When founding a business, you enter one of the most competitive, cutthroat arenas in the world. Where one business does not succeed or becomes complacent, hundreds of competitors swarm the waters waiting to take advantage of any misstep. As a business triumphs and succeeds, competitors follow your roadmap and try and emulate your success. The landscape is constantly evolving and those businesses which stand still, do not innovate, or are content with mediocrity, will eventually flounder. Just look at Kodak, Research in Motion, and BlockBuster to name a few. Over the last 10 years, we’ve been through a number of evolutions in our industry and faced increasing competition in all facets of our business. Despite that, we continue to grow and stay a leader in our industry.
The Inventory Question
When BizChair.com first started, we had no inventory on hand. This was possible due to the evolving supply chain and the internet: no longer did customers have to visit a showroom to view products. And no longer did retailers have to stock merchandise for their customers to buy. When a customer would purchase an item from a retailer on the internet, the retailer would then order that item from a distributor or manufacturer and have it shipped directly to the customer. This process is seamless to the customer and happens a fair amount; it is called drop-shipping. Many large retailers, including Wal-Mart routinely drop-ship products to augment their online selection by providing more products for sale without increasing overheard and inventory costs dramatically.
An example of drop shipping
As a start-up, not carrying inventory was critical to our company’s success. If we needed to stock inventory to start, we would have had to invest in a warehouse, employees, infrastructure (forklifts, pallet jacks, wrappers, etc), and sign a lease in addition to buying the inventory. Given that I only had about $3,500 that I had saved up over the years from some other small business ventures, that was out of the question. With the internet being new and not many others selling furniture online, the drop-ship business model was able to work well. The website start-up costs were minimal compared to a traditional start-up business and the risks were mostly my time and a little cash that I to pay for hosting and advertising.
Wow, It’s That Easy?
As we ramped up the website and added products from the various drop-shippers that we brought on board, the concept was still unproven. Only when we started advertising BizChair.com were we able to see how popular furniture was on the internet. Furniture has always been a traditionally high margin item due to the overhead and inventory requirements. Being able to undercut all of the traditional brick and mortar retailers and offer a far more extensive selection (because of drop-shipping) gave us a significant competitive advantage. The counterpoint was that customers would have to rely on photos and text to make a buying decision. The verdict was (and still is) that most consumers would rather save money and buy online while taking a small risk for most products (which has diminished with the introduction of videos and 360 images).
With our success (and others) on the internet, competitors naturally joined. It was only a matter of time before word spread amongst the close knit furniture industry that a few smaller retailers had been growing very quickly selling office furniture online. The internet was also gaining traction quickly, with sales growing upwards of 50% in 2003. In what was seen as a modern day gold rush, competitors both new and old launched e-commerce websites, vying for a share of this rapidly growing industry.
While the low startup costs helped me launch the business, it also meant that it was just as easy for competitors to launch. It was only a matter of time before the internet would become crowded with thousands of stores selling similar products. Drop-shipping also enabled other competitors to open up and undercut pricing. Why would a customer purchase from us when a competitor was selling it for $10 less? Differentiation based on customer service and consumer friendly policies (free shipping for example) became increasingly important. It was just a matter of time before we would become a marginalized player in the industry with shrinking profits and margins.
So, How Do I Differentiate Myself?
While it would be nice to think that consumers think about more than pricing when selecting a website to purchase from, that is one of the dominant drivers in the decision. Just look at Amazon—their pricing is almost always the best and they offer excellent service and fast shipping. What more could you want? When we launched in 2001, we offered free shipping and a 60 day money back guarantee to entice customers to try ordering a chair online. These were both revolutionary offers at the time and helped us grow sales at a rapid clip—up to 100% per year at our peak growth rates.
We also worked with our vendors to negotiate better pricing and discounts. A recurring theme that we heard was that if we bought larger quantities and stocked them, we would be able to realize greater discounts (upwards of 10 - 15% off of “standard” pricing). We would also have full control fo the customer experience and could set later shipping cut-off times to shorten the delivery timeframe. The downside was obviously more cost in terms of warehousing, employees, and infrastructure.
We took a gamble and started working with a third-party warehouse provider. We shipped a trailer of our most popular item as a test to determine how well it would work. Again, the risk was relatively small since we were paying someone a commission to warehouse the product for us and there was minimal upfront cost. We also had sales history and the items that we sent were also our most popular—we sold about 750 of them per month and only had to buy 550 for the initial order. Those chairs quickly sold and we determined that, in order to maintain our market position, we would move toward stocking more product. While others were racing to the bottom to compete for sales, we would have that extra margin since we owned the inventory. It is somewhat ironic that the one thing that allowed me to start the business (drop shipping), was being replaced by such a capital intensive business model to keep the company growing and profitable.
It’s almost amazing to look back and see how fast the industry and internet have changed. When we first started, all of our sales were drop-shipped. Even 5 years ago, the vast majority of our sales were from drop ship vendors. Today, drop ship sales make up a fraction of our business and merely augment our selection to provide more options to our customers. We now stock over 1,000,000 pieces of inventory and have over 700,000 square feet of facility for distribution. The warehouse buzzes with forklifts and pallet jacks moving inventory around the clock. Inventory ownership has been one of the driving forces behind our business and has helped grow us through the recent recession. We’re also able to provide higher customer satisfaction levels by controlling all facets of the shipment process and decreasing delivery times.
To be honest, if we were unable to drop-ship, I don’t think BizChair.com would have started. Coming up with an idea and executing are one thing, but investing tens of thousands (if not more) into an unproven idea can be daunting, even if you believe in it with all your heart. I doubt a bank would have lent a 14 year old $100,000 and I had no practical way of raising the money at the time. Not to mention only about half of businesses last more than five years. Starting any business venture involves risks and that is why the rewards for success are so plentiful. The key takeaway is that risks should be prudent and success will follow. Overextending yourself is setting up for failure.
I’ve been through a lot over the past 10 years: I’ve seen competitors come and go, revolutionary products introduced, and technological innovation that has disrupted industries. Staying ahead of the curve and always evaluating how your competitors and industry is changing is imperative. Taking risks and trying new ideas is what entrepreneurship is all about; don’t be afraid to uproot a market and buck the trend. But don’t close your eyes once you’re at the top and let the rest of the competition catch up.