From eBay Seller to Software Entrepreneur: Seller Labs CEO Paul Johnson (Part 2)

Sramana Mitra: Talk about the specifics of that business in terms of metrics. How many transactions were you doing?

Paul Johnson: This is a long time ago. I’ll see if I can remember. We started off with a $1,000 or $2,000 order. Guitars are a high-ticket item. We would sell them for $200 to $1,000 per guitar.

When I first started that business, I only had a little bit of capital. I just reinvested all the capital back into the business to where we were making $10,000 orders. You’d probably gross $20,000 on that order and then you net out $5,000. Your ROI on $10,000 is 30%.

If you can turn inventory quickly and make good ROI, you can compound money and turn it into more. As long as you’re not constantly pulling from your capital, you can build a nice business quickly. That’s what we did. I couldn’t tell you exactly how many units we’re moving because the prices differed so much.

We had some items that we would sell for a couple hundred dollars and then we’d have things that we’d sell for $1,500. At our peak, we were doing about $300,000 a year in revenue on that business.

We ended up opening up a retail store, which was a terrible idea. I always had this passion of owning a small music shop. We opened up a small retail shop. I taught guitar lessons out of it. We had our guitars there for sale. You could buy them in person, on eBay, or on our website. Those were the channels that we used.

We also advertised a lot on Craigslist. Craigslist is a really good place to find customers. One of the reasons I opened the guitar store is that we decided that we wanted to expand outside of this one supplier that we were getting our inventory from.

We started going to other suppliers to buy inventory. They said, “What are your distribution channels?” We’re like, “We’re selling online.” They didn’t need an online seller. There already were 20 people selling on eBay. Brands give you a territory. You tell them where you are. They look at the other music stores around you and they say, “There’s nobody within a certain amount of miles of where you are. We’re going to give you a dealership.”

You have to buy in for a certain amount of money. For small brands, it’s a couple thousand dollars. For big brands, it might be $10,000. We opened that store to be able to get those brands and increase our catalog. Once we had those dealerships, we could then sell online and brick-and-mortar. We did that.

It was good and the store was profitable, but the time and energy that it took to run the store was draining. It was a distraction. It took us away from growing the online presence and putting the systems in place to grow the business.

Our main channel of inventory was still the supplier in Tennessee. We were getting merchandise that was pretty much brand new, but it was way below wholesale cost because of the relationships they had with the manufacturers.

At the beginning, there weren’t a lot of people doing what we were doing. It was pretty easy to be competitive online. Over the course of the business, our suppliers kept on heavily marketing to lots of different distributors. They had no rules about who could buy and sell their product. If you had money and a pulse, they would give you inventory.

They created a bunch of competition for us. There was a race to the bottom on the internet. A lot of the margins started to erode at that point. That was when I decided it was time to start thinking about other opportunities. 

This segment is part 2 in the series : From eBay Seller to Software Entrepreneur: Seller Labs CEO Paul Johnson
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