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.

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

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.

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.

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?

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.

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

Crapware has even gone virtual. The homepage of my favorite retailer and former employer, amazon.com, recently morphed into a franken-ad for everyone’s least favorite web browser, IE8.

Who does crapware come to be? And why is it so bad?  The answer is business development. Although the term “Bus Dev” gets misused as a synonym for sales (usually by sales people trying to sound more important than they are), here I am specifically referring to partnerships and alliances. And the loser in bus dev isn’t always the consumer, it is often (maybe usually) one of the companies involved with the deal.

Bus Dev is a common function in Silicon Valley tech companies. It grew out of a legitimate need. Back in the early days of the microprocessor evolution (late 70′s and early 80′s), companies only designed and sold a narrow slice of the technology stack. In order to offer a whole product to the market, it was necessary to form alliances between companies. These required both technical integrations and marketing integrations. The most famous example is IBM bundling Microsoft DOS on their first PC.

I’ve been involved (to varying extents) with the business development function at two companies, Amazon.com and Box.net. Having been on the inside, I can tell you that it’s like seeing sausage being made.

Let’s look at a fictional but typical deal to see where things go wrong. A small startup called CloudTwit.com wants to expand their market share with Small & Medium businesses. So they make a deal with HewleDell, a major computer manufacturer, to pre-install their client software and bookmark their website on all business laptops sold is 2010. CloudTwit.com pays HewleDell 60% of all the revenue generated from the deal, with a minimum payment of $1 Million (in 2010). HewleDell has done lots of deals like this in the past and knows that they never generate significant revenue from their partner, which is why they require this minimum payment of $1 M.

In order to get executive approval for the deal, the VP of Business Development at CloudTwit.com builds a financial model which shows how much they will make from the deal. The model boils down to this: HewleDell will sell 2 million computers next year. CloudTwit will have a sell-through rate of 1%, resulting in 20,000 new sales. Average sale price is $500, so gross revenue is $10 Million. HewleDell’s revenue share is $6 M, leaving $4 M in revenue for CloudTwit. If this VP is extra sharp he will factor profitability into the model (many companies don’t). At a 75% margin, CloudTwit nets $3M in profit.

The problem is that the assumptions that will go into this deal are wildly optimistic and incorrect. The Excel spreadsheet contains a number of inputs, assumptions about the sell-through rate and average sales price. In order to justify the deal, the VP changes these numbers until the outputs (the net revenue or profit) are attractive enough that they’re executive team or board can’t possibly turn down the deal.

So the deal gets approved. The resulting sales are disappointing. Instead of a sell-through rate of 1%, CloudTwit and HewleDell only see about .02% of the computer sales convert to new customers for CloudTwit. So at the end of the year CloudTwit has $80,000 in revenue and $60,000 in profit. And they are contractually obligate to pay HewleDell at the minimum level of $1 M. Net loss $940,000. Oops.

The Director of Business Development at HewleDell gets to put $1 M of revenue on his P&R, with almost no cost to him. Pure profit.

Next year the deal isn’t renewed, but there are a dozen new companies eager to make similar deals.

But after a several years, HewleDell’s customers get sick of all the crapware. While the savvy customers uninstall it (or pay Nerd Squad $100 to do so), most customer leave it on. The software slows down their computers and causes them to crash more. Eventually they are fed up. For their next computer purchase they buy from Orange Computers. The computers are sleek, they run reasonably well because Orange only installs their own software on them, and the un-boxing experience is thrilling because the packaging is beautiful and free from advertisements. But no one at HewleDell correlates their loss in market share to their business development deals because they have no instrumentation for measuring the long term effects of such things.

To summarize, the root causes of these problems are:

Fortunately technology and market forces are improving the situation. Open APIs in the web world allow companies to integrate their product without any formal partnership agreement. This not only increases the agility of integrations, it also puts their execution the the hands of software development or product teams rather than business development. By focusing on product innovations, the likelihood of this sort of “partnership” is much higher.

In addition, many companies are attempting to emulate Apple – including the minimalism and beauty that they employ in packaging and product design. Removing crapware is a natural extension of this.

In a future post, I’ll talk about how to avoid these problems and only do bus dev deals that are good for your company and your customers.

Leads: Where Sales Starts

If you want sales, you need to start with leads. Your sales team requires leads in order to find new deals that they can cultivate and close. Lead generation is a straightforward process which, if done correctly, allows your business to maximize the effectiveness of its sales team.

To review, a lead is an unverified prospective customer. The best way to understand leads is to think of them as a stack of business cards that you collected at a tradeshow. You don’t know if the people that gave you the cards are interested in your product, or even if the information on the card is correct. But there may be a few good sales opportunities in the stack, so you contact each person.

Sources of Leads

There are many ways to collect leads. Some of the most common sources of leads include:

1. Inbound phone calls (generated from marketing campaigns or word of mouth).
2. Contact information collected from your website.
3. Referrals from existing customers.
4. Purchased lead lists.
5. Industry directories or companies in the phone book.

I’ve found that simply scraping leads off of the Internet can work surprisingly well. This works if you know the profile for your ideal customer and are able to easily find their websites. Just go to the websites of these customers and hunt around for contact information. Smaller businesses usually have their contact information on their website. You can also use Whois or LinkedIn to find a name. Remember that it’s always best to find the name of a real person at the company – they’ll be more likely to take your call.

Not All Leads Are Created Equal

The leads that you collect from inbound phone calls are much more likely to become paying customers than companies you have cold-called from the phone book. By reaching out and contacting your business, the lead has already indicated some level of interest in what you have to offer. Leads of this type are known as “hot” leads. If you are a website that offers a free or trial version of your product, then you have a great source of warm leads, your trial users.

What to Measure: Quantity and Quality

Measuring your lead generation process is actually quite easy. You need to measure how many leads you generate, and what percent of these leads covert to opportunities (i.e. conversion rate). Both of these metrics can be viewed on the lead status report in Salesforce.com. One important thing to note is that you won’t know the conversion rate for your leads until they’ve been through the qualification phase (described in the next section).

How to Manage It

The goal of lead generation is to always have enough good leads to keep your sales team busy. To obtain this number, simply multiply the number of leads required to generate one sale by the number of sales that you need to make each week. This is the number of leads required to “feed” you sales machine. Review the quantity of leads you generate on a weekly basis to ensure that you have enough.

How to Improve It

The best way to improve the effect of lead generation on your overall sales is by generating higher quality leads. Higher quality leads are those that have a better conversion rate (to opportunities). If you find a source of leads that converts particularly well, attempt to get more leads from that source. In addition, you can record the cost of acquiring leads from each source. Dividing the cost per lead by the conversion rate (from leads to closed sales), will yield the lead cost per closed sale. This is ultimately the value that you should seek to optimize in the generation process.

I can’t think of too many companies that would answer “no” to these questions. One of the simplest ways to move the needle on sales for your business is to implement an effective sales process. There is a lot of information on the web about designing sales incentives and how to sell, but there is a surprising lack of information on how to design and manage the process.

The basic sales process is really quite simple. The goal is to transform your company’s leads into paying customers. However this is not a one-step process. Have you heard the adage that the average sale requires ten contacts with a customer? On the journey from lead to customer there are a number of steps that you and your customers most go through. The key to being successful is to define, measure, and continuously improve these steps.

Let’s first define the 3 basic objects in the sales process:

1. Leads are potential customers (and their contact information) that you don’t know much about and don’t have a relationship with. Leads can come from business cards dropped off at a trade show, people who signed up for a demo on your website, of even listings in a phone book.
2. Opportunities are the sales deals that have not yet closed, i.e. the opportunities that you company has to make a sale. Opportunities are the core piece of the sales process.
3. Sales – you know what sales are!

At the highest level, the sales process consists of the following steps:

1. Generate Leads: Find potential customers. Leads can be generated in any number of way. Common examples are incoming sales queries (via phone or internet), contacts made at trade shows, or purchased lists of companies.
2. Qualifying Leads: Many leads aren’t potential customers for your business. They might be outside of the geography that you serve, the wrong type of company (if you only sell to a certain industry for example), or unwilling to speak with your firm. Because of this you must determine which leads are genuine opportunities to sell your service, and which should be ignored. A qualifieds leads is an opportunity.
3. Selling: This is where the rubber meets the road! Your sales agents explain the value of your service to prospective customers (i.e. opportunities), and convince them to purchase something. The most important thing to understand about this step is that it actually consists of many smaller steps. These might include finding the decision maker, explaining your offering, quoting services, or negotiating price.

If you don’t already think about and manage these three steps separately, start doing so. If your entire team is performing each step, then you need to determine how they allocate their team between each step. For larger teams, you may have different people perform each step.

Mathematically speaking, the number of sales your company makes will be:

# Leads contacted  x % Leads Qualified  x % Opportunities that Purchase  x Average Sale Amount  = Total Sales

Now that we’ve broken down the top level process, we can start to improve it. Start measuring each component in the equation above. Use your best managerial skills to figure out how you can improve them. Measuring these will also help you  with your forecasting.

In my next post I’ll go into the details of tracking your selling opportunities. Stay tuned.