'm going to buy it, it's going to solve my need and I don't ever need another one. Someone's looking for a knee ice wrap for instance because their when you go running after they run their knee hurts or whatever they just got replacement knee surgery and they need an ice wrap for their knee. Well, they buy the knee ice warp that doesn't really wear out. We sell high quality products for this reason so they don't need to get another one a year from now or two years from now so they're basically a one and done customer and it's awful because you … email marketing, drumming up business from your existing list is a really important part of e-commerce and it's something that is very difficult for us with Icewraps .
We do have some of that type of business we sell some custom gel packs for chronic consumable, we sell some just regular ice packs that people will replace after a while because they dry out or there's a clay ice wrap or a ice pack product that we sell that eventually dries out and people will replace those.
Another thing we see is, we use youth pictures or pee wee players that are growing and need to get a larger size but for the most part you buy it once and you're done and the same thing is true with in cutting boards I mean, if you buy a carving board for your Thanksgiving turkey or you have your all-purpose cutting board that you bought just sitting on the counter and be a display piece. You don't really, you don't have room for 10 cutting boards in your kitchen and you're probably have a room for one or two. It’s something that we've been looking at a lot and new businesses we're getting into one of those is we're developing a coloring book company that I'll talk about in future episodes that we just started launching right now.
It's a perfect example of consumables , as you finish coloring that first book, here we have a customer for life. They'll buy additional titles or there's complimentary products we can sell them like pencils or other things like that and I think that having that type of niche is really important and that's something that we're looking at considerably moving forward.
Grant: Yes, I agree. One of the things that I feel like it's one of the situations where we've got 3 good things and pick 2. Everyone would love to be in a recurring revenue business and let's talk about like Dollar Shave Club or 1-800-Contacts. I mean talk about great high margin it's recurring, you're always going to need to shave, you're always going to need new razors and you're always going to need to get contacts if unless you think so. Just like BB products are kind of great too, a lot of people are going to stick with the same product.
Once you've got a brand. people just they don't really change but I… you don't really need to get ice wraps every year, you don't really need a new cutting board every year but people will know that your other disposable products are just going to be something you are done and you get rid of with like Cutting board one of the things we're actually doing is going toward the commercial market because for the home market if you buy a hundred dollar cutting board, you're going to expect that to last a long time and I've got a lot of customers that tell me , “Hey, I got my board , it's fantastic, I love it,” and that makes me feel great and then they say something that just kills me on the inside they're like, “this is going to be the last cutting board that I'm ever going to buy, it is so beautiful.”
And I'm like, “Great! That's wonderful, I'm glad to hear that. I hope you come to me for more cutting board oil in the future to maintain that once in a lifetime board.” I say that a little bit kind of jokingly.
I don't think they honestly think it's going to last a lifetime but they're really expecting it to last a very long time and especially if it's like a John Boos butcher block or something like that I mean we're talking that's like can be a family heirloom but at least they'll get come to me for the cutting board oil hopefully but with restaurants for example they don't use hundred dollar cutting boards, they use 20 dollar boards that they just abuse, they kick the hell out of them, beat them up and then they get rid of them and then they buy a new set and that's because of safety for sanitation so that is a recurring revenue stream, getting restaurants onboard with plastic boards and NSF, FDA approved boards I mean that's kind of a get industry to be in and I think if you can sit around and brainstorm and you thought about what great industries are there to be in there's a lot of stuff that has great recurring revenue and I think that's one of the big reasons like you look at Jeff Bezos and the whole diapers.com .
You can Google that because of the back stories at Diapers got a very, very hostile takeover bid from Amazon where Jeff essentially came in personally and said I going to and not so many words destroy you and undercut you because it's such a lucrative market. Babies eventually grow older but for a very good amount of time they regularly poop.
Mike: Laughing
Grant: And that's going to be an issue …and that kind of goes and you can think about medical type equipment. Diabetics for example ore you can think about people that need treatment like chronic treatment for anything from a skin condition or just hair loss or something like that and people are going to be willing to pay a recurring for a very long time … Those are all great industries to be in .
Mike: Alright, that's actually the end of my list of things I look at on a product level basis we're going to move into things to consider as far as buying an e-commerce site itself but before I get into that I mean Grant do you have any other things that I might have missed that you think of on a product level?
Grant: On the product level, I would say the one thing that does still make a lot of sense and this is kind of a … I think you can say it's almost an implicit understanding but I feel I should say it anyways is that you really should have an interest in what you're selling and I know ice wraps and cutting boards sounds like very strange interests but Mike is a fitness guy, I enjoy cooking, these sounds like very, very strange things to be in but we still enjoy it and it's something that we can get behind and if you actually had me selling something like cardigans I really just could not be interested. It feels like a great business , I'm sure I could pick it up and I'm sure I could do well at it and find suppliers and do the marketing and learn all I needed and learn about cardigans but at the end of the day I would really be emotionally leaving a lot at the table. I just don't care about my product that much and it's just not interesting to me not in the least. I'd be like if I sold lizards there's a lot of people that love it absolutely love it so when a customer calls they're going to be able to hear that in their voice but if you ask me about the lizard I'm just going to say they're good at eating insects and that's the only reason I would ever keep them around. Though with cutting board I could tell you all about the lamb shank that I made and the osso buco or that 28 day dry-aged rub that I cooked and just served it up on my like hickory smoked teak board or whatever and I can talk to, I can to my customers, I can talk to manufacturers anything like that and I enjoy it I love it so I think that's one of the things I would say is a must you've got to have some kind of passion for your product.
Mike: I definitely agree on that I had an opportunity at one point to buy balletshoes.com and it goes right into what you're talking about I mean I can care less about ballet shoes and we feel almost awkward trying to sell them to somebody I would never be able to intelligently speak about them or get behind it.
Grant: Hey, didn't you drag me to that ballet when we were in London to the Billy Elliot I think it was?
Mike: That's not a ballet, that's like a Broadway show, that's a lot different than a ballet.
Grant: It was a Broadway show about a boy doing ballet that was close enough to ballet (inaudible – 0:36:53). Definitely want don't do that again, right?
Mike: Alright so moving on to the actual purchase itself once you kind of … obviously we ran a lot of criteria out there and it's tough to find a site that matches all these different things but I think it's important not to cut corners and be like, “Ah, sacrifice this or sacrifice that I think for me like it's just got to it's just got to hit on everything all those different product things then and only then will I look at actually purchasing the site and then there's another whole list of criteria which we are going to go over here right now that makes it more difficult and but you'll really one thing I want to talk right here really quickly is your success rate on this is going to be incredibly small.
If you set out to go buy an e-commerce site you might look at literally hundreds upon hundreds maybe in the thousand different opportunities before you find one that meets all the stuff and you buy it and when you're buying your first e-commerce site or you purchase if maybe you already run e-commerce store but you hear this podcast and like, “Oh, I'm going to out and buy an e-commerce site.” And we definitely fell in this trap we're guilty. You're over eager, you're like, “Oh I want to go buy this exciting it's something new.”
I encourage you not to fall into that trap; there's always another train that pulls into that station. There's every week another A ++ opportunity comes up that I pass on because can only do so much with our time. There's certainly if I had an opportunity with unlimited money and unlimited resources I could buy an A+ opportunity every week so just take your time let the things that aren't A+ go by and the next week there'll be something else I think that that's really important. And on the heels of that, the first thing I want to talk about is valuation, I think this is incredibly important you don't want to overpay for a site.
Valuation is an incredibly important aspect of the transaction and for me like I just refuse to pay more than 2x of valuation that's on the low side and I know that so for me a lot of opportunities go by the wayside just because of that but the reality is that there's always gotchas after you buy the site that make the valuation higher than it really is. You can find things that you obviously is the person selling the site are broker that's representing the site, they're really good at pitching and spinning whatever it is in making it look like ice cream with cherries on top and sprinkles et cetera but it might be coated in a pile of poop and there's things we'll talk about here a little quickly that kind of help you identify that stuff and it's really important but for me a starting point on the valuation is no more than 2x and I try to even be less than that with Icewraps it was actually a 1x and just real quick what that means basically what you're talking about if a site makes net profit in the end of the day after paying all expenses is a hundred thousand dollars and if it's 2x you're going to pay two hundred thousand dollars or 2 times that net profit.
For me I would I just won't pay more than that I think the standard valuation range in e-commerce seems to be to 2 to 3 x and sometimes you see 4x for really established businesses but I'd like to be at that 2x number or less and also on my valuation I'm looking at ways I'm going to be able improve that business quickly and get my money back even faster but that's not something that is ever taken into account like the seller's not going to say, “Oh well it's listed at 2x but you're really going to make it back in 1x because you can do all these great things that's not accounted for but that's kind of where I am at I mean what are your thoughts on valuations Grant?
Grant: Yes, I'm really on that same boat and it's a little bit tricky for those of you that are listening to me and Mike because Mike and I both have very strong technological backgrounds and we both come … I mean Mike was a director of I.T. at a tech firm over in D.C. many moons ago. I've been essentially acting as the chief technical officer of our past company which had like 70 odd people, team of coders under us and like I.T. guys and everything like that so we know our tech stuff and there's a lot of things that we can be able to spot and that we can also be able to kind of do on our own that we don't necessarily need to bring in a developer for and even then we, we try to come in at like 2x and the reason is we just know better than most people how hard it is and what ‘s it going to require to really get a site going and most people think that with technology you get a site it's turnkey, it's already running great I'm just going to get into it and
I would say for most websites even if it is already running you're probably going to need a developer at some point just to like get you to a level of understanding of what's going on in there. It's pretty rare for a lot of websites just to be templified and have no customization whatsoever. I mean we're probably talking like clothing and just very ,very basic stuff and that's going to be difficult because most websites that sell any kind of moving parts have a lot of a lot of different things that have gone into them and we're using Big Commerce which is a fairly easy platform but even Mike's got a developer on it and I do my own development on it and it still gives us trouble here and there and you can see on our posts on EcomCrew we talk about upgrading our checkout process and everything like that. If you're just a regular dude that's coming from the brick and mortar side I mean this is all Greek.
So it's pretty difficult to be able to really understand all of the all of the additional I'm trying to think a like the brick and mortar version of it but it's probably the tenant improvement, the virtual tenant improvement that you're going to have to put into the website and I guarantee you that you will have to so when you really think about it as buying a 2x like me and Mike do I mean we're going to put in a lot of money after we get the site. If you're buying it at 2.5 to 3x like it had better be completely , completely clear and free of all kind of like crap and if it's not then you're overpaying.
Mike: Yes, definitely for sure. I mean I look at Icewraps and after we bought the site we took it from Yahoo Stories platform to Big Commerce we had a developer and a coder designer and all that, all new photos for products as they were using stock photos from the manufacturer for their product photos which since we've taken on their photos our conversion rates way higher than the old site and we wrote new descriptions and they were copying and pasting descriptions out of a catalogue. We had a physical therapist, certified physical therapist write all of our descriptions and talk about the product in a very educated way and now when you type in any of our product names into Google we're first page for like all that but yes I mean that's added cost after the fact that one in that I had taken into account with the valuation and the old owner doesn't care about that in their valuation because it's not their problem kind of thing that's why you just don't want to ever, ever, ever, ever (inaudible)(0:44:45) ever overpay. Sorry, I don't know why that was hard to say.
Grant: Ha-ha. Seriously …
Mike: Okay …
Grant: I'm just going to jump in really quick to I just want to hammer again on the technology side which is at with a technology company, the technology always is changing so you can almost think about it coming from a business side that your website should be considered a depreciable asset if that helps explain it at all and that is something that's is going to be something that you really, really, I can't stress enough really need to like grab your head around and I would give it probably a 5 year depreciation schedule. I don't know if you'll agree with that Mike maybe?
Mike: No I think it's less than that I think it's probably more like 3 years realistically technology changes pretty rapidly.
Grant: Yes. You should probably ask Dunner (0:45:36)(unintelligible) like when's the last time they've ever done some serious work on it and if the answer is 3 years ago…ha-ha…you've got a really, really depreciated website same goes as SEO and everything like that and obviously they're going to think about it differently because they've put in all this on cost onto building a website and be like, “Yes, we've got this great site and blah, yada, yada, yada.”
All these great things but if we're talking about like a website that is running on one of these standard stores or kind of God forbid if it's running on like a very ancient platform Mike with Icewraps sells (unintelligible)(0:46:11) on Yahoo Stores. When I got Chopping Blocks it was running on Miva.
I don't necessarily want like dog on Miva here, they can do some stuff pretty well and there's a lot of stories that run perfectly fine on Miva and it's got some really complicated stuff that it can do but for your average person even when I took over Miva within a day I said my number one goal is to get off Miva and that took me months to figure out on how to properly get everything over and that wasn't included in the valuation but like Mike I also paid a very, very low multiplier for Chopping Blocks that was quite nice so I'm going to get my return back in a year as well on that one. Mike already has gotten his return I'm pretty sure, right Mike?
Mike: Yes, I think so it's definitely close to that. From a cash flow perspective were behind because we're in developing a lot of white label products, it's been cash intensive but the profitability's definitely there and we're right at that break even I think on the transaction which is great and it's been under a year.
I want to kind of get into the nitty gritty of kind of my philosophy in how I approach looking at buying these sites. We obviously just talked about valuation extensively here but what I'm looking for basically is really difficult to find it's a needle in a haystack and that's you're basically a site that's struggling for some reason, very few other people would want to touch it. It's a turn off to lots of other people which helps get that valuation down.
You're basically … I'm looking for that deal and but there's a lot of a lot of red flags a lot of things that that turn me off very quickly and make me run the other way just as much as anybody else. I don't want a site up in looking at a site that the traffic is down for instance like Icewraps their traffic had been declining over the years which is to a lot of people a major red flag and it certainly is to me as well but I'm comfortable with it if it's happening for quote unquote all the right reasons.
I don't want a site that was over optimized or got some type the SEO penalty that I'll never be able to get the traffic to recover. With Icewraps I mean the guy basically didn't know what SEO was and the traffic in my opinion had tailed off because of A, it was on a horrible platform on the Yahoo Stories platform. My theory was that once I upgraded to a better platform like Big Commerce or if I did Shopify or Magento or any of the more prominent platforms like my theory was that that would help in itself. My other theory was that if we added all of our own photographs and our own descriptions that that would help significantly and it did and if you look at the traffic history now for Icewraps it looks like a huge valley it's like there's traffic on one side of the valley.
Let's say 10 thousand visitors a day just to use a number that's it definitely not that high but just to use a number and it dropped off to 500. It made it just the traffic had really sank when we had taken it over and we're well on the road to recovery back to like the glory days of where Icewraps was.
Mostly because again, it was it wasn't unrecoverable traffic problems it was things that can be fixed and that's really tough to discern I mean it's a it's hard to know exactly you you'll never know for sure you can't call up Google and say, “Hey, is this site hurting because of these reasons?” They're obviously not going to tell you so it was definitely a risk but with the experience that Grant and I have of doing SEO for almost 15 years now I was able to make a pretty safe bet with Icewraps and feel like we were doing the right thing there and again it was knowing by looking at the link profile that it just wasn't spammy stuff.
We look at some of these sites and I recommend SEM Rush by the way semrush.com they have a free version of their software that you can use x of numbers searches a day that'll tell you basically what the traffic is for the site. You can also use moz.com they … open site explorer will tell you their link profile along with SEM Rush and basically look at the link profile and see, “Hey is this is this Icewraps site getting spammy links from directories or thin content sites or whatever is that's the reason it’s taken a hit or is it just you got very few links and the problem is on-site. Is that … make sense Grant? Do you kind of agree all that?
Grant: Yes, I definitely agree.
Mike: The other thing I look at is the age of the site. One of things I don't want to see is, “Oh I started this site last year.” With Icewraps it was a 10 year old site. To me history is incredibly important, it's important from an SEO standpoint.
Google will rank older domains way higher, way easier but on top of that there's just a lot more data. I want to see the ups and downs of a site over multiple years and be able to look at multiple years financials. I don't want to look at the trailing 8 months and have to make a decision on what the site's going to do moving forward based on just a short period of time and I also feel like if a site was launched 8 months ago and it's doing really well then I just can start up myself and only be 8 months behind versus something like Icewraps that have been around for 10 years it were just a huge amount of history there. What do you think of that particular angle Grant?
Grant: That one I think is interesting because again we, given our background, we can launch websites and I think that one is kind of a very much dependent on the person getting into it I mean if you've got like one website under your belt or two and creating a company from scratch I think that's pretty easy but if it's your very first venture into e-commerce I think there's a lot of argument for buying into a website to at least kind of get the training wheels on and kind of knowing what's going on.
The hard part of course is that it's also risky, both of them have very, very real risks they're a little bit different. When you buy into a website you've got your capital at risk when you don't buy into a website you've just got not knowing how to build it at risk. It kind of depends on your appetite for risk and how you can handle this so I think that's kind of the big one.
Mike: Yes, the next thing that I look at is and this this you see this a lot is this whole concept of owner only spends dot, dot, dot hours per week, they're are absentee owner, with no employees blah, blah, blah. I mean it obviously can happen. Icewraps had a absentee owner but they also had 2 full time employees .
What I look at if you're looking at the P and L, the profit and loss statement of the business which will eventually will get at some point after you sign an NDA and there's no number on there for salaries that is like a huge red flag for me. What are your thoughts on that Grant?
Grant: Yes, I totally agree I mean when you're saying that I pretty much was thinking in my head like yes I've got property on the moon to sell you I mean . If a guy's saying that they don't spend any time on the website you should be concerned for 2 reasons: one, if they're not spending any time on the website and they're actually telling the truth, who's doing the marketing? website live and die by marketing and if no one's doing the marketing that means that the parents are gone the kids are taking care of themselves.
We're talking about a website that is not nice and tidy. It's not a 2.5x it's not a 3x it's not somebody that's maintaining the yard letting the weeds take over and they're letting their competitors like catch up to them. All they're doing is cashing in right and playing in Tahiti or doing whatever they're doing.
If they're aren't telling the truth then obviously they are working on the site, the way that I look at it I just ignore that completely. Whatever they say, “Oh, I only work X amount of hours just act like they didn't even write it. Just expect that you're going to be spending 40 hours a week minimum on your website. There is simply not another type of business that exists.
I know one of the top franchise owners for a snack food, it's actually Auntie Annie's in the West Coast region, we are not great friends or anything but I met the guy he's a really, really good guy regular business and that guy probably makes a pile of money but he's also hanging in his store.
He’s talking to his managers, doing all this stuff, that guy could easily sit on his laurels every day and just collect money and make it rain but he doesn't spend 1 or 3 hours a day working and that guy owns 18 stores but that guy's going to be putting in work, you're going to be putting in work. There's just no easy no like no free lunch it just simply doesn't exist.
Mike: And without a doubt . At the very least you need to account for the fact that there that they aren't putting any expense on the books for the for employees because either you're going to be doing it or you're going to have to hire someone to do it and that eats into the valuation and I get into arguments with people all the time when looking at these businesses. Some people come around ,some don't but they're like that’s a part of the business owner's responsibility or whatever and that's BS because like everything has a cost so if there's no numbers on the P and L for salaries that's a huge red flag.
I'm just looking out at the timer here and I'm realizing we're kind of getting run over here on this episode. We're trying to keep all these down to an hour and we're right we're at an hour right now. I'm thinking that we'll probably just spend a few quick minutes here we did pick one business to evaluate today. We'll just end on that and like I said it's going to be a recurring segment we can talk about more things to be thinking about when purchasing an e-commerce site in future episodes but I'm thinking Grant we should probably just reveal the site that we picked for today and spend a few minutes talking about why we think it's a potentially good pick and go from there.
Grant: Okay, sounds great . The site that we're going to be looking at today is epicbeautybar.com and we found this because it was listed on BizBuySell and we don't mind saying that because we just want to let anybody that wants to take a look at it go there as well and they have the domain listed there. A lot of times people don't actually list the domain but these guys did the favor and already did it. This company from the BizBuySell listing, they're asking for 150, cash flow of 42, that's about a 3.5ish valuation, it's almost up to 4.
It's pretty high valuation. Gross income 176, they've got 18 thousand in inventory, established 2013, has 2 employees. Now, very first thing that they say can be run by 1 to 2 people working 1 to 3 hours a day right?
I mean kind of what we did just talk about we ignore that. It's not a huge operation, they say that they do about a 100 to 130 orders per month but that's still like 3 shipments to 4 shipments a day and they say that they've got I think they said that they've got a logistics company in here and they're also running on Big Commerce.
It's a pretty straight-forward website, they've got a bunch of make-up and other beauty products on here and it doesn't seem like its anything terribly complicated. It's essentially kind of a very attractive business I would say to a lot of people that are trying to get started out. Mainly, because the asking price is 150 and that's like a very beautiful number for most people. And I'm not saying necessarily cash so to speak but 150 seems generally affordable as kind of a first time business. If you were to get into a franchise, you'd have at least double that, if not triple or quadruple that and then the cash flow is pretty low at 42 thousand that's kind of a … most people think it could be like side gig kind of deal. That's kind of a little bit about the business, if you want to start analyzing it a little deeper Mike?
Mike: Yes, the first thing that I always do when the situation is like I said go to semrush.com. I put Epic Beauty Bar in here and the first thing that I see huge, red flag is there's just no traffic. There's no organic traffic. They're getting some50 visitors a month. They're claiming that their doing 9 to 10 thousand dollars a month off of this traffic. It just doesn't equate to me. It's definitely a massive red flag.
Doesn't have a lot of organic traffic, never has had organic traffic. I would already be on the defensive with this site. I certainly would still ask for, fill in an NDA and ask for financials and ask questions on where they're getting their traffic from. It could easily be that they're a social media company more than anything and they're getting the traffic that way.
But for me seeing this low a traffic would just turn me off if it's not really in the wheelhouse as much as something that either has traffic or previously had traffic.
Grant: Yes and like Mike is saying, we're actually doing this live. Just to let you guys know we haven't actually, I mean we look at the perspective just a little bit but we're going through this like as we're talking to you. You're getting on actually a real time breakdown of how we're doing this. Right now, I'm SEM Rush as well. I'm looking at the referring domains, I'm trying to figure out who's back linking to them and I see epicbeautyguide.com, I see bellatristicbeauty.com. I'm opening these site right now because like what Mike said if there's no organic traffic, where is this traffic coming from?
The first one, this Epic Beauty Guide, it looks like a blog and my first question is going to be is this person running this blog? Is this part of their like referral? Is this how they get all the people in here and if that's the case I mean now you've bought yourself a job blogging. This is kind of the, is this person really spending 1 to 3 hours a day running it? I mean if you are running a beauty blog does that count to 1 to 3 hours? The blog included in the sale? I'm going to be looking for that right now.
And I don't see anything in there regarding a blog involved. I don't know if this blog is being paid or anything like that, that's kind of a very big question that you would want to ask.
Mike: Yes. May I? I think with this particular site, it fits very, very well into all the criteria that we mentioned towards the beginning of this episode with products being light and relatively easy to ship and all those other things that we've talked about. I think it's a great candidate from that but I start to get nervous when I see the traffic where's it's at and soon would be asking questions about that. I also think that their asking price is astronomically too high and I mean 3.49x basically 3.5x. I would never spend that much on a site, I mean I want to be more at 2x like I mentioned earlier which would mean I would come in with an offer of 86 thousand as a max and I'd probably would even start blow that and try to start from negotiating at 75 thousand or something like that which you might just be a non-starter. You're asking, you're willing to offer half of what they're asking for that's always a tough one.
Grant: Yes and I actually have a very, very strong opinion that as the cash flow gets lower or closer to zero so does the valuation. For example, if the cash flow is 10 thousand no matter what your platform costs are all the same and your still going to need to manage like an e-mail yourself, you are still going to need to manage a website. you're still going to manage product, you're still going to have a UPS account, you're still going to have taxes to pay. You're going to have all of this standard overhead cost and all of that takes time and even if the company's making zero amount of dollars, all of that takes time to run and upkeep. There's kind of this implicit cost of just running a damn store that you've got to be paid for your time and somebody can't say, “Oh, well I made 10 thousand, I'm going to sell it for 30.”
It really doesn't make any sense, you're buying yourself a job and I don't know why digital brokers seem to think that this is like a legitimate way of doing business but in the brick and mortar industry, if you run a restaurant and your cash flow at the end of the day is 50 to 70, there is no way in hell that you can sell this restaurant for 150.
And the reason is everybody with any modicum of like IQ understands that when the company is only taking in 50 end of the year cash in hand that means the owner is grinding out a living. The owner has bought himself a job. Why would the guy pay 3 times his own salary just to buy a job that pay salary, it doesn't make any sense at all.
In the digital world, that same concept of lies and this is the way a lot restaurants, a lot of times it's just simply an asset sale when things go down and in my opinion, after a certain cash flow amount and I can't really specify exactly what that is but I mean it really does turn into cash asset sale. I'm not saying that Epic Beauty Bar is any of that, I mean I don't have any of the right details here but I wholly agree with Mike. Asking for a 3.5 multiplier, you have to prove to me that this site is about to blow up for that cost and I don't see any blow up, not yet.
Mike: Yes and there's always another site when there's … when you go into BizBuySell right now we were looking before this episode, I saw at least 3 or 4 other sites in this exact niche and we couldn't pick them to talk about because they're under NDA and they don't list their URLs. It's hard to find these listings where people are disclosing their website like we talked about but if this is a niche that you're interested in there's plenty more to pick from. You can find one that's at a lower valuation and is more of a slam dunk.
Grant: Yes and one of the things that you'll often hear from people and they'll say, “Well, I've paid X amount, I paid 50 thousand dollars for my website to be built so you're really getting like a 50 thousand dollar website in this business and you should be paying 50 thousand as an asset. My response is again, one, is a depreciating asset. If you haven't done any work into it then it's depreciated, you've not up kept it and second, if your website, if you put a million dollars into the website but you're generating zero sales that doesn't mean your website's worth a million dollars, that means your website's worse, zero.
There's always opportunity of course but if you've actually put in the work into a website that's got all the wheels on and it's bolted and everything's on correctly, you've still bought one giant paper weight essentially and it's not doing anything until you actually push it and that's you're being paid to do.
Mike: It's exactly right, yes. Well, I think we've kind of hit our time limit for this episode. I think we can continue to talk about this for another hour if we have the time and maybe we'll make a follow-up episode with more details about this at some point but I think this is probably pretty good for today unless Grant you have anything printed or really important you want to add?
Grant: No, I’m pretty good I think we covered all the bases over here and yes next time we're going to go into a pretty deep investigation for the next site that we pull up and if anybody out there wants us to do an evaluation of a site, we're happy to do it as long as it doesn't violate any kind of NDAs of course. If you're looking out there for a website that you want to buy, if maybe you have the NDA and you just give us a name of a website and no other details and we can go and we can kind of give our opinion and if we know that it's under a sale, we're going to respect the broker and we’re going to respect the seller. We won' list the company but we can probably just cover that too. That's it from me for right now.
Mike: Just head over to EcomCrew and hit us up on the Contact Form and we'll be happy to consider your submission on a future show and with that have a great week everybody and we'll talk to you next week.
Grant: Take care everyone.
Mike: Goodbye
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