Making a million only to lose it: hard lessons from early success

- July 21, 2020 3 MIN READ

It was the early 2000s, and ecommerce was on an upward trend. After two years in an IT job, I was ready to ride the wave. My friend Tim Molloy and I saw an opportunity to start a side hustle that we were certain would kickstart our careers as entrepreneurs. We would go into online retail, write Jeremy Chen co-founder of Good Things.

We made a website, Expert Solutions, that sold a range of IT goods, but our biggest sellers were memory cards for digital cameras, a booming market. They were high value and easy to post, which made them attractive items for online retail. Behind the scenes we handled managing inventory and packing and sending orders, which took us around two hours every night.

About a year after this side hustle began, we took a look at our revenue and found out we’d made about a million dollars. It was high fives and congratulations all round… until we ran the figures and realised we hadn’t actually made any money at all and instead were earning about 10c an hour!

Tim and I had each put in $5,000 as startup capital and everything we’d made since then had gone back into the business, including buying stock and online advertising. If you’d calculated the cost of our labour, maintaining the website, bidding on keywords and dispatching orders, we were collectively out of pocket about a hundred grand. It was a deflating moment, but one that we took as a critical lesson and took with us into our future business ventures.

Anatomy of a failed business

Operationally we did everything right. Our advertising attracted sales, which actually obscured the fact that the business wasn’t sustainable. So what went wrong?

Revenue is not profit

Clocking a million dollars in revenue is exciting, but only before you realise you’ve also spent a million dollars. It’s a simple lesson, but one that new entrepreneurs tend to forget: your income has to be higher than your expenditure to turn a profit. Profit is the true measure of a business’ financial success.

Seek higher margins

Related to profitability is the margins you’re making from your product. Memory cards were a hot product and high value, but the margins were tight because the market was competitive. What little we made from each sale we ploughed back into advertising so we could make another sale just like it.

For our next business TiedUp, selling neckties, we were careful to avoid that mistake. We sourced high quality ties from around $3 to $8 each wholesale and sold them for $45 to $200 retail. That ended up being a more profitable business from the start, just because we sought higher margin products.

Sales aren’t customers

We spent a great deal of what might have been our profits on customer acquisition through online advertising and marketing campaigns. If we didn’t advertise, sales would drop. If advertising rates went up because our product was particularly competitive, the sale would cost us more. This cycle meant we were always outlaying money to chase money, but at no point were we nurturing the customer – our focus was converting the product into money. What we were doing was financially unsustainable because we weren’t prioritising building longer term customer relationships.

We couldn’t compete in a crowded market

Online retail was trending and the memory card market was booming but essentially it put us in a very crowded, competitive space. We were so focused on being competitive on price that we didn’t realise it led us down the path of operating at a loss.

When we started our branded merchandise agency, Good Things, we knew there were many others in the sector. From day one we worked hard to hone our difference – quality products, curated selection, speed of delivery and effective service – to ensure we stand out from our competitors and win the trust and repeat business from a wide range of customers from small business to large multinationals.

Working for free is not sustainable

Lastly, we did what typical side-hustling entrepreneurs do: didn’t pay ourselves. It meant we didn’t have anything to show for a year of work – not even pocket money – when we closed the business. And while the experience was valuable, working for free is not sustainable and should not be a long-term situation for startup founders. If you keep working for free, you’re not running a business, you’ve bought yourself a hobby and it affects your venture’s long-term succession plans. So by all means start something in your garage and bootstrap your initial idea, but eventually pay yourself to demonstrate the financial value of what you do.

Making and losing a million taught us a lot about running a business and I’m happy to say these expensive lessons paid off – we’re onto our sixth business now, have grown 30 per cent year-on-year since 2015 and turn over $10 million per annum.

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