The Realities of Operating an Online Product Business

Over the years, I’ve worked with customers who were just getting started with e-commerce. In many cases, their Web site was their first experience with selling products. In every case, they were surprised at how much work is involved in running a Web-based product business.

When you first set up a Web site that sells products, you tend to focus on the development of the Web site itself and the presentation of your products. Although those issues are important in the beginning, you’ll find that you have much more to think about once you start getting sales.

Generally speaking, setting up your Web site is something you do once. Sure, you will undoubtedly add new products and possibly rearrange the catalog, but from the perspective of day-to-day operations, the real work starts the day you get your first order.

Strange Expectations

I’ve spoken with a few people who had very strange expectations of running a Web business. For some reason, these folks figured that the Web let them operate a business on autopilot. That misconception is so wrong. Just because your site is available 24/7 doesn’t mean you will get any traffic to it. You still have marketing problems to solve because you are competing for visitors against many thousands of other established Internet businesses.

Using the Web as a sales medium also doesn’t mean you get to just sit back and watch the money roll in. Even if you are successful, you won’t have time to watch the money roll in because you will be too busy dealing with fulfillment, inventory management, customer service, and all the other responsibilities that go along with operating any business.

Let’s Talk Reality

If you are considering setting up an Internet storefront and selling products, more power to you. Building any business can be fun and rewarding, but you need to be realistic about what is involved.

Keep in mind that most of your business responsibilities as an Internet business tycoon are the same regardless of whether you sell your products on the Internet or through more traditional means, such as through a catalog. In fact, a mail-order catalog business is probably the closest match to the business model of an e-commerce product business.

If you are new to e-commerce or product sales in general, this article will help you get a feel for what’s involved. It will help you prepare for the responsibilities you will have and create a plan for success.

You will learn about:

  • Adding and maintaining products
  • Processing orders
  • Financial implications of e-commerce

Getting Your Products Online

Before you can sell a new product on your product Web site, you should have at least one of them in stock, or have a way to track back orders. You also have to set up the Web site with information about the product.

To acquire stock, you have to find wholesalers and place orders with them, possibly for bulk quantities in order to keep your cost down. As you sell items, you’ll need to monitor your inventory so you know when to place orders for more. You’ll need to have some operating capital that you can tie up in this standing inventory. You’ll also have to find a place to store all this stuff.

If you sell products that you make yourself, you’ll probably need to stockpile a few of them so orders can be filled quickly. Internet shoppers expect a shipping delay, but they don’t expect a manufacturing delay. If you decide to manufacture on demand, you should warn shoppers of how much of a delay they should expect.

When you add new products to your offerings, you’ll need to put pictures and descriptions into the storefront. Depending upon your talents for photography and copy writing, a picture from your digital camera and a quick blurb about the product are probably not going to be compelling to shoppers. It may be necessary to get professional help with the product photography and sales copy.

Fulfilling Orders

The fun begins when you start getting orders through your new Web storefront. Now you have to ship products to the customers, which is a process called fulfillment.

The fulfillment procedure usually consists of several steps.

Pulling Orders

Retrieve the pending orders from your Web store and print a packing slip for each one. If your store tracks order status, you should change it to “shipping” or “in process” at that point so you know you’ve already started on it.

The status indicator can be helpful if you aren’t able to fulfill all elements of the order on the same day. It prevents you from accidentally trying to ship the same order twice.

When you are finished working with the order, you should mark it “complete” so you know you have already dealt with it and can focus on orders that are still pending.

Picking Products

Retrieving products for shipment is called “picking.” Gather together all the products associated with the order.

Packing Orders

Once you have all the products associated with an order, you can decide how you will ship them. You can pack them all in the same box, which usually saves you money on shipping charges, or you can send them in separate boxes.

At this point you realize that you need boxes of varying sizes, packing material, and tape. Packaging is another place where you will tie up some operating capital. You don’t want your customers to have to wait an extra day or week while you come up with a box for the order.

By the way, the key to protecting items during shipping is to “suspend and immobilize.” Use filler material to suspend the item in the box (don’t let it directly contact the sides of the box), and pack it firmly into position (don’t let it move around in the box). Assume the box will be dropped, thrown, and crushed during shipment because it probably will be. The suspend-and-immobilize technique will save you a lot of headache and money in processing damaged returns.

Shipping Orders

Once you have an order all packed up and ready to go, you need to apply the proper postage to it. How you deal with this depends upon what carrier you use. Most Web site software lets you select one or more shipping carriers and use the carrier’s Internet service to calculate shipping for each order. This service is helpful, but it doesn’t account for everything.

The first thing you have to consider is that the shipping calculation is usually based on the total weight of the order. That is fine if you ship all items in one carton and the box is not oversize. However, as soon as you have to split your shipment into multiple cartons or ship an oversize item, the calculated shipping will be inadequate.

So, one of the first things you realize as you start shipping orders is that the amount you charge your customer for shipping and the amount you pay for shipping really have nothing to do with one another. From an accounting perspective, the amount you charge your customer for shipping is another form of income from the order. The amount you pay for shipping is a business expense that is probably not even tied back to a specific order.

In fact, some larger companies consider shipping charges to be a separate “profit center” for their business. Due to their volume, they get such a great deal on shipping that they can charge the customer more for shipping than it costs them to ship the order, and yet still charge the customer a reasonable amount.

However, small companies don’t have this opportunity because they get no break on shipping charges. To keep your shipping charges reasonable, you have to finesse them to be as close as possible to your cost. In many cases, you can accomplish what you need by adjusting the weight of the item. For example, you may find that an oversize item that weighs 6 pounds costs as much to ship as a 10 pound item that is not oversize. To account for this difference, you can set the weight of the oversize item to 10 pounds instead of 6 in your shopping cart software. It’s a low-tech solution, but it works.

Finally, before the box is ready to go out the door, you need some way to generate a label for it. You may also need a way to affix the packing slip to the outside of the box, or you might just throw it inside (hopefully, you remember to do so before you’ve taped the box shut!).

Shipping Takes Time

When you think about what I just covered, it becomes clear that picking, packing, and labeling are going to take some time, and that time adds up. Even if you spend only five minutes per order, you’ll process only twelve orders in an hour. Sure, you can hire someone to do shipping for you, but how many orders do you have to ship in order to cover for that person’s wages?

Financial Basics

Many businesses fail because of improper bookkeeping. When you sell a service, the bookkeeping requirements are pretty simple. You don’t usually have sales tax or inventory management responsibilities. However, when you sell products, your accounting practices become important to the success of your business. I know most of you will fall asleep if I get too deep into this topic, so I’ll just give you a quick overview here so you have an idea of what to expect.

Receiving Products

When you receive products, you need to add those items to your inventory. Depending upon how your accounting software is configured, the cost of the new items is usually averaged with the cost of the older items you still have in stock.

The average cost figure is used to determine your cost of goods sold as you sell items and the value of your inventory at any moment in time.

Selling Products

When you sell a product, you subtract the item from your inventory. Most accounting software helps you track how many items you have in inventory and helps you determine when you need to reorder.

However, you still need to periodically perform a physical inventory. That means going through every product in your stock room and counting how many items you really have. The physical inventory lets you account for “shrinkage” (theft or paperwork errors) and any damaged items you may find.

Collecting and Remitting Sales Tax

Dealing with sales tax can be a real pain, depending upon where you live. The important thing to remember is that you must collect sales tax when it is required and the money is not yours to keep. That sounds obvious, but I’ve known of vendors who failed to remit sales tax to the taxing authority and eventually got in big trouble for it.

To collect sales tax, you must have a seller’s permit of some kind from the state and sometimes from your local government as well. The permit gives you a sales tax identifier that you use when remitting the sales tax you collect from your customers. In Idaho for example, the process is really simple. You tack an extra 6% (as of this writing) onto the merchandise subtotal, and once per month (or quarter), you send the collected money to the state. If your business is located solely in Idaho, you don’t have to charge sales tax for your out-of-state customers. Other states have far more complicated sales tax schemes. Wherever you do business, be sure to consult with your tax accountant about what you need to do.

Capturing Payments

Most Web-based product businesses accept debit and credit cards because that is how customers want to pay. When a customer places an order, your shopping cart communicates with a credit card payment processor to authorize the charge. Once the charge is authorized, the order is accepted by the cart software and you are notified of the sale. However, no money has actually changed hands yet.

After you ship the order, you can “capture” the payment, which means you mark that customer’s payment for the nightly settlement process that will transfer money from their account to yours. If you can guarantee that every order will ship within twenty-four hours, you can set your shopping cart to “auto-capture,” which means the charge will be automatically marked for the nightly settlement. Most product businesses can’t guarantee that kind of response time, so you capture as you ship instead.

Capturing is an important step. If you ship the order and forget to capture the payment, you may never get paid for that order. The payment processor holds onto the pending transaction for a limited period of time. After that period expires, the transaction is automatically voided. To make sure that never happens to you, be sure to incorporate payment capturing into your order processing procedure.

Recording Orders

Orders enter your business through your shopping cart software. Because it is the entry point, your shopping cart software generally determines the shape an order transaction takes from an accounting perspective. For example, they way your shopping cart software handles discounts and coupons determines what kind of special offers you can make to your customers, and every program is different.

Getting order information out of your shopping cart and into your accounting software is another challenge. If your shopping cart does not export to a format that your accounting software can read, then you will have to re-enter the orders by hand. Even if your accounting software can import your cart data, it is often a trial-and-error process because of the way the cart data must map into the appropriate buckets in your accounting software.

Another data integration point involves your payment processor. The payment processor is the repository for information about what deposits were made to your merchant account. If you remember the discussion about capturing payments, you’ll recall that the funds are received for selected orders in nightly settlement batches. Because of this, when you import orders from your shopping cart, you should not record the transaction as an immediate deposit to your merchant account. Your orders should come in as some kind of receivable (i.e. as an invoice). When the customer’s payment is captured and then settled (which could be several days after you receive the order), that is when you officially receive payment and deposit the money into your merchant account.

Get Professional Help

Okay, that last part about the payment processor was probably too much information. If you are still awake out there, you might be thinking, “I don’t want to deal with all this!” Well, you don’t really have to. If nothing else, this discussion about the financial implications of operating a product business might have just convinced you that the first thing you should outsource is your bookkeeping. On the other hand, if you are up to the challenge, then at least be sure to consult with a qualified tax accountant about how you plan to manage your books.

Just to be clear, don’t take the information I’ve given you here as the best or only way to handle things. I’m not an accountant, I’ve just had to deal with managing the books for my business for a while, and I wanted to give you a taste for what’s involved. If you are going to handle the books yourself, talk to your accountant before you get rolling: I certainly did.

It’s Up to You

None of what I’ve written about was meant to scare you off of the idea of running an Internet product business. The best things about a Web storefront are its ability to reach a wide audience and manage much of the sales cycle without your intervention.

My point is simply that the sales cycle is just a small part of the business. Every business has marketing, legal, financial, and operational requirements. Your web store handles only a small portion of the marketing and operational activities. Running the rest of the business is still up to you.