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Tuesday, September 8, 2015

Online Versus Offline: The Pros and Cons of Online Retail

In this modern world of technology the internet is probably one of the biggest and most significant inventions to have come about well… ever. Businesses would be foolish to ignore it as a channel with a substantial route to market. However, whilst there is a lot of money to be made online there are some negatives too. It’s worth considering both the pros and cons of online retail (think websites, online marketplaces like eBay and Amazon, and comparison sites) versus a traditional ‘bricks and mortar’ approach so that you know what you are taking on and can plan your business accordingly.

The Pros of Online Retail

Quick and easy to get going

It’s much easier to setup compared to a physical store. Online marketplaces, such as eBay, require hardly any technical expertise to get going, and websites are much easier to implement nowadays with both out-of-the-box and customisable ecommerce solutions coming in pre-packaged forms. An added bonus is that if you opt to use online marketplaces to make sales you have a pre-existing route to market that you can tap in to. So you won’t even need to do any marketing in order to make sales.

Cheap to setup

These options are much cheaper than stumping up for a physical location too, and therefore have less risk attached with them if things were to go wrong. Online marketplaces generally charge very small amounts for listing items and so long as you go for a fairly standard website option you can usually get this from an ecommerce software package, which are normally pretty inexpensive or, in the case of open source, might even be free (you may need to factor in design costs though). Neither of these solutions is too time-intensive either compared to the challenges of setting up a physical store. You won’t need to expend efforts buying and putting up your décor, displaying stock, sorting out bills and insurance, or hooking up a security system.

There’s no loss to theft

Light fingers and five fingered discounts need not apply in the online retail world. It’s impossible for people to pocket goods that they haven’t paid for which is good for your margins.

24 hour sales

Online marketplaces and webstores can keep on trading all day, every day. You don’t need to be manning the store in order to make a sale. This means your customers can shop when it is convenient for them and lets you offer your services for many more hours per day than with a physical store. More selling time means more sales so this should allow you to increase the amount of stock you can shift.

National and international reach

Additionally, online channels give you access to a much wider geographical pool of customers. You can sell to people around the globe if you so wish and it certainly worth at least broadening your customer base to include people outside of the local catchment area that a physical store would serve. Again you will be able to increase sales as there is a higher amount of people who will be able to buy from you.

Less employees

Once you have setup a website and/or have uploaded your listings you need far less resources to run them. You don’t need someone to be manning the store to watch for theft and to process transactions. This means you don’t need to pay somebody else to do this for you when you are not around or are too busy with other parts of the business. Saving you money and meaning more of the profits come to you.

Collect more data

You can get much better visibility of your customers buying behaviour online. From age and location demographics, initial search terms, related items they are interested and much more. All this data can be collected easily with a simple analytics program. Tracking this level of detail around a physical store would be extremely difficult and time intensive whereas with a website it’s just matter of adding a piece of code and all the data will be collected for you automatically. This can be used to lead optimisation effort and help you to sell more.

Look bigger than you actually are

A well designed website can help a small operation give the impression of the kind of trust and authority associated with a much bigger business very easily compared to a physical shop. Consumers are more likely to buy from these bigger companies as they are more confident that they will go through on their service promises, such as actually sending the products they’ve ordered, still be around if they want to return them, and therefore yet again you will be more likely to sell more products.

Stock more items

People do not need to actually handle the items you are selling and will not expect to be able to instantly take them home. Therefore you only need a much smaller number of them on hand to ship out, as you can order more in response to demand, and even utilise drop shipping to reduce delivery times, leaving you more space to store other stock lines so you can offer a larger variety. By giving people more choice, you’re widening the potential customer base you can service, which will increase the number sales you can make.

More flexibility

Want to work from home? Need to update your stock levels on a Sunday or in the middle of the night? With your online channels this is easy; you can be based from anywhere you like, as you don’t need to be present in your customer facing store. You get control over when and where you make changes as your customers will be accessing your store remotely and at all hours of the day too. They get more flexibility and so do you.

Environmental factors don’t affect the internet

Your online store or marketplace listings will not be affected by the weather, bad traffic, increasing petrol prices, or difficulty parking. Customers will always have easy access to your products irrespective of these kinds of environmental factors.

No bottlenecks

Bottlenecks in your physical store such as queues being too long or staff not being available to serve will not affect your online channels meaning customers will never be driven away by these bottlenecks.

Customers can promote your products much more easily

Customers’ can be directed to share your website’s products and service via social platforms such as Twitter, Facebook and Pinterest, at just the click of a button. Word of mouth marketing is very powerful and it is much easier for you to encourage this via an online store.

The cons of online retail

Marketplaces take a cut

Listing products through a third party website, such as eBay and Amazon, mean they get a slice of your profits. Meaning you don’t get the maximum amount of money you could do for a product. You need to sell more in order to make the same money as your margins are much lower.

More competition

The high street has a limited amount of shops whereas the internet has no constraints on the number of competing businesses than can strive to win business away from you. Also, marketplaces that sell direct to consumer as well (eg Amazon) will be in direct competiton with you too and with their superior buying power will often be able to undercut your prices. Distinguishing yourself from the crowd of competition requires a lot of marketing, an exemplary customer service model and a reasonable pricing strategy. Juggling all three and getting it right in order to maximise your profits is a lot of hard work.

More admin

You will need to write and update detailed product descriptions, take photographs, upload listings, package and post items, as well as the usual stock control that is involved with a physical store. This could be as, or even more time-consuming, than displaying items on shelves for customers to see, fell and collect themselves.

Less customer contact

As you are unable to speak to your customers it is harder for you to upsell other items to them. It is much easier to hold someone’s attention if you are able to get into a real conversation with them. Online they can just click a button and be gone in an instant. Online channels will inspire less loyalty to them for the same reason. People will be more likely to be loyal to the ‘local shop’ than to a faceless website or eBay seller.

No touch or feel

People can’t try things on or feel the quality of item when they shop online. This might mean that you lose out on a sale on a item that, if someone had been able to try it on or feel it in their hand, they would have actually paid good money for. Equally, when poeple buy online there is more chance it won’t fit properly or they don’t like the quality when it arrives at their door. This means that you will have to deal with a lot more returns which can be costly as well as time-consuming.

Lower margins

People will tend to pay more for products that can be viewed and touched in person. Plus if high street shops get it right then people will pay extra for the experience that they get when they go to the store. Physical shops will never be able to compete with the online sellers on price but if the service they provide can outstrip a website quite easily by adding the personal touch or expert advice tailored to the individual above and beyond the scope of a website. For example, a beauty products store assistant could provide a makeover service. People look to marketplaces and the web for a bargain; they go to the high street for an experience.

Postage

Shipping costs can be expensive particularly for bulky or delicate goods. You will need to pay for packaging plus the cost of postage, not forgetting the time it takes to wrap it up and take it to the post office. Often it will make sense to pay extra for recorded delivery as the postal service can be unreliable, or customers may deny receiving items and without getting a package signed for you are pretty powerless to claim the money back. You will need to factor these costs into any online sales you make which will push the price up and might put customers off buying.

No passing foot traffic

You won’t get people walking by your store every day being tempted by your window display or browsing in your store for fun. They will generally only visit an online store or marketplace if they are specifically looking for something. This means it can be more difficult to attract the attention of new customers who don’t even know what they are looking for yet. A physical store lets you create a presence in people’s mind much earlier in the buying cycle which can jump start them into committing to purchases they might otherwise not have made.

Less impulse buying

Whilst online sites have got better at positioning related items or tempting people with special offers they don’t have people walking through the whole store in order to get to the items they are looking for. Plus, physical shops can strategically place enticing items at the checkout which people have to pass and wait by to increase there cross-sell ability. Online checkouts tend to need to be as uncluttered and quick to use as possible in order to maximise sales but this means they miss out on the cross-sell potential that a physical store can utilise.

Dependency on hardware

Hardware can fail whether it is through machine malfunction or disaster (eg fire or flood) and this could lead to lost sales and longer term breakdown of your customer’s trust. In order to maintain uptime you would need to implement a failover service which could be expensive and will probably still not guarantee 100% reliability. The bigger your online store gets the higher the costs will be and this will eat away at your profit margins.

Less trust

Websites and online marketplaces have less trust associated with them than a physical store. Having a bricks and mortar presence suggests that you are financially stable enough to be able to pay your rent, people trust that you’re going to still be there in a week or a months’ time so their warranties will still be valid and they can return items. This assurance helps them to complete purchases that they might not be so comfortable with making in the online environment.

The solution – have both of course

So, if there are pros and cons to both the online and offline channels then how do you get around them? Have both of course – that way you cover all your bases. Of course, this is a lot more work so you may need to start with one and then implement the other however as a long term goal as you scale your business it makes sense to aim to have what’s known as a ‘bricks and clicks’ business model (for more information on the what, how and why of multichannel take a look at this article I wrote for SimplyWholesale.). Hopefully, this post will help you to decide which the best model is for you to begin with by giving you some insight into the benefits and downsides of either option.