Sramana Mitra: The transition from dropship to inventory, how far did you get to dropshipping in terms of gross merchandise volume?
Sean Dawes: We did over a million in annual sales before we had to inventory anything.
Sramana Mitra: That’s terrific. What did you learn about the customer base? Were they auto shops or were they consumers?
Sean Dawes: They were consumers. That was our intent. For any online retail business that is considered a third-party reseller where you’re selling another manufacturer’s goods, the margins are fairly tight.
Before shipping cost, you’re roughly about 30% or 40% on the max discount tier, which is the highest level you can get from this manufacturer. Nowadays, everyone assumes free shipping. That will generally take about 10% off the top. If your margins, at best, are 20% or 30% out the door, that’s very tight when it comes to profitability.
We were figuring out what our average order value is, how often will customers come back. Given our experience with automotive, we knew that if we sold a customer one product, they would be back for a series of products because it’s the nature of this type of market. They will generally do a handful of modifications to their cars before they might stop.
A lot of times, the customer will generally sell the car, buy another car, and do the same thing all over again. Whereas if we look at markets such as baby products, once the baby reaches toddler age, they’re done. In automotive, let’s say someone is aged 17. He or she’ll buy the same series of products just at a different price point.
When they graduate college, they might buy a more expensive Audi. We knew that if we acquire a customer at a good profitability and retain them, the lifetime value would be attractive to us.
Sramana Mitra: What was the next move? After you switched to taking inventory, what was the next move?
Sean Dawes: It was expansion of the product catalog. One of the things that is different about our business compared to where we used to work is that it’s a very deep catalog. From Audi Volkswagen to BMW, there’re a lot of cars in terms of models. There’re a lot of products within those models.
Whereas when we worked in the Ford Mustang market, you’re talking about one vehicle. Our product catalog can get very extensive. For us, expanding the product catalog was important. We started with Audi and Volkswagen early on. Then, we slowly added BMW into our catalog about a year and a half ago.
It’s a very expensive catalog and confusing from a data standpoint. One of the biggest hurdles is actually the product information, which is not readily available.
Sramana Mitra: When you were figuring out your merchandising strategy, what was the organizing principle?
Sean Dawes: When you’re first starting, you try to sell anything because you’re trying to get the data. We would sell any brand and any product. We would get as much of it into our catalog and see what sells. As the catalog evolved, we started realizing the types of products that these customers are looking to purchase.
We started to massage the catalog to get rid of lesser quality brands that we were seeing quality control issues with. Then, we’re moving more towards profitability and focusing on margins. In 2019, we have margin requirements. Unless it’s a product that’s filling a product gap that we’re not offering anything, they have to provide us with margin requirements.
Otherwise, you have to start worrying about what’s called cannibalization. If I’m selling product A currently and I’m getting 40% off, then if I bring in a new brand but only half the margin, I’m starting to cannibalize my own sales. The same customer who is going to buy the higher-margin product is now buying the lower-margin product.
As you start to grow and get to larger and larger revenue numbers, not only are you trying to grow that topline revenue but you also have to worry about the bottomline because we’ll have cannibalization where you’re losing sales to another brand or product that you wouldn’t have. Now you cut your profitability.