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A simple business plan for online retail startups

I’ve been doing some reading about successful online retail startups and talking to some other people in the space and it seems that what follows is the basic path that they all take:

1. Develop the product concept
2. Scale the offer
3. Measure and increase the lifetime value of a customer
4. Acquire customers at scale

To look at each of these steps in detail:

1. Develop the product concept

The first step if you’re interested in starting an online retail business is to develop your product concept. What’s your value proposition? Why are people going to shop with you? Why are you different from other retailers? It’s important to start with a good concept, but getting it right can also take some tweaking.

Amazon’s concept is to offer an incredibly large range of products at very good prices with fast, well priced shipping. Zappos (recently acquired by Amazon for US$1.2B) offers extraordinary customer service which includes customer support team members going above and beyond the call of duty, free shipping, free upgrades to overnight shipping for some repeat customers and 365 day returns with free shipping on the returns.

Watch: The Zappos Family on Nightline

Diapers.com (recently acquired by Amazon for US$540m) provides diapers and related products at incredibly low prices with very fast shipping. While not in the same league as these retailers, our product concept at Shoes of Prey is to allow women to design their own shoes which we hand make and deliver to them.

Once you’ve developed what you think is a good product concept it’s important to test it in the market, evaluate it and tweak it where required. You want to ensure you are providing the right offer before you move on to step two and work out how to make it scale. Zappos didn’t start out with all the amazing customer service activities they now have, these were gradual changes they made based on feedback from customers. They also had a lot of early success with search engine marketing. Search engine marketing didn’t really exist when the business was founded in 1999, so this was also something they tweaked with their model after they started, which helped them to scale.

A key part of this step is to launch your product concept quickly and cheaply in case your product isn’t something people want. If your business is going to fail it’s best this happens sooner rather than later, and if it’s going to succeed there is no better way to tweak and optimize it than to get feedback from real, live customers. So don’t wait until everything is perfect to launch, better to get feedback early and perfect the product concept after launch using customer feedback.

Developing our product concept is exactly what we’ve done over the past 14 months with Shoes of Prey. We’ve made some changes to our model since our launch — in particular tweaking our range by adding Italian silk, ballet flats, and ankle boots — and also redesigning our website based on feedback from our customers.

2. Scale the offer

Once you have developed the product concept, the next step is to work out how to make it scale so that you’re able to supply more and more products as your customer base grows. Amazon had to work out how to do this and achieved it with their amazing warehouses and supply chain.

Watch: Amazon warehouse’s processing

Zappos took the time to develop a strong and effective company culture so that the same high level of customer service could be provided by hundreds of employees that were originally being provided by only a small number. Similar to Amazon, Diapers.com had to develop incredibly efficient supply chain processes to be able to offer their low prices, on low-margin products at scale. Check out their robotic pickers in this video!

Watch: Why Soap.com and Diapers.com are changing the rules on overnight shipping

At Shoes of Prey we need to ensure we can hand make and ship a large number of shoes with high, consistent quality and within our 5 weeks promised delivery time.

3. Measure and increase the lifetime value of a customer

Once you’ve worked out how to scale your offer the next step is to be able to measure the lifetime value of a customer, then work on increasing it.

The lifetime value (LTV) of a customer can be described by the following formula:

LTV = Expected Life x Avg. Revenue per User x Gross Margin

This formula highlights 3 levers a business like Shoes of Prey can pull to increase LTV.

Expected Life or the number of shoes each customer purchases from us. How can we offer better value to encourage single visit customers to make repeat purchases from us?

Avg. Revenue per User or the $ value of each sale we make. Can we sell complementary products to our existing customers to increase the value of their basket each time they purchase? Can we upsell them from our cheaper ballet flats to our more expensive ankle boots? Can we encourage people to buy a higher value gift certificate for their friends and loved ones?

Gross Margin. How can we reduce our cost base to increase our gross margin without having to raise our prices? Can we introduce new, higher-margin products into our range?

These are all things we need to work on to increase the lifetime value of our customers. For a great post describing how to measure the lifetime value of your customers, have a read of this blog post from the Venture Capital from Lightspeed Venture Partners.

4. Acquire customers at scale

The final step is to work out how to acquire customers at scale for a cost that is lower than their lifetime value. If a customer is worth $200 over their lifetime and you can acquire a million customers in a year at $100 each, you’ve got a business that’s going to generate $100m in profit.

This is obviously much easier said than done! You’ll need to test different marketing channels to find out what works best. Is it TV advertising, print media, PR, YouTube, social media, search engine optimization, search engine marketing, or a mix of all of these that works best for your business? What marketing tactics and campaigns within these channels help you acquire customers at a low cost and at scale?

Conclusion

Once you have a business concept that people want, an offer that can scale and you can acquire lots of customers at a cost below their lifetime value you’ll have built yourself a very successful online retail business. These 4 steps are not simple to achieve, but they provide a good framework to work from if you’re setting out to start an online retail or eCommerce business.

Michael Fox is the Director of Operations and co-founder of Shoes of Prey.

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