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.
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.
|Revenue||$15.7 billion||$22 million|
|Loss||$7 million||$2.5 million|
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.
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…