Don’t Be Afraid to Start An E-Commerce Website in Trinidad & Tobago: Part 2: The Model

There are two online stores in Trinidad & Tobago which are ‘popular’ for reasons I can’t fathom except that local e-commerce is so lacking it’s like we’re in a desert and in the absence of water people are drinking the sand.

But this article is not to disparage and pick apart these sites— and heaven knows that I want to— but I want to use them as examples to illustrate a strange disconnect I’ve noticed between online and offline stores. These two stores and others like them have NO PHYSICAL SHOPFRONT which means they’re totally online and in terms of operating costs they have a tremendous savings compared with their offline counterparts, such as:

• No rental of store premises
• No start-up investment in store fixtures & fittings- like display racks, shelving, signage etc.
• No investment in equipment- like cash registers, point of sale systems, office equipment
• No expenses for store personnel- like sales clerks, cashiers
• No ongoing expenses for store maintenance and other overhead costs

How much do you think the above adds up to in total costs that are not incurred with an online store? At least a couple hundred thousand dollars TT for sure. And to put it in perspective, how much do you think the overhead (ongoing expenses), if they existed, would have added to the price you pay for the product? Let’s ballpark it to about 15%-20% more included in the mark-up.

So if these costs are being saved, why aren’t the savings passed on to you? Why are the prices charged the same as in a store? I’m sure there may be explanations but none that can fly, except of course greed.

It’s the mechanics that’s easy, the model is hard

The customer browses, adds to cart, pays, the order is created and that’s THE FUNDAMENTAL function of an online store. You pick, pack and deliver. Repeat. If you’re doing a good job, you also get repeat business. Every day in Trinidad & Tobago, orders for goods are being delivered via trucks, vans, cars, some owned by the company, some sub-contracted, some even by mail. The mechanics are sound, we’ve been doing it all these years.

Simple number-crunching using margins

This is not to oversimplify a complicated process but a useful terms of reference for gauging potential profitability. I’m sure you have a great idea for an online store but before you ‘try a ting’, run some numbers first before you take the plunge into E-commerce.

I like to use margins instead of mark-ups, and just to explain the difference:

Sales Mark-up vs Sales Margin

A product costs $100 TT and I sell for $125 TT that’s a 25% mark-up. Expressed as a margin it’s a 20% sales margin. A markup is a expressed in terms of the cost price while a margin is expressed in terms of the selling price. In this example, the dollar amount of the mark-up is $25 and so too 20% of the selling price of $125 the same $25. Even though the profit is the same $25, I like the margin approach as it’s easier to get a handle on the cost. Bear in mind that product cost doesn’t mean the purchase cost but also includes the other overhead costs, i.e. the total selling costs.

Using Margin to estimate cost and profit

If I use a 20 % margin on every $100 sold it means that for every $100 sales, I only keep $25 as pure profit and the rest should cover my cost, i.e., my cost should be $75. But you probably won’t be able to narrow it down to a single product cost so let’s use larger figures.

At a 20% margin if for the month I project my sales at $100,000. then the cost should be around $80,000.

That $80K includes the purchase cost of the items sold and all the overhead for that month. Now step back and paint such a scenario in your circumstances. If you sell $100K a month, would your cost be even close to $80K?

Break projected sales down into shorter periods

If you think a $20K monthly net profit would be enough to leave your job and concentrate on your online store, that’s great. It’s also a way to work backwards to a possible sales figure, by saying, ‘I want to clear $20K per month, how much do i need to sell?’, then seeing if that’s figure is achievable.

For argument’s sake, lets say that $100K/mth sales is your relatively realistic goal, then to get a handle on just how realistic it is, break it down into weekly: $25K/week— or daily: around $3,500 to $4,000. Now how achievable is that?

Using a Marginal Costing approach instead

I like this approach is it’s very simple to understand. It divides your cost into fixed and variable. This costing method is usually applied in a manufacturing environment (not only heavy manufacturing but any business where you’re making a product instead of buying to resell), but I still think it can be useful here.

The principle is this: if you do no business there are costs still to pay, such as rent for your warehouse, installments for your delivery vehicles, salaries, and so on, i.e. these costs are FIXED.

The total amount of your fixed costs, regardless of how they are categorized, is actually your Break Even Point which is the amount you absolutely have to make without incurring a loss. Quite simply, it’s the cost of DOING NOTHING.

The other part of the cost is the VARIABLE COST which obviously includes the cost of products and other costs like cell phone, gas, advertising etc.

Use 3 scenarios for projections

It’s easy to get carried away with ‘all de money yuh could make’ so having other scenarios other that your outrageously optimistic projection is in order. So before you get carried away on a stretcher from a heart attack if you fail, come down to earth with the following scenarios:
 

Monthly projections (simple) at 20% Sales Margin

Obviously I’ve way simplified the table as the projected total costs comprise the individual components like rent, electricity, insurance, etc. I’m just giving you this as a rough guide.

E- Commerce Model: Little or NO Inventory

If you have no physical store you already saved a ton of money by having to put out only a fraction of the investment. With lower overheads you can still make money even if you buy at regular wholesale in T&T, i.e. from the same suppliers many store owners are buying from to stock their stores and sell to a limited geographic area. You on the other hand are doing the exact same thing to supply the entire island.

But you still need inventory, and if you’re a start-up with limited financial resources then you have to be creative. Here’s a suggestion: negotiate a few alliances and partnerships with local wholesalers to supply their goods as needed or ‘Just in Time’. They wouldn’t mind as they’ll still be moving stock with a potential for it growing tenfold. Sounds crazy? So is putting water in a bottle and selling it to Trinis.

What about physical stores going online?

Well you’re already halfway there as now all you need is a website. But you have to decide if you want your online store to operate as a separate business unit or an extension of your store. You also have to determine how much you can integrate online and offline for a combined synergy.

You don’t have to look to far, it’s no secret we look to the US for inspiration and ‘copyration’. Stores like Macy’s and JC Penny and countless others are doing it, and they were offline first.

Conclusion

Well my formal education in Business Administration and Management Accounting didn’t go to waste. Back in my younger days I went to SAM’s which led to my very first job as a lecturer in Accounting and Cost & Management Accounting. That’s why I understand these numbers and can give you such a business perspective.

A business model comprises many elements and I’ve only touched on a couple here. I hope I’ve provided a little clearer perspective. I know there are many individuals and start-ups who see opportunities but lack the funding. Your heads are probably giddy with ideas so take what I’ve said, put pen to paper and let them out.

E-Commerce in Trinidad & Tobago is going to come down on you like a ton of bricks so stop dilly-dallying and get to it.