Public vs Private Companies – the Web Battle

You might know (or not) about the recent posting from Amazon on their Q2 results – a US$7 million loss on revenue of $15.7 billion.  You probably didn’t know of Geeknet’s (Thinkgeek’s parent company) loss of US$1.5 million on revenues of $22.0 million  Public companies – you got to love them.  They keep churning out losses and most people shrug their shoulders and figure that these are ‘growth’ companies, thus a few losses for a few years (or a decade or two) are fine.

The Data

Here’s a quick comparison taken from their Q2 financial releases.  Note, Geeknet rolls the entire cost of fulfilment & COGs (stated as Cost of doing business) into one number which is the number I used for the % provided.

Amazon Geeknet (Thinkgeek)
Revenue $15.7 billion $22 million
Loss $7 million $2.5 million
Growth 22.30% 24%
CoGs 71.40% 79.96%
Fulfilment 11.20%
Marketing 4.10% 8.72%

Amazing isn’t it?  In both cases, just paying for their goods and shipping costs approximately 80% of the revenue they take in.  That’s 20 cents on every dolllar dedicated to just making sure they have stock and can ship it to you.   Never mind the cost of acutally getting customers or the operating cost of running the site.

Let’s put it another way – you earn $40,000 a year (gross).  To generate enough money to just pay for your salary using the 80% metric, you’d need to generate $200,000 in sales a year.  Just to pay your salary.

Private Companies (us)

As you can guess, there is no way we could survive on margins like that.  Until recently, Amazon made losses year-in, year-out. Geeknet is still in that stage it seems.  Privately financed companies like us (i.e. small businesses) just do not have the level of capital required to sustain such a business model.

We have to build a business with a better margin from the get-go, which requires us to do things differently from the Amazons and ThinkGeeks of the world.  And in Canada, that means we have to have higher prices due to the lower number of customers available in total.

That’s not to say it’s not possible or viable for private companies to run losses – it’s obvious that we can and have.  However, we have a finite set of funds, while public companies often have a huge cash egg and have access to even more capital if the initial amount isn’t sufficient. Our investors (if we have any) are also often more demanding and have much shorter timeframes.

The Result

At Starlit Citadel, we actually charge the cost of shipping (unless you hit the Free Shipping threshold).  We provide discounts, but we keep our discounts at a level that provides a higher margin on COGs.  We have to basically run a business that is meant to make a profit – soon.  Not one that will make a profit in 5 or 10 years, but one that will do so in 2 or 3 years.

And once we do make profits, we often have to invest it back into the business…

Amazon the Giant

I recently was contacted by Amazon to list on their site.  It’s an interesting proposal that I decided not to go ahead with for a number of reasons.  Many of the same reasons for not listing on Amazon hold true for eBay too if you think about it.

a) Lack of transparency

One of my first questions was; can you give me details on previous sales for a few games (like Settlers of Catan) so I could get an idea about my potential gains.  Unfortunately, they wouldn’t share even that basic information.

b) Lack of control

When it comes to listing on Amazon’s site, there are some major advantages.  You get a major boost to sales in the short-term (possibly) as you tap into their marketing budget, their current customers, their design team, etc.  On the other hand, you have no control over any of this.  They are optimising the site all the time – for Amazon.

c) Giving them data

Amazon has a history of using sales data to decide which product category to next enter in their quest to sell everything under the sun.  Now, obviously they already sell a lot of our board games in the US but haven’t done so yet in Canada.  And as usual, when they enter they generally ‘scoop’ the bestsellers and then leave the dregs for everyone else.  And remember – the entire product page is designed and controlled by them, so its easy to tweak the design to give them the best overall profit for Amazon – whether it’s by selling more of the product directly or more via 3rd parties.

Also, we’d be helping them build up their website as we list all our products.  Kind of silly to do all the work for another competitor eh?

d) Lower Margins

Amazon takes 15% of every sale.  So if we sold games at our usual price, we’d take a 15% haircut immediately.  Not a fun thought considering how small a margin we already have.  If we increase our prices by 15%; then we have to keep 2 databases.  Not to mention the fact that they’ve got a strange system for Shipping Costs where each individual item is priced to ship individually.

e) Competing on Price Only

Since there’s very little to differentiate one 3rd party seller from another in Amazon (beyond some basic review mechanisms); you are basically competing on price and price alone.  Not something we’re that interested in doing.

f) Multiple Databases

Not to forget we have to start managing multiple databases instead of the single one we have.  As it stands, keeping stock up to date is a problem, having to do that for 2 sites / series of orders is just painful.

g) No Repeat Customers

Lastly, one of the major things that keeps us as a business afloat are our repeat customers.  With the Amazon system, we lose out on the repeated sales from customers.  We have no way to contact them (e-mail newsletters, twitter feeds, blog posts, etc) to let them know about new products / features / etc; nor does Amazon want us to.  Those customers are ‘theirs’ and thus creating / building customer loyalty to us is extremely difficult.  As such, each product search / page is a new battle for the same customer.  Now, I’ll admit the cost of acquisition of the customer is much lower as it’s all borne by Amazon; but it also means that you never have your ‘own’ customers.

Conclusion

In the end, joining Amazon works for some businesses but not for us.  It’s just not something I’m that interested in.  Could we get additional sales? Probably.  But with it comes numerous headaches and a very transactional nature of business.  In addition, we end up ‘tangoing’ with a big-boy who at any time could shut us down.  There are numerous horror stories of companies that rely on a 3rd party for the majority of their sales that go out of business due to changes / tweaks in the 3rd party’s policy’s.