How Fulfillment by Amazon lost $2,460.94 of my inventory!

Amazon has a little-know service called Fulfillment-by-Amazon. It does what it says. They hold your inventory in their warehouses and fulfill it for you. I have been a longtime seller on Amazon, and I thought I would try this service out. I sent them four SKUs that I was selling – some moderately expensive Nikon lenses worth about $2500. They lost them!

Signing up for the FBA service was relatively easy. They advertise it on their seller account pages, and also give you the option to enroll in the service when you list new items for sale.

Preparing a shipment for FBA entails a 12-step or so process in which you add items to a shipment, print out bar codes to place on the boxes, package everything up, and print out a packing slip and shipping labels. The process and UX was a bit kludgy,  but overall it was straightforward. A nice bonus was that the shipping cost was incredibly inexpensive. It was only $5.20 for an 8 pound shipment! This show the depth of discounting that Amazon receives from UPS.

Amazon received my shipment on September 22 at 8:45 am (per UPS, and notified me that they had received the package about 5 hours later. Almost 3 weeks later, the products in the shipment are still shown as “Inbound” on my Seller account.

I contacted Amazon on October 5th to inquire about the status of my inbound shipment. Mark T., a seller support agent, replied that they would check on the status and get back to me. On Oct. 7th I contacted them again, asking for an update. Mark T. replied writing that they inventory had “yet to be found”, and that he would request that a credit for the lost inventory be issued to me. As of today, I have yet to receive a credit, or any update from Amazon.

This shipment was 1 of 2 that I sent to Amazon. The second shipment was received and processed with no errors. And the product, a used Nikon flash, sold in less than 48 hours at a selling price of only $5 less than Amazon’s new price.

So Amazon has a 50% success rate with their FBA service. Will I continue to use it? It depends on how they deal with crediting me for my lost inventory. Their language around refunds for lost or damaged inventory states:

Under circumstances where Amazon takes responsibility for paying you the Replacement Value of an item as set forth in the FBA Service Terms, we will reimburse you based on our estimate of fair market value less FBA and Selling on Amazon fees that are applicable to the item. We will consider several factors in our estimate of the fair market value of the item, including your sales history, list price and other sellers’ list prices of the item on Amazon.com. If we determine that there is insufficient information available to estimate the fair market value of the item, then the Replacement Value will be determined based on the applicable Default Replacement Value from the table below. In no event will the Replacement Value for an individual item exceed $2,000 (USD). For items with values greater than $2,000 (USD), we recommend considering third-party insurance.

I set the sale prices of my items on the higher end (but still within the normal range) of the used products on Amazon. One of the really cool things about FBA is that Amazon Prime customers get free 2-day shipping on your inventory. I believe this enables FBA sellers to get higher prices. In addition to the added value of free shipping, customer have the assurance that the product will be delivered quickly (a common customer complaint with 3rd party sellers on Amazon is that shipping takes much longer than it does with Amazon proper). This was confirmed with the sale of my flash. Will Amazon accept the prices I set, or will they lowball me? The ball is in their cour.

In Defense of the MBA

In the Silicon Valley startup community, there is a bit of an anti-MBA sentiment floating around right now. Recently a talk by David Heinemeier Hansson (DHH) cracked the top 5 articles on Hacker News. I have found my MBA from Wharton to be incredibly useful in technology startups. So I wrote a rebuttal. I’ve pasted it below.

I discussed my post with Jason Freedman and Evan Konwiser, the founders of FlightCaster. They both have an MBA from Tuck, so I was curious to get their opinion. Jason made an interesting point: MBA skills are useful at startup that has found product:market fit, but aren’t useful prior to that. And he is probably correct. The quantitive analysis and thought processes that you learn in business school are perfect for optimizing and analyzing a “real business”, however they don’t munch contribute to the pivot and iterate process that pre-product:market fit startups most go through. This isn’t to say that someone with an MBA isn’t useful at this stage startup, it’s just that they will need a different set of skills in addition to their MBA.

Original Post

DHH makes a few mistakes in his reasoning here. I have an MBA and work for a successful YC startup. Here are the flaws with his argument:
  1. Mediocre business schools aren’t worthwhile. And although school rankings are only an approximate quality measure, any school that isn’t in the top 30 in the world or top 10 in the US is probably mediocre. He is basing his analysis on his experience at the University of Copenhagen, which doesn’t make most global rankings (Financial Times rankings, WSJ rankings, Business Week), doesn’t crack the top 30 in Europe (FT Europe), and doesn’t actually offer an MBA. In addition, the 3 year program the DHH refers to is actually an undergraduate program (the MBA is a graduate degree).
  2. Internet businesses operate at large scale (if they are successful), and understanding large scale businesses operations requires quantitative analysis. Working for a YC startup myself, I can attest that what I learned in business school is incredibly useful. My school (Wharton), focused on quantitative analysis, and I came out of it with a set of tools that I use everyday. These include statistical analysis, quantitative model building, quant marketing tools, and financial analysis. Of course you can learn these tools on your own, but you risk not knowing what tools are available to address the problems you face.
  3. In addition to tools, a good MBA program will teach a general problem solving technique to systematically break down, analyze, and solve business problems. And it will teach you to effectively communicate your solutions to others (you boss, a client, a VC, whoever). Some people are naturally good at this and don’t need an MBA to do it. But many need to be taught how to think in this manner.
  4. As another commenter pointed out, a lot of value from getting an MBA comes from networking. However if you get an MBA in one country (Denmark) and then move to another continent, that network will be less useful.
  5. Many of DHH’s lessons about building a successful startup – including charging for your product, picking a competitor, and rejecting conventional thinking about starting a tech company – are exactly the type of things you learn while getting an MBA. In fact, rather than learn specific lessons like these, you learn a framework for evaluating your business and market, and formulating the right way to structure your company.
DHH does make a few good points, both explicit and implied:
  1. Strategy frameworks like the Porter’s 5 Forces (he incorrectly describes it as a management theory) aren’t particularly useful for starting companies. Although these frameworks can help to gut check if a startup is entering a good or bad market, they won’t be at all useful in the day-to-day running of a company.
  2. Based on my small sample set (of 1 school), I don’t think business school is useful for learning how to build a product or be entrepreneurial. Granted, some schools specialize in this and mine did not, so other schools may be useful in this regard (Stanford GSB is known for entrepreneurship).

3 Simple Ways to Avoid Stock-Outs in Retail

Well, the Apple and AT&T online ordering for the next iPhone (which I must have on Day 1) are crashing under load. Ooops. That’s at least 3 people getting who have lost their jobs (or heads) at apple from this launch of this iteration of the Jesus phone (1. the guy who lost his phone 2. the guy who fucked up the internet access at the keynote 3. the guy in charge of the pre-order website).

What can we learn from this?

Lost sales from stock-outs, closings, and long lines can be one of the largest drains on profits in retail. Optimizing in-stock availability can increase profits far more than advertising or marketing.

Why? If a customer comes to your store (physical or online) to purchase something and you don’t have it in stock, they will likely purchase it from a competitors. You just lost the profit from that sale. Let’s compare stock-outs to marketing:

Let’s say I sell headphones  for $100 / each, and buy them for $40 / each. My profit is $60 per product. I normally sell 200 per week, resulting in gross profits (i.e before things like rent and salaries) of $12,000 per week. In order to meet my demand, I purchase 200 headphones per week (on average) so that my supply meets my demand.

Now let’s say that my store has a busy week. Maybe there is a trade show in town and my store has unusually high foot traffic. 280 people come to my store to purchase the headphones (a 40% increase over the norm), but I only have 200 in stock. Selling 40 headphone per day, I run out of stock on Friday night and have no headphones left to sell over the weekend. And I’m unable to get more stock to my store in time to handle the demand over the weekend. Of the 80 customer who come to the store to buy headphones on Saturday and Sunday, 70 leave to purchase them elsewhere; only 10 come back leader or purchase them on backorder. So I’ve lost 70 * $60 = $4200 in profits! Ouch.

Compare this to a marketing campaign. Let’s say I run ads on the Internet to boost my sales by 40%. I spend $3,000 over a week, resulting in a 50% boost in sales (these would be impressive numbers btw). My net profit is 100 * $60 – $3000 = $3000.

Managing my in-stock availability beat advertising by 40%.

So how can I do this? Here are a few suggestions:

  1. Many stores stock-out of their most popular items most frequently. For example I’ve noticed that supermarkets are frequently out of fresh herbs. These are surely a top seller. And a top out-of-stock item. So make sure to keep some extra of your top-sellers in stock.
  2. Try to record lost-sales from out-of-stock items. This is a tough trick, and retail businesses rarely do it. Every time someone asks about a product that is out of stock, write it down! Review the total lost sales by product and purchase more of the popular items.
  3. For the math geeks out there, have a looks at the newsvendor problem on wikipedia. This requires some basic understanding of statistics, but is the best way to manage your stock and purchase levels.
  4. And if you are apple, throw some extra servers up so I can order my iPhone.

I’ll end with a great story. I was in Brooks Brothers looking for size medium khaki pants. And they were out of stock. I asked the sales person why they didn’t have any, and she told me because it was their most popular item! Right.

FaceTime for iChat coming in Mac OS X 10.7

Apple said very little about the next version of Mac OS X at the WWDC last week. But its what they didn’t say was more than enough to confirm one of the most exciting features of Mac OS 10.7 – FaceTime for iChat.

Integrating FaceTime with Apple’s iChat IM client is a no-brainer. Actually that’s being generous; it’s one of those features that is so obvious that we all know it will happen. Like all telecommunications services, the network effect will govern FaceTime’s value. This means that the value that consumers receive from FaceTime (which is a significant component of the marginal value of the iPhone 4 vs 3/gs) will be equal to the number of devices that have FaceTime installed. By enabling FaceTime for iChat, the will be tens (hundreds?) of millions of additional devices in the FaceTime network. This will make the iPhone 4 (and Mac OS) more valuable to consumers, which will in turn result in more sales for Apple. QED.

So if Apple will sell more iPhones and Macs by adding FaceTime to iChat, why didn’t Steve announce it on stage last week? FaceTime was already the big “one more thing” of the show (albeit an expected one given knowledge of the front facing camera). And announcing this feature followed by his signature “boom” would have given more punch to the announcement. The answer can only be that it is coming in 10.7.  This makes sense for a few reasons:

  1. Apple rarely releases significant new functionality in between new releases of Mac OS. The only exceptions to this are Safari and iTunes. Safari needs to be on a faster release schedule than Mac OS to stay competitive with other browsers (Chrome) and up-to-date with evolving web standards. And iTunes releases are driven by iPhone, iPod, iPad release schedules.
  2. There aren’t many features to add to desktop OS’s, so when Apple comes across one like this there is some incentive for their marketing team to save it for a major release in order to have something to announce. The last major releases of Mac OS (10.6) and Windows (7) both focused on speed, stability, and polish. This is largely because most of the work on the desktop OS is complete. New features often just slow things down, decrease stability, or increase (possible decreasing new value).
  3. By saving FaceTime for iChat (FaceChat?) for OS 10.7, Apple will likely sell more upgrades.

Will it Work?

Will Apple be successful is in making FaceTime the de facto standard for video calls? They have several factors working in their fabor:

  1. FaceTime is built on open standards, which makes it much more likely to be adopted by other companies because Apple doesn’t own the core technology.
  2. The network effect is working in Apple’s fave because they have a 28% market share of the smartphone market.
  3. Branding the technology is a nice touch, making it more approachable and communicable for consumers.

I believe that if it is true that Skype integrates FaceTime, then becoming a de facto standard is a done deal. But in the meantime I can’t wait to use it.

20% Extra Time => Greatness… The corollary to 37Signals’ Do Less philosophy

Projects where the time allocated is 20% more than the time needed come out orders of magnitude better than project where there is just enough time. And projects with 20% too little time? Disastrous.

Here’s why. When a project is finished early, the makers have time to finish off the rough edges and hone it to a pretty shine. They can squash the last few bugs. Add delighter features. Proof read. Polish.

Here’s an example. Heroku asks all of their potential hires to do a consulting project in order to evaluate their work. My project was to evaluate their data on conversion rates (I’ll talk about the discoveries I made in another post, they are fascinating). I made sure that I had ample time to work on the project and as a result I finished the major work with an extra 2 days to spare. I used this time to do some small things such as tidying up my excel model, rehearsing my presentation, and reformatting my deck to match the company’s branding (which was a huge hit). I also had enough time to build a proof of concept of a Ruby on Rails program which performed the same analysis as my model, but on live data. This last piece ended up being a Steve Jobs style ‘one more thing’ at the end of my presentation. The result was that I massively exceeded their expectations both in the content and delivery of my project.

What if I was 20% short of time? I wouldn’t have had time to get the content of my analysis working perfectly, I would have been unsure of my results, my deck would have been ugly (and in the exact opposite color scheme than the company’s), and I would have had an unrehearsed and sloppy presentation. All of the hard work I had put into the project would have been masked my having a rough outer layer.

The same pattern exists in software development, writing, graphic design, and most other work. The last 20% of the project, the fit and finish, determines how the first 80%, the meat and potatoes, will be judged and perceived.

This dovetails nicely with 37Signal’s do less philosophy. If you aim to build or make just a little less than you think you are capable of doing or have time to do, then you will that extra 20% time to make it great. And don’t we all want to make it great?

My spiffy rails template – Heroku, HAML, Formtastic, and more

Rails application templates are great ways to DRY out your application creation process.

For the impatient, have a look at the git repository here or build your rails app with my template using:

rails YOUR_APP_NAME -m http://github.com/mattsoldo/matts_rails_template/raw/master/matts_rails_template.rb

I like my rails apps to have the following:

  • HAML (w/ hassle for Heroku compatibility)
  • Formtastic (so awesome)
  • Delayed Job (a must if you use Heorku)
  • Factory Girl
  • Shoulda

So I created a rails application template that installs all of the above automatically. There is a rails 2.3.x and rails 3 branches, so use whichever you want. The template will:

  1. Setup the App
  2. Install the necessary gems / plugins
  3. Create a welcome (i.e. home) controller
  4. Create a git repo and do the initial commit
  5. Create a Heroku application
  6. Push the code up to herou

Boom – one line and your skellaton app is deployed and running.

The best part is you don’t need to install anything, rails will read the template from “the cloud”.

For rails 2.3:

rails YOUR_APP_NAME -m http://github.com/mattsoldo/matts_rails_template/raw/master/matts_rails_template.rb

For Rails 3.0

rails YOUR_APP_NAME -m http://github.com/mattsoldo/matts_rails_template/raw/rails3/matts_rails_template.rb
update: It appears that my template doesn't work at all for rails 3, and whats more rails 3 modular design makes it much easier to do all of this.

Why boosting sales is like picking up girls – there’s no easy answer

A friend of mine recently asked how she could increase the traffic and sales on her website. She runs BloumeBaby.com, a groovy e-commerce site selling modern and green baby products.

This question reminded me of a 17 year-old boy asking how to pick up girls. You can explain how to do it, but the right answers (like being confident or knowing yourself) are the hard ones to do, and the easy answers that they are looking for (like pickup lines) don’t work. Improving your e-commerce sales are just like this. Easy fixes (register on this directory) don’t work and are a waste of money. The right answers take time, work, and thought.

Step 1 – Self Awareness

First you need to be able to answer 3 questions. Your answers can’t be hunches, they need to be empirical observations:

  1. Who are your customers?
  2. Why they are purchasing from you instead of your competitor? In other words what is the unique value that you provide?
  3. How did they find you?

If you can’t answer these questions, pick up the phone and start talking to customers who have actually purchased something from you. And make sure that they aren’t friends and family, talk to people who “found you”, not who “knew you” (if you don’t have any customers yet at all then that’s an entirely different problem – a subject for another post).

Step 2 – Hypothesis

Now you understand some of the critical components to your business (the customer facing side at least), you can make some educated guessed on how to improve things. You won’t know the answer to these questions so it’s best to make 2-4 guesses for each.

  1. What message conveys your value to potential customers?
  2. In what mindset or during what activity will your customers be most receptive to this message?
  3. Where you can find more people like your current customers, when they are in the right mindset or doing the right activity to be receptive to your message?
  4. How can you actually deliver your message at the right time and place

Based on the hypotheses your formed here, you should now have several potential marketing communication channels in which to reach your audience. These could be anything from PR opportunities to twitter messages, to neighborhood associations. Be creative. It’s not just about advertising.

Step 3: Experiment

Now that you have your hypotheses, be scientific and test them. Be sure to record how much time and money each requires, and how much revenue (and profits) each results in. If things work, keep doing more of them. If they don’t take what you learned and try new things.