Almost anybody has heard how easy it is to launch a business on marketplaces. When the first COVID-19 lockdown started, sellers started to buy out everything they could put their hands on, from baby onesies to electronic devices, in order to sell them online. But what does actually stand behind the seemingly easy business? Is it really a piece of cake to earn one’s first million by selling goods on Wildberries and Ozon? Today let’s talk about the most common mistakes that will kill your marketplace business in the bud.
We will look at the actual experience of somebody I know. Ksenia decided to sell swimwear during the summer season. Sounds like a good business idea. After analyzing the popularity of the product using analytics services, she identified a bestseller model. She found a bulk seller that traded 100 pieces and higher for RUR 1,050 ($13) each and 1,000 swimsuits and higher for RUR 950 ($12) each.
Ksenia predicted good sales for several months ahead and decided to make a big purchase, which also saved her some starting capital.
Leading sellers on marketplaces were selling that particular model for RUR 1,800 ($23). Emerging sellers who wanted to stand out from the competition lowered the price to RUR 1,600 ($20). Ksenia decided to have a proper photo shoot and hired a photographer for RUR 10K ($127). She also ordered fulfilment services (an intermediary dealing with the entire delivery process) in order to avoid storage costs (RUR 50, or 64 cents, per swimsuit).
Finally, it was time to launch sales. Ksenia posted the product on a marketplace but, due to her lack of experience, she had to pay RUR 20K ($254) for a marketing consultation. She started with RUR 1,800 ($23) per piece but then the marketplace launched a promo campaign and she reduced the price to RUR 1,600 ($20). That helped sell more and Ksenia was earning RUR 300K ($3,820) per week. She was extremely happy and started to cover some of her expenses from the weekly revenues.
Now let’s add things up:
- Marketplace commission (15%)
- Taxes under the Simplified Tax System (6%)
Total mandatory expenses: 21% of the price.
1,600 — 21% (336) — 50 (fulfilment) = RUR 1,214
The buyout rate was 60% (i.e. only 60% customers accepted the product once ordered while the other 40% returned it), or 6 purchased and 4 returned swimsuits out of 10 orders. The logistics expenses were RUR 40 (51 cents) to deliver and RUR 33 (42 cents) to return an item from a customer. As a result, we have the following actual earnings from selling one swimsuit:
- 6*40 + 4*33=372 — expenses per six sold swimsuits
- 372/6 = 62 — the cost of delivering one sold swimsuit
1,214 — 62 — 950 (net cost) = 202.
Here comes the first mistake.
1. Lack of preliminary calculations
After spending significant budgets in the beginning, Ksenia was left with RUR 202 ($2.5) earned from every sale, not including continuous expenses such as accounting and other services she could not do without.
In addition to that, budgets were spent on advertising (in-app promotion and Instagram bloggers). We should also count in personal assistant salary (RUR 30K ($380) per month). The money for the first bulk purchase was borrowed at the monthly interest rate of 1.5%.
Ksenia achieved a turnover of RUR 3 mio ($38,100) within three months, including expenses. Reasonably, she succeeded in building a multi-million business on the first try. But when she calculated all her expenses, she realized that in fact, she only made RUR 10K rubles ($127) in net profit.
Closer to the end of the season, Ksenia decided to buy another 1,000 swimsuits and send any remaining items to a storage facility. All of a sudden, the sales dropped. Simply put, the money was stuck in the product while Ksenia continued to pay an interest on her starting capital. And here comes the next mistake.
2. Choosing unusual or seasonal niches at the start
Ksenia picked swimwear relying on the expectation that the product would be selling well during the high season. She did not research how many swimsuits her competitors sold, when the season started and whether she even could earn as much as she wanted in that niche. I would not recommend going for seasonal or unusual niches without understanding when the trend will end and how it can be monitored.
3. Not analyzing the niche before buying a product
There are plenty of analysis services to check what products get sold and for what price. It is easy to analyze which niches are already monopolized and which niches would be hard to enter with a small budget.
If you are starting a business on a marketplace, choose a niche based on figures and analysis. I can confidently say from my personal experience that smart analysis helps earn more than 100% of the net cost via marketplaces.
4. No accounting
Ksenia did not keep books and did not monitor her stocks or money in her bank accounts. All this time, she felt like she was making good money. After all, large sums dropped in her bank account every week. Almost entirely, these funds were spent on maintaining the turnover.
Keeping books allows for managing sums of over RUR 5 mio invested in goods, and I know it form my own experience. Knowing how much is invested and how much money must remain in the accounts, I can maintain a 20% return.
5. Selling uncertified goods
Most goods purchased from wholesaler do not have certification, and marketplaces check documents more carefully each year. When the tax authority sees a steep growth of income of a company or sole trader, it would show interest in where the goods were purchased. If there are no documents, the products are blocked on the marketplace and it would be almost impossible to get them back, and all efforts to create a business would be in vain.
It is possible to earn millions on marketplaces, but one should consider potential risks and adopt practices from those who already have a good and stable income. Through trial and error, I managed to earn RUR 300K in the first month, RUR 700K in the second month and RUR 1.4 mio in the third month. I continue to develop and learn new information, and my performance is improving.
By building a right system, you will be able to enjoy all advantages of doing business on a marketplace. You will go on a vacation, buy luxury goods and eat out at posh restaurants while your products are selling themselves.
In business, figures are like a traffic light, they are a very simple indicator. If there is a traffic light and the rules are obeyed, road traffic will be safe. If there is no stoplight, one can crash their car. So I suggest creating traffic lights for your business in order not to kill it.
By Ivan Fisanov, marketplace expert, serial entrepreneur, business coach