Fixed Costs are the Enemy of Niche BusinessesIt’s tough to differentiate your product. Focusing on a niche helps. Niches, however, abhor fixed costs. Fixed costs drive up the minimum scale of our businesses and force us to broaden the appeal of our products. Outsourcing is a way for us to share in the economies of scale of others, keep our fixed costs down, and profitably distinguish our products from the competition. Crucial Vacuum, for instance, sold through others, including major online marketplaces such as Amazon.com. In other words, Crucial Vacuum didn’t have to replicate Amazon’s enormous investment in a global platform in order to benefit from the resulting economies of scope. Instead, Crucial Vacuum (in effect) rented Amazon’s platform through variable selling fees. In addition, Chad and his colleagues at Crucial Vacuum determined it needed to outsource its warehouse and fulfillment operations to a third-party logistics provider (3PL). Running an operationally intensive warehouse just wasn’t a strength. By outsourcing logistics, Crucial Vacuum could take advantage of its 3PL’s economies of scale and keep its own fixed costs down.
Managing Complexity is an ImperativeChoices have consequences. One consequence of outsourcing business functions is coordination complexity. Consider, again, Crucial Vacuum’s management challenge:
- It must manage a supply chain characterized by thousands of products. That includes private label manufacturing of its own products as well as procurement from other brands.
- Crucial must pass accurate information about inventory to a couple dozen e-commerce storefronts.
- Fulfillment must be done in a timely and efficient manner.
- Important business information must be readily accessible in order to inform timely decisions.
- To maintain its niche, Crucial Vacuum must keep its fixed costs – including its headcount – to a minimum.
Buying Shoes You Can Grow IntoChad recommends Skubana for e-commerce companies that are fulfilling 3,000 or more orders per month. (If your average order is $50, that works out to about $1.8 million in sales per year.) That’s a significant threshold for a young company. Getting to that point is no mean feat. Consequently, many founders will defer making the investment of time, effort, and money to implement such a sophisticated platform.
Don’t step over a dollar to pick up a penny.Some may never need a solution like Skubana and will be well-served by stitching together what Chad would call “entry level” solutions (e.g. TradeGecko and QuickBooks with a dash of Zapier). But for those with the desire – and reasonable expectation – of growing their e-commerce businesses to 7-figures, he warns, “Don’t step over a dollar to pick up a penny.” As Chad sees things, e-commerce sellers face a choice:
- They can create a bricolage of tools today in anticipation of “re-platforming” in the future, or
- They can “buy shoes into which they can grow.”