Why consider… An online or mail order business?

Stocking up can be costly, but when you’re starting out you can focus on a relatively small number of product lines.

A conventional retailer setting up a shop on a local high street faces significant upfront costs. He or she must buy or rent premises, fit the shop out and ensure the shelves are stacked with goods. The distance seller – either via mail order or the internet – also needs premises but their base of operations can be a spare bedroom or a garage, at least in the early days. Stocking up can be costly, but when you’re starting out you can focus on a relatively small number of product lines.

But distance-sellers needn’t stay small. Richard Branson’s Virgin-branded mail order record shop offered vinyl discs through the post at discounted prices, which both established the Virgin brand and formed the basis for the company’s present multi-stranded empire.

There are plenty of other examples of mail order success. Some start small. For instance, male outfitter Charles Tyrwhitt started selling a limited range of shirts by mail order from modest offices and grew to a £60 million business covering mail order, internet sales and – ultimately – high street stores. Others, such as internet seller Amazon, started out with big ambitions and raised a lot of money early on to build an operation that could deliver on its goals.

Distance-selling models can easily be scaled up. You start with a few products sold from a spare room. As sales grow, you move into a small, dedicated warehouse and hire a few staff. If growth continues, you move into bigger premises and expand your product lines. The beauty of this is that you can build a strong and trusted brand regardless of where you’re based.

Today, in many retail sectors, it would be difficult to stay competitive without a transactional website.

The rise of distance-selling has had a huge impact on the way traditional retailers (and other transactional businesses) interact with customers. From the high street chains to small specialist shops, many retailers see the internet and mail order as an integral part of their business model. In the early days, this was about obtaining a competitive edge by launching sales channels that rivals didn’t have. Today, in many retail sectors, it would be difficult to stay competitive without a transactional website. Put simply, if you’re not selling online, most of your competitors probably are.

These days, there isn’t much that can’t be sold over the internet or by mail order. If you offer a range of products with clear price points, then the chances are that you can trade successfully on the web or by mail order. However, some products aren’t suitable. For instance, if you supply bespoke products created from specifications provided by the client, you can certainly provide an online or printed catalogue, but completing a sale will usually involve discussions with a client, not to mention a certain amount of haggling. Thus a product such as a made-to-measure suit can still be marketed online although the sale will ultimately depend on a face-to-face meeting.

In brief

• The pros and cons
• The statistics
• Business models
• Money matters
• Sources of funding
• Common pitfalls
• The Moneysense top five
• Regulation
• How I did it
• Useful contacts

You can create a strong online brand without the expense of fitting out shops or customer-facing offices.

As with any start-up, the positives and negatives will depend on personal as well as business matters. Here are a few points to consider if you’re thinking of launching in the distance-selling sector:

Pros

• You can start small – with a spare room or small office and a couple of staff – and only move to new and bigger premises with a higher headcount when the business warrants it.
• You can create a strong online brand without the expense of fitting out shops or customer-facing offices.
• You can test a retail idea before going to the expense of setting up a physical shop. If the idea works, you can expand into physical retail later.

Cons

• The competition in both the internet and mail order space is intense. In any given retail sector, there may be dozens or perhaps even hundreds of competitors.
• The marketing costs associated with acquiring customers can be high. With no passing trade, you’ll have to use a range of online marketing techniques to get people to your site.
• You must keep up with comprehensive credit card security standards in order to trade online. If consumers can’t trust your site they won’t shop there.

Distance-selling by phone is even more prevalent, with 85% of SMEs taking payment in this way.

The importance of having an internet presence is illustrated by figures from Actinic (an e-commerce provider) suggesting that 40% of small and medium enterprises (SMEs) now take payment via a website (with a further 20% planning to do so in the near future). Distance-selling by phone is even more prevalent, with 85% of SMEs taking payment in this way. These figures suggest that the ability to take orders remotely is a competitive must-have.

Online sales continue to rise. In the midst of recession (2008-09), Office for National Statistics figures showed a steady increase in online retail sales between August 2008 (£150 million) and January 2009 (£178 million) while online sales as a proportion of total retail sales went up from 2.8% to 3.7% in the same period.

Again, this trend suggests that not only is the value of the internet market growing, the rising percentage of online sales means the web is a channel that few businesses can afford to ignore.

Distance-selling companies fall into three broad camps:

• ‘Pure play’ internet These are sellers that transact sales solely on the internet. While they may (and should) have a call centre to handle inquiries and deal with customer service issues, their goods are marketed and sold online.
• ‘Pure play’ mail order These sellers are currently dwindling in number. Many companies that started out as mail order companies swiftly added an online sales channel. Thus, clothing retailer Boden sends out mail order catalogues while also running a successful website.
• Multi-channel or ‘clicks and mortar’ sellers These are companies that sell across a range of outlets. For instance, a shop may have a physical ‘bricks and mortar’ store, as well as a catalogue and a website.

Selling and pricing strategies

Online competition is intense, so you’ll have to think carefully about both your target market and how to price your products. There are a number of selling and pricing strategies to consider:

The selling point is that customers can buy through whichever channel – mail, web, shop – that is most convenient at the time.

• Pile high, sell cheap As a mail order or internet operator, your costs will generally be lower than those of a high street retailer. This provides an opportunity to price your products competitively. To put it simply, people buy from you because your prices are cheaper than those of anyone else.
• Offer unique or hard-to-source products Many customers buy from mail order or internet companies because their goods are unobtainable elsewhere. The customer may live in a part of the country where there isn’t a convenient shop that specialises in, say, electronic parts for radio controlled aeroplanes. Or else the seller may offer goods that are unique to that particular company. For instance, you can’t buy Boden’s clothes from anyone else but Boden. This sought-after uniqueness means you can maintain high prices.
• Multi-channel convenience If you operate both offline and online shops, the big question is whether to offer the goods cheaper online to reflect the lower overheads of that operation. Some shop owners do this. Others offer the same price across all channels. The selling point is that customers can buy through whichever channel – mail, web, shop – that is most convenient at the time.

First off, you’ll need a business plan and you’ll need to research your market. Decide who your target customers are and how you can best reach them. Then you need to look at pricing. Will your ‘unique selling point’ (USP) be the discounts you offer or will you offer unique goods at premium prices? This will partly depend on the nature of your business and the expectations of your customers, although you should also look at what your competitors are doing. Look at their approach to pricing, customer service and marketing. Assess their strengths and weaknesses and formulate your own marketing and pricing plan on the back of that analysis.

A URL

To sell online you’ll need a web address, otherwise known as a URL (universal resource locator). An address is made up of the company name (for instance, ‘Brownelectrical’) plus a top-level domain name such as ‘.co.uk’, ‘.com’, ‘.biz’ or ‘.info’.

Well used .com and .co.uk addresses tend to be more expensive than newer arrivals, such as .biz or .info, but most small businesses should be able to purchase an address that isn’t owned by a third party for between £5 and £30 a year. They can generally be bought as part of a package from companies that will provide you with the facilities to publish a website on the internet.

A hosting company

Build-it-yourself sites can be bought from suppliers such as 123-reg.co.uk, Vendor.com and Mr Site for between £100 and £400 a year.

The hosting company stores your web pages and provides the technology to make them visible on the public internet. Hosting packages come in various shapes and sizes:

• Hosting only You (or a designer) create a website. The host provides the storage facilities and the internet link. As a small business you should expect to find standalone hosting (with a web address as part of the package) for around £100 to £300 a year, although £20-30 should be enough for a basic non-transactional site.
• Instant sites and hosting The hosting company also provides an easy site design tool (which can include transactional e-commerce facilities). These instant sites are often based around templates to which you can add your own pictures, text and colour schemes. Build-it-yourself sites can be bought from suppliers such as 123-reg.co.uk, Vendor.com and Mr Site for between £100 and £400 a year.
• Design and hosting A design company builds a bespoke site to your exact specifications and provides the hosting facilities.

Design and construction

You can buy an off-the-peg website that offers e-commerce facilities for a few hundred pounds from a hosting specialist. You could also pay several thousand for a gorgeously designed site with an easy to use content management system (for uploading and deleting product data) as well as links to a back office order processing system.

Credit card processing facilities

Security is all-important and you’ll need to comply with the standards established by the Payment Card Industry (PCI).

To take orders online or via the telephone, you’ll need:

• A merchant account This is the card acquiring account that permits the processing of card payments by credit/debit card, enabling a business to use authentication, authorisation and settlement services.
• A Virtual Terminal System or ‘Paypage’ This is the system that actually processes the card transaction. The information collected is then sent to the card acquirer for processing.

There would be charges for both the merchant account (normally a percentage of credit cards and pence per transaction on debit cards) and for the Paypage (which could be a combination of percentage and pence per transaction, or a monthly rental of the Paypage with a 'pence per click' charge).

Security is all-important and you’ll need to comply with the standards established by the Payment Card Industry (PCI). Paypage technology handles the online side of security on your behalf but there are also strict rules governing records stored on your own systems.

Graphics and other content

You can buy strong images (or more precisely the right to use them) for a few pounds.

You will need to budget for online graphics. Free graphics and templates are available and you can use your own photography. Equally, the text-based info on the site can be put together by the owner at no extra cost other than time. However, you want the site to have a look of its own and it may be worth searching the database of an online image provider. This needn’t be expensive. You can buy strong images (or more precisely the right to use them) for a few pounds.

The amount you spend on graphics will depend on the nature of the site. For instance, if you’re selling high-end fashion, you may have to spend on regular photoshoots, which cost hundreds of pounds. This certainly shouldn’t be underestimated when budgeting.

Staff

The number of staff you take on will depend on your initial business ambitions. If you expect sales will be low at first, then one or two people to process, pack and post will be enough. However, you’ll need working capital to live on until the orders come in. If you plan to employ people, remember you have to pay both employer’s and employee’s tax and National Insurance.

Premises

Small mail order internet businesses can run from small offices or spare space in the home and many big name businesses have started this way.

Small mail order internet businesses can run from small offices or spare space in the home and many big name businesses have started this way. However, you’ll have to ensure that the space you choose is suitable. Is there ample room for stock? Are you close enough to a post office to make it feasible to send out products on the same day? Will there be any objections from neighbours about your working from home?

Advertising and catalogue costs

Mail order businesses reach their customers in several ways, including flyers posted door to door, posted leaflets, catalogues and press advertising. If communicating by post, you’ll need to consider not only the cost of printing your marketing material but also buying lists of target households based on demographic information.

Online marketing costs

Spending on a website represents only part of your online investment. To direct people to your site, you’ll have to spend time (and probably money) on marketing. The most effective way to advertise is bidding for position on Google. When a customer searches for, say, cameras, your advertisement will be served on Google or your company’s link will appear at the top of the Google search page in the ‘Sponsored Links’ section. You can also pay specialist ‘search engine optimisation’ agencies to ensure you have a high ranking on the normal search engine results. A cheaper means to market across the internet is to join an affiliate-marketing network. Essentially, this allows you to build a family of ‘affilitate’ sites who carry your links or ads on their pages. You don’t pay upfront for this, but you will give them a percentage of every sale that they help to generate. In addition, you’ll have to factor in the usual overheads, heat, light, telecoms, postage, etc.

If you’re starting in retail for the first time, you’ll be looking at sources of finance that are available to all new businesses. These include:

• Personal investment drawn from savings, redundancy money or remortgaging property
• Friends and family investment. That is, money from people you know, either in the form of repayable loans or an equity investment in which the backer buys shares, which can be resold back to you at a later date.
• Angel investment. This is generally less likely. Angel investors are wealthy individuals who back businesses. Their aim is to sell shares at a profit and they look for businesses that will grow quickly to increase the value of those shares. To attract angel investment, you’ll have to have a truly heavenly growth plan in place.
• Partnership. Going into business with someone else allows you to split the costs.
• Grants. There are some grants available for small business. You can find out more about these through your local Business Link.
• A loan from you local bank.

Here are some common pitfalls to look out for in the distance-selling sector:

When a product runs out, you should make it clear this product is ‘temporarily out of stock’ and that delivery will take longer.

• Poor marketing Unless you market your business effectively, you won’t make a profit. Internet and mail order start-up costs can be low compared to conventional retail, but the customer acquisition costs are high.
• Poor stock management and fulfilment Ordering online or by mail order is something of an act of faith on the part of the customer. If a customer places an order for goods that aren’t in stock and consequently waits three weeks for the parcel to arrive, you’re unlikely to win much repeat business. Ideally, your front end (the website) should be linked to a back office stock control system (either manual or automated). When a product runs out, you should make it clear this product is ‘temporarily out of stock’ and that delivery will take longer. Equally important, you should avoid overstocking, buying equal amounts of similar products regardless of their sales potential. For instance, if you sell shoes, you’ll want to base your ordering on the most popular shoes sizes and colours.
• Failure to meet customer service requirements Unless you deliver on time and have good practices and procedures for handling returns and customer complaints, you won’t win repeat business.
• Lack of a ‘unique selling point’ Internet and mail order is a competitive arena and you’ll need to differentiate yourself from the competition. You do this through your ‘USP’. The specific reason people visit you rather than a competitor may be lower prices, customer service, a strong brand, or unique products. The key is to establish what makes you unique and weave that into your business plan.

• Research your market. Establish what items are likely to be most and least popular and stock up appropriately.
• Research the size of the market. Is there a sufficient customer base to justify your investment?
• When working out your finances for the business, don’t forget to include working capital within the one-off and ongoing costs. You’ll need cash to pay yourself and employees as the business gets on its feet.
• Talk to as many website suppliers as possible but don’t make a decision based solely on cost. Consider the facilities they offer.
• When drawing up a business plan, be conservative in your sales projections (too many people over-estimate) while taking the time to come up with the most accurate cost figures that you can achieve. That will help you arrive at a realistic profit estimate.

Like all businesses, retailers face a complex regulatory environment.

Tax

If you operate as a sole trader, you will be responsible for your own tax return under the Self Assessment rules. However, if you employ people, you’ll be responsible for paying both your own and your employees’ tax and National Insurance. You’ll also be required to file VAT returns.

Trading Standards

Your business should be compliant with Trading Standards regulations relating to distance-selling. As set out by the Trading Standards Office, the key regulations are:

• You must give consumers clear information, including details of the goods or services offered, delivery arrangements and payment, the supplier's details and the consumer's cancellation right before they buy (known as prior information)
• You must provide this information in writing
• The consumer has a cooling-off period of seven working days.

Style advisor: ‘Making yourself visible’

In a highly competitive online environment, directing customers to a website can be a challenge. If you’re new to the game, you may find that potential customers stick to the devil they know, preferring to use, say, Amazon or HMV for books or CDs rather than experiment with a less established seller. So how do you make yourself heard? One way of attracting traffic is to use content as bait for consumers. This is the approach taken by Cherylcolestyle.com, founded by Lucie Follett.

The idea is simple. By drawing on material created by stylists and fashion experts, the site shows its target audience – teens and twentysomethings – how to copy the look of style icon Cheryl Cole while also providing a means to buy the recommended clothes. “For instance, if Cheryl Cole is wearing a certain type of jacket in a video, we can show people how to get that look on the high street,” says Lucie.

The site makes its money through an affiliate system. “Our content attracts consumers, then we show them how to get the look and allow them to link through to affiliate sites where they can make the purchase,” she says.

“If you use a content management tool such as WordPress, you can add content cheaply and easily,” says Lucie.

Follet’s day job as director of Mavenmetrics.com is in search engine optimization (SEO) – and as she describes it, the site follows the golden rules of SEO. “You bait people with content and then offer them relevant opportunities to buy.” Perhaps surprisingly, creating content for the site isn’t difficult. “If you use a content management tool such as WordPress, you can add content cheaply and easily,” says Lucie.

To ensure the content is relevant, Lucie uses an analytics programme (the free Google analytics) to track where customers are going on the site and what they’re doing. “Once you know what people want you can create even more relevant and popular content”, she says.

Lingerie retailer: ‘Cutting costs by selling direct’

For Maxine Wells, founder of own-brand lingerie company Maxine’s of London, the web has provided a low-cost means to sell direct to the customer. Maxine’s aim was to establish a brand that could be sold both in the UK and internationally. Recognizing it would take time to establish relationships with enough fashion retailers to provide a sufficient income, Maxine built her own website as a base from which to generate income and build her brand. “I was able to do it very cost-effectively,” she says. “I was working from home and I managed to get the photography and the models for free. The only cost was the fabric.”

Before launching the site, Maxine researched the market thoroughly. “I looked at whether the market was big enough and I also looked at what my competitors were offering and their price points,” she says. Today, Maxine sells through her own site to the retail market while supplying one boutique and another online retailer on a wholesale basis. There are further orders from shops in the pipeline and Maxine aims to establish a brand that can be sold across a wide range of outlets. “The internet is a good short-term solution but you have to look beyond the web if you’re going to sell in large quantities,” she says.

So the brand building goes on. Maxine has promoted her business through articles in the trade and national press while working hard to expand her list of stockists.

Children’s clothing: ‘Why I went online’

The idea behind clothing retailer Kids Should Be Kids was born out of founder Malene Hansen Stanley’s own search for good quality clothes for her children. “I was struggling to find clothes that I liked in England so I used to shop for them when I went to Denmark,” she recalls. When English friends began to ask where she bought clothes for her children, Malene identified a gap in the market. She contacted suppliers in Denmark, bought stock and set about building a website. “The idea was that I could generate income working in the evenings,” she says.

Malene cheerfully admits that she had a lot to learn. In the early days, she overstocked on some items and had to sell at a discount to reduce her inventory. She also struggled with the seasonal cycle of the clothing industry. Stock up on winter or summer clothes too late in the cycle and you miss the boat in terms of sales as customers are looking ahead to the next season.

Over time, Malene arrived at a stocking formula that worked. She honed her range to focus mainly on stripy tops. This not only solved the seasonal issue (they can be worn in layers or on their own at all times of the year) but also differentiated her business from the high street players. “You can’t really compete with Next or M&S unless you have the resources to do so,” she says. “I think it’s much better to specialise – to find a niche.”

Malene works hard on marketing her niche clothing. She’s taken the time to understand how search engines work and laces her site with key words while also writing blogs and establishing a presence on sites where she can find her target audience, such as Mumsnet and Facebook. She updates the site and her blogs regularly attract hits while driving commerce. “Marketing is very time-consuming, but it’s also great fun,” she says.

Links: Distance-selling

• Actinic, e-commerce software for businesses
• 123-reg.co.uk
• Vendorcom, cards and payment community
• Mr Site
• PCI Security Standards Council
• Cherylcolestyle
• Mavenmetrics.com
• WordPress
• Maxine’s of London

Links: Business

• Office for National Statistics
• Business Link
• British Retail Consortium
• Trading Standards Institute

Sources

• British Retail consortium
• Government statistics office
• My own research over ten years writing on e-commerce