Managing Your eCommerce Business

Click here to view the webinar video “Managing Your eCommerce Business”.

Most entrepreneurs still think of their e-commerce site as a shop selling goods, like the old days, when they should be thinking of them as marketing machines. In this video I give you lots to think about.

 

Is Your Marketing A Gamble?

How many times have you heard or participated in discussions about the effectiveness of marketing dollars? Personally, I can’t even begin to count. There have been so many. Undoubtedly there will be even more. However, when I ask people to describe the actions they want to undertake and the outcome they seek to achieve it often sounds more like gambling than business to me.

Businesses are organizations that take the uncertainty out of specific outcomes for their clients. Consequently, the processes and actions engaged in must take the uncertainty out of the business providing its goods and services to its customers. Marketing, as a process, is not an exception.

All too often, my own customers as well as some colleagues presents marketing plans which are so ambiguous that they seem to based on a hope and a prayer. In the worst case, they appear to be the power play of an individual or department seeking to push their own agenda to justify their existence. At the other end of the spectrum, many marketing actions seem to be motivated by something someone absorbed through the media; if worked for them it will work for us type reasoning. None of this works for me and I hope it doesn’t work for you either.

Although I can’t provide an answer that will satisfy every marketer, I would like to provide a framework for considering the marketing actions you plan to engage in: probabilities.

Do you know the odds of your marketing producing the desired outcome?

In my view, any marketing action must have a probability of outcome better than walking into a casino to play a game of craps. For those of you unfamiliar with the game it is played with 2 six sided dice, thus I figure you have a 1 in 36 chance of getting the result you want. Although this is not strictly mathematically correct it makes no difference to this argument. If you prefer, use a roulette wheel which has similar odds. My point being these odds are considered gambling. This is not business!

If the odds of achieving the objective are higher than gambling at a casino then you haven’t thought things through. To be more precise, your marketing is gambling, not business.

Before going to your boss, investors, or partner with a marketing action please, please, please, work through it so you have some idea what the odds are of success. If you don’t then you risk having another long discussion about the value of investing in marketing.

Before doing anything you and your team need to set out the goal. Whatever that goal may be ultimately it should turn into revenue. And revenue turns into gross margin and then profit. All too often I see marketing plans that cannibalize gross margin thereby never generating any profit. Don’t get caught up in circular reasoning.

Determining the odds requires testing and more testing. Holding the objective steady test the audience, the message, the connection between the two, and anything else which impacts the objective until you are no longer in the realm of gambling. The better your probability of success the easier it will be to have that budget granted.

Now, present your plan.

Consortium

How To Split Equity In Your Startup?

It seems like not a day goes by without someone posting somewhere on the Internet a question asking how to split the equity in their startup between a founder and co-founders, then with employees, next with investors, and so on through each round funding. Splitting up the shares in a company requires first and foremost attributing a value to the company. Not an easy task at any point in time. However, even more so, when you are just starting out.

Not long ago, I posted an answer to just such a question based on the ROKC ™ Method which was quickly picked up by Mr. Randall Reade, a Board member of Washington DC Tech Fund, Executive VP of Washington DC ArchAngels, and President of Global Tech Exchange, we found our point so enlightening that he asked us to diffuse it as widely as possible.

“Yes, I like that idea! You should spread it around more. And you are correct — it can be difficult to determine a valuation, especially when there is no revenue. Most startups just assume a $1M valuation, and it’s at least a yardstick to go by. But you are correct — many times there is no value.”*

Well Randall, here you are.

The ROKC ™ Method states, a business exists because it owns and/or controls an asset – which we refer to as the “Key Component” – that is used their products/services which customers will seek to acquire because it gives them a competitive advantage in achieving a specific outcome. Therefore, a company valuation can be broken down into elements: the value of the Key Component, and the value of the economic activity that generates the Return On Key Component, or ROKC. Likewise, the Method states that a business will continue to exist as long as the ROKC is higher than the Cost of Capital. Consequently, when valuing a business at the idea stage the business owner has neither the Key Component nor the economic activity making it impossible to attribute a value. Similarly, most early stage businesses may have only the Key Component but not an economic activity making it equally challenging to determine a value. This is why we recommend using a more non-traditional approach: the consortium, otherwise known as a contractual Joint Venture.

A consortium is basically a contract between parties – individuals or legal entities – who come together to achieve a specific goal, which can be work on a common project or jointly provide a service, by way of example. The contract details how the parties will work together and divide up the benefits. It is not a legal entity so it does not have any of the administrative burdens required by law. The consortium is ideal for early stage companies because it is light and creates the conditions for focusing on building the business instead of bureaucracy.

Let’s look at the example of an idea stage business before increasing the complexity. At the idea stage, there is no manifestation of the business yet, there is on Key Component or economic activity. At this stage, there is nothing to bring to a legal entity or a need to limit liabilities so why go through the hassles of creating and administering one. Even to give the idea expression there is no need for a legal entity.

For the first iteration, the “idea person” will a small team to build a prototype. Until the prototype is built there is not Key Component to place in a legal entity making this phase ideal for a consortium since there are two or more parties collaborating. It is at this stage that a contact between the parties forming the consortium can be drafted detailing each party’s role and expectations going forward. To keep things simple, we suggest each party define an hourly market comparable rate for their work and keep track of the time they spend working on the prototype. At the end of each month – or any period agreed upon – each member of the consortium validates the others so there are no conflicts at the end.

Assuming the prototype is determined to be of equal value, when forming a legal entity, each party receives an equity stake equal to the number of hours employed multiplied by their hourly rate, or can be bought out by one or more of the other members. If the prototype is given a value inferior to the time spent times the rate then a percentage based allocation is made. And, if the prototype is worth more the remainder can saved for future employees, advisors or new equity partners.

In the next phase, the prototype may actually be put to work allowing the founding team to determine the business’s market fit. This phase can require a whole series of pivots and adjustments which means more time and resources dedicated possibly by new parties. Once again, the contract can be adjusted to take into consideration each new party and their expectations allowing the work to continue before creating a legal entity.

“The consortium approach has the added value of seeing what you have and can do BEFORE the expense and trouble of founding a company. Focus on the product first, and the determine whether this product and the team can generate revenue. If the answer is no, then why waste all that time and money? If yes, then you can always put it together.”*

As long as the parties to the consortium do not require a limit to their liabilities beyond what they already have entering the economic phase should not be a problem.

So when you launch your next startup, please consider the value of creating a consortium between those who will be collaborating and cooperating with you instead of how to divide a pie which is worth nothing.

 

*Quotes are Randall Reade.

Value & Price

Value & Pricing: The Great Enigma

One of the most challenging issues for any business is to understand the relationship between value and pricing. On the one hand, business leaders understand that to be in business the company must create valuable outcomes for customers and have that outcome recognized, and quantified, through monetary compensation, the price. On the other hand, determining how much value is created and what price to put on it can often be an enigma. Recently, I did some interesting work with a client on this subject, the results of which are relatable for all businesses. I will explain what was done and the results below:

The problem the client wanted to address was how to capture the most value from each business transaction. So I asked them, “Where is the company creating value, and for whom? They replied, “For the client.” But did not know where. So, I asked them to answer two questions:

  • Where do you create value?
  • What does it cost? In time and money.

At our next session my client came back with the following:

  • My business creates value for my customers and my vendors. Customers get value because we address their concerns about…. And, our vendors get value because we bring them business that keeps them working.
  • On an average job, we employ a qualified technician for 3 hours.
  • If the customer wants the financing package we add another 4 hours for the technician plus 2 hours of administrative work.

At first glance, they answered the questions. However, on closer inspection we discovered that the company was not capturing enough of the value for any of these stakeholders. The following key issues came out:

  • Do the vendors compensate you, directly or indirectly, for the business you bring them? Do they share in your costs of client acquisition?
  • Of the 3 hours of work done on an average job, how much is for the project managing the vendors? Do they compensate you for any of this?
  • How much you building into your price for all the labor required to get them the financing? Are you cannibalizing your profit margin from elsewhere?
  • In pricing are you also including benefits, other overhead costs, interest, and a profit component or is it just remuneration?

From this one exercise and the ensuing discussion, the company was able to determine where value is being created and for whom but is not capturing enough of it from either customers or vendors!

In the ROKC Method we see businesses as owning and/or controlling an asset which is used in their products/services which customers seek to acquire because it gives them a competitive advantage in achieving a specific outcome. In applying this method, it helps to breakdown the process by which this transformation occurs into all the sub-processes and then treat them as individual micro-businesses. At the very least, the transformative process should be broken down into pre-production, production, and post-production. For example:

 

  • Pre-production
    • Acquiring a client
    • Sales funnel
    • Closing the contract
  • Production
    • Organizing the job
    • Informing Vendors
    • Executing the contract
  • Post-production
    • Client sign-off
    • Collect payment
    • Pay Vendors

 

Next, determine who creates value where and the price at which it is being valued. To use my client’s business as an illustration, in the pre-production sub-process “Sales funnel” each prospective customer who makes an initial contact is called back. When the company was asked who does this and how long does it take? They replied it is the technician because it didn’t require much of their time: X minutes. Fair enough. However, in this case their salary is being viewed as a sunk cost because it is already being paid so we don’t need to count it again.

However, I know – from prior work with this client – the technicians are run ragged and would like to free up their time to do other things, more “valuable” activities. Consequently, even though this sub-process may only be a marginal part of their workday, by the end of the month it will be a significant amount time, and that time is either being built into the price asked of the client or eating into profits. So, one has to ask, “Can this work be done by a lower cost – internal or external – resource?”

When discussing this question, the client happily brought up a company they had recently encountered who impressed them with their call center service and would – potentially – be an excellent addition for this portion of the process. Perfect! They are already thinking about this.

As I hope you can see, when this sub-process is viewed as a micro-business, the value the company can ask of its customers and the costs associated with it will undoubtedly produce a loss. However, by adapting the value needed to that created it may result in a neutral, or slightly positive, outcome. Lastly, if the company can get both the client and the vendors to recognize the value in this process then the result will surely be positive for all stakeholders and the business will capture the value it needs to have recognized for its making this come positive outcome come about.

In some cases it might not be possible to create a positive outcome. In this case, you may want to seek out a substitute sub-process that allows the business to pass on the right amount of value to the customer. One such new sub-process might be automation; use an online service to walk your customer through the sales funnel. Another might be to sub-contract the work to a low-cost service provider.

It is the leader’s responsibility to adapt the value needed with the value created and to do it for the right price.

Leading a Customer-Centric Business

Leadership has changed over the decades in substance but not in form. To be clear, leaders still have to identify and communicate a less uncertain view of the world, which the community will perceive as well, and together they can make into a reality. However, in business, the key to realizing that vision was a tangible assets everyone could see, touch and/or feel. More recently, those assets became intangible and while one part of the community could still relate to them the other perceived only the benefits. These businesses are noteworthy for their productive capacity; that is, the making of products and services used by clients. Exercising leadership in production-side businesses requires clearly identifying the asset underpinning the business and maximizing the return on it. Today, many economies are consumption-based – also known as customer-centric – making leadership a bit more challenging.

Consumption based businesses are no longer established on the basis of assets owned and/or controlled by an organization but by their ability to capture a specific market segment of like minded clients.

the evolution of e-commerce might be a good way to illustrate this point. The first e-commerce companies provided clients with a stand alone software product they ran on their own servers. This gave existing and new companies the opportunity to develop sales through a new distribution channel, online, as opposed to the tradition “brick and mortar” store on the high street. The second generation came in the form of software as a service, allowing anyone to start an e-commerce business without any of the costs associated with maintaining and developing a stand alone site. Here, once again, the e-commerce platform targets an intermediary by providing them with an efficient tool. These businesses are all on the productive side of the fence.

However, the benefits of the e-commerce solution were short lived. The process of driving traffic to the site and converting visitors into paying customers is significantly more expensive than the store. Many of you have surely heard the term “cost of acquiring a client” when pitching your online business to investors; well, this is what investors are referring to.

Consequently, on the consumption side of the fence any number of new economic actors entered the marketplace to help manage the processes and costs associated with capturing prospective clients and turning them into repeat buyers. But these tools too are only tools and should not be confused with actual leadership. They are simply bought in resources available to all competitors.

So how does the leader of an e-commerce site contribute to the success of the business?  The most successful e-commerce leaders are those who approach their business not on the basis of the old product-driven mindset but of a consumption-driven one targeting a distinct segment of the market on the basis of shared identifiers and values. A shared culture, if you like.

Let’s take the example of Zappos, a very successful online shop company. The company doesn’t make shoes, it only distributes them. The technology underlying the business can be acquired by anyone. Similarly, the tools for attracting customers will be bought by many competitors. There is no real ability to differentiate in market without any proprietary assets. So how to resolve this challenge and stand out in the marketplace as a place where consumers want to shop? Initially, the company put the emphasis on customer service. This worked well for a time but like with any market competition rolled in making the distinction between Zappos and the competitors difficult to distinguish.

In a brave move, company leadership, Tony Hsieh, saw that what brought together  employees, customers, vendors, partners,…, all stakeholders, was a shared set of values. A quick view of the company’s “about us” website page illustrates this point quite well:

As we grow as a company, it has become more and more important to explicitly define the core values from which we develop our culture, our brand, and our business strategies. These are the ten core values that we live by:

  1. Deliver WOW Through Service
  2. Embrace and Drive Change
  3. Create Fun and A Little Weirdness
  4. Be Adventurous, Creative, and Open-Minded
  5. Pursue Growth and Learning
  6. Build Open and Honest Relationships With Communication
  7. Build a Positive Team and Family Spirit
  8. Do More With Less
  9. Be Passionate and Determined
  10. Be Humble

 

The stakeholders attracted by and who contribute to Zappos’s “culture” of openness were welcome and work together to make their community a comfortable place for like minded people. From a leadership perspective, the uncertainty of living in a non-like-minded community is reduced.

The company went one step further with its mantra of openness by implementing an organizational structure based on ideas of holacracy; an organization without hierarchy. After 2 years of implementation, in 2015, the company pushed out anyone who didn’t subscribe to this new organization. Although such a move might be perceived as intolerant – thus contrary to the company’s values – it is not because culture is the foundation on which this business is built. Not adhering to the company culture in a consumption-based company is like impairing or stealing the property on which a production-based company is built. The important thing to note here is the significance – if not, importance – of maintaining a like-minded community through whatever means possible.

The consistency of values communicated to the community and echoed by the same allows company leadership to be effective and drive results in a purely consumption-based business. In effect, any other economic actor seeking an entrance into this market will have a much easier time of it if they go through the  gate keeper known as Zappos making the company very valuable.

  • Are you the leader of a company on the production side or consumption side of the economic fence? Or, is it in between?
  • If you are on the consumption side, are you really able to access a specific market segment? Which one?
  • How authentic are you, as a leader? Are you perceived as such by your community of stakeholders?
  • If your business’s key component is culture, how good a leadership job are you doing at keeping the connection with your community going?

If you wish to explore these questions and issues like these, please contact me directly.

Productive Teams is Child’s Play

Recently, I had my nieces over for a sleepover and a couple with a daughter of the same age for dinner that same night. The three girls were a really excellent example of successful teamwork notwithstanding the challenges that faced them. It got me thinking – ok, nostalgic even – about how poorly most business teams work together and how much they can learn from these 3 ten year old girls. So read on!

Now, I love my nieces. They are great. They are really bright, curious children. Much like my own daughters were at their age, and probably they way your kids are too. However, no matter how much a sponge they may be they are still limited by their own experiences and learning. Basically, they speak English and little bit of Italian.

My guests are French and Italian, and their daughter speaks french fluently and some Italian.

These three little girls had never met each other and barely had one language between them but they made do.

We got out some lego blocks for them to play with and they set themselves up in a corner of the bedroom to play. Just before dinner was served I went to get them and found them playing together, building something or other with the blocks, and finding very basic ways of collaborating. After dinner, I could here mumblings. Sounded like Italian. Which was later confirmed when the little girl ran back and forth between the bedroom and the table to ask her mother how to say lizard, frog, and so forth in Italian. But what really blew me away was finding this sheet of paper with drawings and words.

Using images to communicate

I do not know of many teams that came together out of the blue and made their collaboration work as well as productively as these 3 little ten year old girls. And, regarded themselves friends after just a few hours. Do you?!

Some of my work is with Project Managers who are experts in all sorts of PM methodologies – like Agile – none of which I have much understanding of but they have nothing on these three little girls. Not all the techniques and methodologies in the world can be a substitute for people actually wanting to achieve something together!

As leadership coach, I am constantly reminded and constantly remind my clients that regardless of your constituency, regardless of the stakeholders, everyone has to want to be there to do something together. You can’t force people to play nice together. They have to want it.

I Want To Hear What You Have To Say

Most of my life, I have been told I have something to say about everything. In some cases, this was said with admiration. However in others, it was quite negative. Nonetheless, I often have an informed view and people listen. Some times they even act upon my words. All in all, I am pretty happy about this. So when I work with my clients and find them hiding their true selves behind roles, titles, company names, techniques, technologies, methodologies, and what have you I am surprised.

Truly, I want to hear what you have to say. I love to listen to well formed thoughts. I enjoy having my views challenged even more. How else can I progress? How can you progress?

More fundamentally, if you want to start or grow a successful business or career you must be able to make yourself heard. You must come to the table with your own point of view. This is your opportunity to differentiate yourself from your competitors and convince clients of why they should hire you.

Please. Speak up.

Your community is listening.

What Do You Expect

For those of you who read my posts on a regard basis, you know my view that a business exists because it owns and/or controls an asset it uses in its products to provide customers with a competitive advantage. In other words, a customer’s use of the product reduces their uncertainty of achieving a specific objective. We call this asset the “Key Component” because without it nothing else in the business is possible. Consequently, a business leader’s role is to establish and manage the delicate balance that exists between the return on the Key Component and the benefit the customer receives from using the product.

An often overlooked facet of this balancing act involves explaining to customers what exactly they can expect from the product and delivering on that promise. In short, creating and managing customer expectations.

Unfortunately, so many business leaders forget this; they over promise and under deliver, when and if they deliver at all. It is for this reason that when taking on a new client I let them know my expectations right from the start and bend over backward delivering on that promise.

All my coaching relationships start with a very clear expectation: we work together every week for one hour a week, on the same day, and at the same time. I know this may sound very demanding; we all have unexpected events in our life. No worries. Like hotels or dentists, clients can cancel or reschedule with 24 hour notice. Nonetheless, this expectation serves a number of purposes.

  1. It allows me to gauge the client’s level of engagement. How serious are they really about improving their leadership skills. If they can’t manage their time and priorities, how do they expect to take care of their customers?
  2. In my own value proposition, I offer my client certain results – improved leadership performance – but if I am the only one engaged in this process both of us will fail. This can reflect poorly on my service having a negative effect on future clients who read poor reviews about my services. In any relationship, both parties have to want to be there.
  3. Lastly, experience has shown me, unreliable clients clients are ultimately unsuccessful business leaders.

So I don’t like to waste my time on these clients as neither one of us will benefit from our relationship. It will not be a win-win. I don’t want that. I want my clients to succeed because then I succeed.

You have to walk the talk. Successful businesses know who they are, define and communicate customer expectations and deliver on them through excellence. After all, they defined what that level of excellence should be. Right?!

I ask you each to recall situations in which a business has lived up to the promised value proposition. For example: a restaurant promising a certain style of cooking but serving a nondiscript mish-mosh, a hotel in which you had an awful night’s sleep/poor experience, a product you bought that so friggin’ complicated to use it was useless to you, or a garment you bought one day and found significantly less expensive later but the retailer wouldn’t adjust the price or take it back. Basically, the list is endless. Go ahead, give it a try.

How to Grow Your Business Using: ROKC, BMC & VPC

For a while now, I have developed an interest – from afar – for Alexander Osterwalder’s Business Model Canvas (BMC) but never taken the time to really study it. That is until this week. It is a very powerful tool for defining and evolving business models; as attested to by the large number of organizations that have adopted it.

Although I am sure there are many presentations to the BMC, I found the video shot at Stanford University in 2012 to be the best (Here is a link to it.). In this video, Alexander uses the example of Nestle’s Nespresso coffee to illustrate the power of this approach. It works quite well.

However, while viewing, I was a bit concerned that he might have missed the reason why businesses exists: to get a return on property. But Alex did not disappoint me. At a certain point, about a third of the way in, he does say, “Patents. Right? Patents [are] a key component of the business model. The entire business model is built on patents because otherwise anybody else could make pods.”

Although the BMC does implicitly recognize the importance of the key component it does not place as much importance on it as it does on the customer. In fact, Alex’s second book is the Value Proposition Canvas, or VPC, which focuses on the relationship between the value proposition and the customer’s needs (or “jobs” as he calls them in the video).

By adding the ROKC™ approach to Alex’s work we can place the key component back into the equation as a counter-weight to his customer centric approach wherein the the value proposition is at the middle of the equation. In doing so, we place the company’s development in the economic, political and cultural framework that is pertinent to the markets within which it operates.

The marriage of ROKC, BMC, and VPC makes for an even more powerful framework for growing your business.

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