The Web has opened a huge opportunity for home-based online entrepreneurs. In fact, there are consumer sites on the Internet, many of which are home-based businesses, that have been quietly counting profits continuously. They may not be the darling of the press, but they have been making substantial profit and revenues to sustain and grow their online businesses.
What are the secrets of these home-based Internet entrepreneurs? We talked with some home-based online entrepreneurs who have turned a profit. Some of these entrepreneurs operate from their homes, but others have grown big enough to afford a real office or open a retail store. These Internet entrepreneurs have demonstrated an important fact: e-tailing has more to do with old-fashioned business sense than with which outfit has the snazziest web site or most innovative business model. They may not have the bells and whistles of well-funded sites, but they knew the value—in dollars and in loyalty—of treating customers right.
By looking at those few online home-based businesses that are actually making money, we’ve extracted twelve lessons that can lead to profits on the Net.
1. Find a promising niche.
Niche marketing entails offering unique products or services to a few concentrated markets. Whether on or off the Internet, it is a less risky strategy and provides the best opportunities for small businesses throughout any marketplace.
Tony Roeder of RedWagons.com, an online store selling mainly Red Flyer toy wagons, credits much of his success to his strategy of concentrating on a small area of the toy market. According to him, “We focused our attention on Radio Flyer Wagons and became an Internet toy store primarily selling their products.” He balanced his narrow product offering by giving customers the widest selection in that niche. As a result, “We have the advantage because we have a wide product line whereas most online stores only carry two or three models of the products. We’re filling a niche and answering the problem that there was no selection since most stores carry only 2-3% of that selection.”
RELATED: How to Pick a Profitable Niche
Michelle Donahue-Arpas, founder of GeniusBabies.com (http://www.geniusbabies.com) selling infant developmental products said, “We tried to stay with our niche, and expand our product line within that niche.” From selling five different baby gift baskets containing an assortment of infant stimulation and pre-natal products, Donahue-Arpas’s product line has grown to about 700 as her business grew.
2. Keep your operations tight.
The successful Internet entrepreneurs we’ve featured thus far has one common trait they are all frugal. They all avoided unnecessary expenses in the beginning, particularly since they all operated on a shoestring budget. They started with very small budgets and proceeded without spending a bundle. These entrepreneurs all proved that you can make money on the Internet if you don’t spend a lot in the first place.
Sean Lundgren and Todd Lidvahl spent $1,000 each to start Sneetch.com, an online store selling DVDs, videos and games. With careful planning and judicious spending, they were able to quit their jobs after a month and earned a million dollars in their first year of online business.
Donahue-Arpas of GeniusBabies.com said, “We started very small. We literally started with just a few thousand dollars invested – less than $5,000 — and then only about $300 a month to sustain the business, with more supplies, business phone and fax lines, web hosting and such.”
The key to success on the Internet is to treat it just like any old-fashioned business: minimize costs and maximize profits. Roeder of Red-Wagons.com perfectly captured this bit of wisdom:
“The main part of our strategy is that every decision, especially the marketing decisions, has to make fiscal sense upfront. We do not spend any money on speculation.”
3. Expand slowly, but surely.
Entrepreneurs working on smaller niche markets and tighter budgets have no choice but to grow slowly. Donahue-Arpas said, “I am content with the business growing steadily, not growing rapidly. That is not our ultimate goal. And we don’t want to compromise what we had – the personal care that we give to every customer that has made it successful. We give our customers a unique experience that they couldn’t believe that people actually cared – that they got a personal reply or response for all the things they said, or someone being kind to them.”
Roeder reaffirms this,
“For the past two or three years, we just focused on building a business and getting it up and running. Now that we are established and feel that we have the strength to move on. … We’re in our second stage right now. We still need to grow our customer base. We need to build the strength of our company. So many online businesses, the greatest examples are Etoys and KBKids, spent millions of dollars on advertising. They spent $50 million on advertising and got $50 million in sales, so at best they had a 1:1 ratio. So when you look at their sales and profits, there’s bound to be a loss. We cannot afford a 1-to-1 basis.”
4. Avoid keeping inventory.
As part of the strategy to keep the costs down, one of the things a start-up home-based Internet entrepreneur must avoid is keeping a huge stock of inventory. While in its infancy, an Internet site is still struggling to find its audience. Keeping a huge inventory at this point may mean that a lot of money will simply lay dormant as inventory sleeps.
In fact, most of the home-based entrepreneurs we featured even avoided, to the extent possible, having any inventory at all. The founders of the once successful, Sneetch.com were even “inventory-averse.” As Lundgren and Lidvahl stated,
“When we started, our goal was – and it may not stay the same the entire time that we are in business – not to carry an inventory. We did not want to think about what to pre-order or hold; and how to get rid of those that didn’t sell or the dead stock – the whole inventory process. We want to do something else.”
Donahue-Arpas reaffirmed this thought, “Some people go out there and spend a fortune on inventory. And I say noooo!”
To get around this problem, these entrepreneurs employed two approaches: arrange for drop-ship fulfillment or purchase small quantities at a time.
Roeder describes the drop ship arrangement that he used for RedWagons.com as, “We would download orders off the Internet, convert them into purchase orders, which we would fax to the manufacturer and they would fulfill the order.”
The same approach is used in Sneetch.com’s operations. Their distributor drop-ship fulfillment, freeing them from overheads associated with shipping and handling. The founders described it as, “Once we get the order into our system, we process it, screen out for fraudulent orders, etc. After we do that, we submit through EDI (Electronic Data Transmission) to our distributors for fulfillment. They carry the entire inventory. So after that, they ship it out if it’s in stock and they send us back a file that says this has been shipped, or this has been back-ordered. Then we get the tracking information of the shipment, which we send to our customers in their confirmation email.”
Donahue-Arpas simply arranged to buy smaller quantities: ” I started with small manufacturers, calling them up and saying, I want to start this business, can I buy 12 and can I have a discount? I started small: paying very small money and paying things upfront. I told the manufacturers, “I believe that it can be bigger, if you could have some faith in me. And hopefully, we’re really going to grow.”
5. Customer service reigns supreme.
Good online businesses rely on customer relationships built upon mutual advantage and trust, the way businesses always have.
Donahue-Arpas attributes the success of GeniusBabies.com to her customers. As she said, “Our business has blossomed– thanks to our wonderful and loyal customers. It is much more difficult to give the personal touch when there’s 50 or 100 orders a day, than it was when there were 10 or 12. But no matter, I see to it that all inquires are replied to promptly. If we see that someone has selected to pay for Next Day Air Shipping for $30 to ship to North Carolina, and we can send it by Ground, as we’re in Charlotte, we immediately reduce their charges to $6.95 and inform them through email. The personal touch again, the old fashioned idea of being kind, courteous, and respectful, and treating our customers just as we would like to be treated. Simple as that! Many of the big e-tailers spent millions of dollars to get everybody to their site. We are not doing that. Instead, we just took exceptional care of the customers that did come.”
Aside from personal touches, prompt delivery and fast response time to customer inquiries, most of them use promotions designed to keep the customers that they have. Tamara Carlise, owner of BigKids Video (http://www.bigkidsvideo.com) uses such promotional programs. “We try to keep existing customers and show them that we appreciate their repeat business. Customers, after their fourth order, are elevated to a Preferred Status where they receive a 10% discount from us from now until eternity.”
6. Keep the quality of your products high.
Competition on the Internet is much tougher than the brick-and-mortar variety. Your customers can simply leave your site and find your competitor at the click of a mouse. It is therefore imperative that you ensure the quality and consistency of your products or service. The Internet entrepreneurs that we’ve featured may not have the best-looking web site in their category, but they make it a point to give the best value for their customers.
A significant part of BigKidsVideo.com’s success lies in the high standard that it sets for its products. Its founder, Tamara Carlisle, makes sure that every product that they sell are of the best quality. “We’re extremely particular of the products that we choose. .. We strive hard to maintain high standards for our products. We look for quality of the production and the sleeve (packaging). Sometimes the product is great but the packaging is terrible. It has to be a show that we feel really strongly about.”
Donahue-Arpas offers the same advice, “Now we have over 700 items that we sell and we could continue to expand but we are looking for something special. We test it out with our family and friends; even our neighborhoods test it out. We have to really love the things before we sell them.”
7. Ability to diversify and keep revenues streaming in from different avenues.
One strategy that has become crucial to success on the Web is the ability to diversify a company’s offerings, allowing them to earn money from various sources. Yahoo, for instance, now earns from a variety of means banner advertising, directory listing, Yahoo store, auctions, even web site hosting. HomeStore, on the other hand, earns revenue from advertising and listing fees to real estate agents, as well as on sales of software that help realtors keep track of clients.
Home-based online businesses, particularly start-up businesses, may not have the ability to implement different revenue models simultaneously. However, those who have gained an understanding of their markets have begun to expand their offering to several niche products that have great market potential.
Charlotte Fowkes, founder of Baby-Cakes.com started out by offering diaper cakes. Now, she has expanded her product line to include “cakes for all occasions.” Using the same concept of a diaper cake, she branched out to offering non-edible cakes made from towels to create unique and practical gift ideas for housewarming, anniversary, and weddings. She also added wholesaling to her business: “I’ve developed a wholesale line for other stores and Web sites. At least 30 web sites and about 50 retail stores, hospitals etc. across the country carry my “baby cakes.” I now probably put an average of 35 or 40 a day for wholesale orders.” As a result, corporate clients are now a sizeable part of her business.
After three years of being in business, Fowkes also shifted from an Internet pure-play venture to a clicks-and-mortar when she opened her first gift store in her downtown area. Her new store represents a new milestone for her business. As she describes it, “The store is 900 sq. feet. While there, I can still operate my online store; take orders and answer emails. We have arranged for UPS to pick up deliveries. They are already picking up at the house. I print all the shipping off the computer anyway. And I will do the assembly there.”
Carlisle of Big Kids Video Production (http://www.bigkidsvideo.com) combined the power of the web with direct mailing. “I started with a small brochure of about 9 videos and did the direct mailing. I started to make my way through the maze of distribution in the country, both retail and other wholesale distribution companies. We realized the value of having an e-commerce site tied in with our print catalog.”
8. Use the Internet as one of many distribution channels.
The Internet can go hand-in-hand with other distribution channels. In fact, studies show that customers’ overall loyalty goes way up if they can shop in more than one channel.
BigKidsVideo.com has found that the more catalogs it mails out, the more Internet traffic the company gets. Carlisle notes, “The Web and catalog complement each other because a lot of our clients who receive catalogs are avid web users. Even if they get our catalog, most order on the web. Like with mothers, it is easier to go to their computer at night when their kids are in bed to place orders.”
Savvy Net entrepreneurs understand the power of cross-distributing products. Roeder of RedWagons.com feels that his company is now ready to look at other options of distributing their products.
“For the past two or three years, we just focused on building a business and getting it up and running. Now that we are established and feel that we have the strength to move on. So we’re turning our focus on the direct marketing aspects of the business. We’re neophytes in that area. We approaching it with the same kind of ignorance, confidence and excitement that we undertook the whole venture in the first place. We may do something on it eventually, and if we do it, we will find a low-cost way of doing it.”
9. Always watch your back.
While most of the talk with regards to credit card security focuses on the customers, credit card fraud can create havoc to the bottom line of an online business. Chargebacks can be costly, and businesses can suffer massive losses as a result of credit card fraud. Since the credit card is not actually present when orders are placed, the Net entrepreneur must devise ways to protect itself and his or her business against unscrupulous Web customers.
Sean Lundgren and Todd Livdahl, takes credit card fraud very seriously. Livdahl said,
“It’s pretty amazing, all these fraud. What happens is that the credit card company verifies and all they do is to give you address verification to make sure that the zip code or address checks out. I look at that as a hint, too. If I’ve got red flags all over the place, I examine the order very carefully. We get 2,000 to 3,000 orders a month, and there could be 5,000 items in those orders — that’s a lot! Sean and I do a dozen different things; it’s a lot of time but it’s just something that has to be done manually over and over. Thank God that we have programs and friends and employees who crunches numbers. But when you go up to thousands of orders a month, if you are not really careful, that could put you out of business. You really have to keep an eye for chargebacks.”
10. Concentrate on low-cost yet effective marketing campaigns.
No matter what type of business you operate, how, why and where you advertise will play a role in your overall success. Donahue-Arpas said, “The biggest mistake I did when I started was to think that with so many people online they would come across or stumble on the site. No way! And it takes a long time, but once you put in a lot of hard work, it pays off.”
A shoestring online entrepreneur must learn to identify the marketing strategies that will yield the best results for their business. As Roeder of RedWagons.com said, “Our marketing has to make fiscal sense. So I sit with a calculator and say its going to costs us this much to do it, this is the industry standard return, and this is my profit margin, so ok it doesn’t make sense.”
11. Network: there is strength in numbers.
Partnerships are essential in e-business. The right partner can help an online business achieve its marketing and technological objectives.
GeniusBabies.com benefited tremendously from the partnerships that Donahue-Arpas built at the start of her business. From designing and developing her site, to marketing her products, her group of fellow “mompreneurs” have lent a valuable helping hand and provided a strong support system for her business. Today, her main marketing strategy is focused only on cross promotions that she does with other e-moms who have online businesses with the same target market.
“My mentor, Dawn from BabyUniversity.com, was the one in the beginning who said “Girl, what are doing? What are you doing in frames?” She helped me develop my traffic. I really owe her everything. We have one big group that I find most beneficial. It is called MyBabyShops.com, organized by several mompreneurs and serves as a cooperative advertising group. We have LOW budget. We try to think of different marketing things that we can do. Like when one has a baby fair in their area, they come, represent us, and bring all of our marketing materials with them. We all try to promote that site from our site. There is a very friendly competition. We feel like “well, maybe this time this person will want to buy something from us and next time, they’ll buy something for you.”
Her advice to startup online entrepreneurs? “Network as much you can with fellow e- merchants. This is still such a new field; your neighbors, family and friends may not be able to give you the valuable insight and feedback that your e-colleagues can.’
12. Love what you are doing.
All of the entrepreneurs who have seen real success on the Internet shares one common thing: they all feel passionate about what they do. As David Marcks, founder and owner of GeesePolice.com said, “You better like what it is you’re doing. If you’re not having fun anymore and you don’t enjoy it, don’t do it. Because I am still having as much fun today as the day that I started.”
Success on the Internet is a combination of various things. It may be a result of offering more and better services, defining the position in the marketplace, finding the right market, establishing quality strategic alliances with other Internet businesses, and continuing to take advantage of technological changes. Moreover, success can only be achieved as a result of the commitment to never-ending improvement.