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Better to Launch Online?

While online stores appear to have the low-cost advantage over brick-and-mortar locations, looks can be deceiving.
March 10, 2009
URL: http://www.entrepreneur.com/article/200582

Q: I'm thinking about opening a women's clothing store in the town where I live, but with everything that's going on in the economy right now, I'm afraid to invest my life savings in a business that may not pan out. What do you think I should do?

A: In times like these, it's smart to be cautious. Retail stores have high failure rates, even when times are good, and now that consumers have tightened their purse strings, startup retailers face even worse odds of success. One way to minimize your risk is to test your concept online before you sign a lease on a physical location, stock up on inventory and hire staff. Not every retailer can test-market his concept online (think ice cream stands and nail salons), but a merchant selling clothes, shoes, bags, toys or gifts can quickly and inexpensively launch a website to find out what prospective customers want to buy and how much they're willing to pay.

However, while online stores would appear to have the low-cost advantage over brick-and-mortar locations, looks can be deceiving. "The unique costs associated with an online business make the neighborhood shop, with reliable walk-in traffic, look positively simple by comparison," says Joseph Fulvio, a consultant who advises businesses on internet marketing strategies. Those costs could include everything from the design of an easily navigated website, search engine optimization, paid search and other traffic-generating strategies to the bounties paid to affiliates and marketing partners, to the price of providing remote customer service.

Another consideration is the type of market you're trying to reach. Are you peddling plus-size pajamas that could potentially appeal to customers around the world or are you selling custom wedding dresses that require your customers to come in to be measured and fitted? While the internet can be a great way to target petite and plus-size women, it may not be as effective for selling to your friends and neighbors as opening a shop on Main Street. Logistics are important, too. Do you have a physical product that requires packing and shipping or is it a virtual product that can be downloaded from the internet?

That's why Fulvio says startup retailers need to make sure they understand all the costs associated with reaching, capturing and servicing customers, both online and off, before investing their hard-earned capital or trying to raise money from banks or investors. "If you've accounted for all your costs and your revenue per sale, and if your conversion and retention assumptions are accurate," he says, "the numbers should tell you where your best customers will be found and whether or not an online store, a brick-and-mortar location or both is the path to profit."

Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses. She can be reached by e-mail at rosalind@abcbizhelp.comor through her website, abcbizhelp.com.