Wise Web Strategy

Google and a look at the future

Google's numbers were released yesterday, and as Google CEO Eric Schmidt said, "Business is very, very good here. We had an excellent quarter in all respects, especially international."

To summarize, Google showed a profit of $722 million on $2.69 billion in the third quarter.  About 44% of all searches done online were done by Google. For comparison, Yahoo had 28% of the search market.

My hat is off to Google.  A 27% net profit ratio is incredible.  However, it is important to realize that if you are advertising in Google's Adwords, you are probably not breaking even on that advertising, much less seeing a 27% net profit.  In other words, you are transferring your money to Google and making them wealthy.

I certainly believe Google's current profitability is unsustainable because I believe that online advertisers will eventually get smart enough to bid appropriately.  As that starts to happen, bids will start falling, and so will Google's revenue.  Already, the average bid online is down 25% in the last year.

I like Google, and I want them to make a profit, but I long for the day when their profit is more reasonable.  That will be the day where Adwords is actually a legitimate online advertising opportunity again.

Why Startups fail

If you are in the early stages of building a business, I encourage you to read this excellent article from Paul Graham.  Entitled "18 Reasons Why Businesses Fail", it discusses traps to avoid.

Written from a VC perspective, it specifically discusses the importance of software development in a business.  If you are an online business, you are in the software business at least in some capacity.

One of the things that will make or break you when launching a new site is your timing.  I am impatient, and I want new sites launched fast--perhaps too fast at times.  However, most people are the opposite and think it is perfectly acceptable for sites to take months to finish.

If you are in this category, change your mindset.  For most businesses, a web site is not complicated.  You should have it up in days or weeks, not months.  If it is too complicated for you to get it up quickly by yourself, get some help.   Push hard--laggers are not rewarded on the Internet.

We will be launching a new and improved Vitabase within a few days.  It has completely been converted to new technology, and has many new bells and whistles.  It has been a huge project that has taken us a few months even with multiple programmers. 

Originally, it was due to launch at the end of the month, but I felt the need to move up the date.   We have been working hard, and will get it released on time.  The fact is that with software, you can hit almost any date you choose, but it may just not be as done as you want it to be.  Your developers will always be tinkering with the software until the last second--as this article points out, software never seems to get more than 85% done.

I would encourage you to be in a hurry to release software as soon as possible, even if it is not complete.  Don't ruin your reputation, but don't be scared to get into the game before the software meets up with your idea of perfection.

Online discounting

I have a confession to make.  When I started selling online, my business strategy was to undercut all my competition.  That was a stupid move.  I accepted low margins but sold a lot of product.  However, within months, my competition was matching my prices and my market share fell.  To this day, on that web site, I have low margins with no hope of ever getting them raised.

Price cutting is the #1 differentiation strategy used by unsophisticated online retailers.  It is also the easiest, and normally, the worst strategy you can do.

To this day, we deal with distributors who try to start price wars with us on our own products.  Talk about stupid.  Since we are selling them the product in the first place at a substantial profit, how can they possibly think they can win a price war with us?  We immediately cut off distributors who can't figure this out--we don't want them or need them.

Of course, even large companies make this mistake.  I can think of many companies such as Overstock who have yet to make a profit by discounting. To be honest, it could work in certain situations.  Amazon is the king of online discounting, and after losing billions for a few years, it started working for them.  If you have billions to invest, it might work for you, too.

Here are the reasons why discounting is probably a bad strategy for you.

1) Discounting starts price wars where no one wins but the consumer.  Manufacturers hate price wars because their product is devalued and they lose distributors who need high margins.  Online retailers hate price wars because they end up with such tight margins that it becomes impossible to make money.  Dropping your price will likely start a price war.  Do you really think you can undercut your competition without them matching your price and possibly going lower?

2) Discounting means that you are surrendering your profit for no good reason.  Yes, you might get extra sales for a while until your competition matches you.  Once they do, you can forget about raising your prices--it will never happen.  At that point, you have surrendered a lot of potential profit both on the sales you have done as well as all future sales.

3) Discounting tends to distract you from real marketing.  Face it--discounting is an easy way to make a few quick sales.  However, anybody can discount, and if you do it, they all will, too.  You would be better off focusing on real marketing.  You will know that you are doing your job right when you can sell your product for more than your competition.  I admire companies that can position themselves so they can charge a premium price for their product far more than I admire discounters.

4) Discounting does not help you build company equity.  Some day, you may want to sell your business.  If your business consists of simply selling everybody else's product for the lowest price, you can forget getting any real money for it.

On the other hand, there are times when discounting makes sense.  If you want to discount successfully, you must have these two things going for you:

1) The ability to get product cheaper than your competition.  There may be times where you stumble on a great deal.  Other times, you may get product cheaper by buying in larger quantities (ie: taking more risk) than your competitors.  If you can consistently do that, discounting is a viable option for you.  That is Wal-Mart's secret.

2) A strong stomach.  I can assure you that if you discount other companies products, you can expect lawsuits and other unpleasant problems.  Manufacturers do not want their products discounted and they will take drastic steps to prevent that from happening.  Be prepared. 

Sometimes, you have to weigh the risk and factor in the legal costs you may have to pay.  At the end of the day, discounting might make sense.

Most business people do not have either a strong stomach or the ability to acquire product at a cheaper price than the competition, and that is why they should not discount.  You probably should not either.

Social Responsibility

There is a lot of debate on the high level purpose of business in society.  This is an topic that is worth some consideration if you are a business owner.

Milton Friedman, a noted conservative economist, has famously proclaimed throughout the last several decades that the sole social responsibility of business is to maximize profits for its shareholders.   Ayn Rand was another notable writer who went even further.  She stated that not only should businesses avoid altruism, but altruism in itself is evil because it keeps people in a state of dependency. 

I have a very conservative background, and the private schools and college I went to promoted this kind of philosophy. They did not quote Ayn Rand as much as Friedman, but her philosophy was there in subtle ways.

I am not a socialist by any means, but this kind of ultra-conservative thought is extreme and dangerous.  The fact is that businesses have a greater responsibility than making money. 

From a religious standpoint, as a Christian, such philosophy is directly against the teachings of the Bible.  For example, the Bible goes to great length to express the fact that we are responsible to take care of the poor.  Altruism is encouraged, even with the danger that a dependency might develop.

Social responsibility is a buzz word in business circles, and many companies have learned how to capitalize on it.  For example, after 9/11, how many companies did you see advertising that a portion of all sales would go to the New York Fire Department?

This brand of social responsibility is disingenuous and ridiculous.  Your business has a deeper responsibility than that.  You can start by looking at how you treat employees.  You can also examine relationships with customers and vendors.  You can help with issues in your community, alleviate potential environmental concerns your business might cause, and ensure that you are selling products that are actually helping people in some way. 

The goal of social responsibility is not publicity and more growth.  However, I believe that an emphasis on social responsibility has big dividends. 

Landscaping and Pastries

On my way to the office this morning, I passed a landscape supply store.  They sell stone, mulch, stone statues and similar things.  Today, they have a new banner up that says "BAKERY." 

I laughed about that.  That sign tells me right away what the purpose and goal of that business is--to create cashflow.  The owners saw the potential for making a few extra dollars in the same building, and decided to go for it even though a bakery and landscape store have nothing in common.

There is nothing wrong with that kind of thinking in itself, but if you make those kinds of decisions in your business there are ramifications that you might not normally consider.

A landscape store can grow in several ways.  It can franchise itself and become a national brand.  It can private label its products and find ways to distribute them around the world.  It can simply open several other stores in nearby towns. 

Or, it can open a bakery in the back.

You can probably see now why the bakery decision initally appears to be ridiculous to me.  However, I am not quick to condemn the owners.  They are simply interested in getting a bit more cashflow out of their business.  If a bakery does not hurt their long term plans, you cannot blame them for that.

Your goal for your business is probably either to generate as much current profit as possible or to grow as fast as possible.  Unfortunately, these two goals conflict with each other.

Once you decide what your goal is, you will be able to make decisions better.  I may not agree with your decisions but that is unimportant--your decisions should align with your goal.

I will readily admit that for years I was focused on cashflow, and I took a lot of cash out of my business as income.  In the past year, my perspective has changed.  I am now focused on growing a big business.  As a result, I am paying myself a fraction of what I made in the past and am investing back into the company.

In the past, we developed many websites that were unrelated to our core business.  We have been involved in everything from catfish supplies to collectible swords.  Some of those ideas generated cash for us.  However, none of those ideas moved us in the direction of becoming a great company.

In a nutshell, here is my advice if you want to grow quickly and become great.  Stay focused as much as possible on your core business and concentrate on doing it better.  Don't try to grow by just getting involved in a bunch of unrelated things.  In other words, open a second landscape store rather than opening a bakery in your existing store.

Be prepared to invest heavily with this strategy.  I don't know why, but it is just more expensive.  We are investing in new technology and knowledge at a rate that I would have found staggering just a year or two ago.  However, it is the right direction for us. 

If you are focused, you will be in a better position to be the best at what you do.  Do not settle for being anything less than the best.  If you cannot be the best in your industry, you are in the wrong industry.  You may not have the resources to be the best when you start, but have a plan to be the best in the future.

Being the best in your industry at your core business is the key to growth and greatness.  Nothing against bakeries, but they do not belong in your landscape store.