In a previous post I made the case for fewer sales and higher prices. The TLDR version is that transaction costs such as labor and credit card processing fees destroy your profitability on lower dollar transactions, and by their nature low dollar transactions don't leave much to cover fixed costs. But with high volume you end up with higher fixed costs because you need a bigger warehouse, software subscriptions cost more, you have more full time employees, etc.
What I didn't mention in that post is why I HAD to raise prices. Many people who can't believe we are charging such high prices on 80sTees.com have found the previous post. That post was never intended for that purpose, and that post makes me look like a greedy business owner without the context that this post will provide.
In order to provide context about why we HAD to raise prices I need to go way back in time to the year 2000 when I Iaunched the site. My original costs for the shirts were $13 because I was buying the tees from a retailer near my college. (You can read the 80sTees origin story here if you are interested in that sort of thing.) Because my costs were $13 my original prices were $26 to $30 for a typical retail "keystone" pricing structure.
As the business grew we found more suppliers and ordered direct from them and costs were around $7.50 to $9. With lower costs we settled on pricing from $20 to $24. We maintained a gross profit of $12 or so on a full price t-shirt sale.
For the first 7 years the majority of our sales came from search traffic that didn't cost any money at all. This meant that on the majority of our shirt sales we had $12 in gross profit. After accounting for transactional costs that probably left us with $9 that could go towards paying employees, covering overhead like rent and utilities and monthly software costs, expanding inventory (because selling one shirt only gave us back the cash to buy 1 replacement, to grow inventory we needed to take cash from the profit), etc. And ideally some of that $9 would make its way to the Net Profit column.
In 2007 our landlord told us he was putting our building up for sale, and since it wasn't an ideal warehouse we needed to move. Because we had experienced nothing but growth we moved into a 45,000 square foot facility in 2008 with the idea that we'd have tons of room for expansion. This was not a lease because I did not like the experience of getting kicked out of my warehouse. This was a purchase, meaning we were locked in.
2008 happened to be our peak revenue year due to the changing landscape of ecommerce. Search results got more competitive and Google was doing their best to make it so more of the clicks on the search results are paid (they are still doing this). Competitors who weren't able to compete with us for exclusives via their web sales all of the sudden had buying power due to their sales on Amazon. These competitors were using Fulfillment by Amazon. And they would always look at our top sellers and make sure to list them on Amazon. Our best sellers would end up with multiple third parties selling them, which led to really low prices as they stumbled over themselves to win the Buy Box.
The third party sellers were less of a traditional merchant and more of an investor. If you asked a stockbroker if they were happy earning a 20% return on their money over the course of a year they would tell you that if they could do it every year they'd be in the investment Hall of Fame. And these third party sellers could do that. If they made 10% selling a shirt and it took them on average 6 months to sell a shirt that's a 20% return. And because they used Fulfillment By Amazon they had very little in the way of expenses. So if a shirt cost them $8 and in 6 months they got $8.80 back (after Amazon's fees) they were ecstatic.
I knew I couldn't run my business that way and I did not respect them because to me they were not in our league. To me they didn't have a real business. To this day I think of them as retail buyers who work on commission and take all the inventory risk. But regardless of how I classify them, they were eating my lunch by being super lean on the expense side and not spending any money on marketing.
This new environment forced us to react. I decided to try and fight fire with fire and we started to list our products on Amazon. We joined into the competitive pricing fray. We even decided that it would be a good idea to take some of the most popular products and list them for only $10. We would make this possible by ordering 500 to 1000 units at a time to get our prices down to $5 per shirt.
The idea of the $10 shirt was the loss leader concept employed by stores on black Friday. They are relying on the majority of customers to also pick up some other items. This proved not to be the case. Most discount shoppers don't pay full price for anything. In fact many of our $10 tees were sold with a 10% or 20% discount. That $1 to $2 discount is disastrous on such a low priced item. Despite this not really working as intended I didn't have any better ideas so we kept it up.
In 2014 I noticed many ads on Facebook for shirts being sold on the Teespring platform. Teespring was like kickstarter for t-shirts (and also was a haven for copyright infringement, but that's beside the point I'm making here). A seller could set a goal of 5 or 100 or 1000 shirts and then start taking orders for the shirt. If they didn't reach their goal the sales would all be cancelled. I realized we could do something similar as a way to test designs. And if we were really confident in a design we could set a high minimum number of orders. The high minimum would allow us to get better pricing from our suppliers, so we could sell the shirts for lower prices.
In addition our sales on Amazon had grown considerably. But unlike our third party seller competition we were not super lean. The end result was that most of my Amazon sales were somewhere between a small loss and a small profit. It was a lot of work that didn't accomplish much at all.
By July 2016 through aggressive marketing on Facebook (of crowdfunded products) and low pricing (on staple items) years of sales declines turned around and we finally had revenue growth. It felt like a dark cloud had been lifted. Years of effort finally paid off in growth. But then we did our financials at the end of the month, and the news was grim. We lost money in our highest revenue non-Christmas season month in years.
I realized that the solution to my problem was not more sales if those sales were coming from products with decent margin percentages but low overall gross profit dollars. The transactional costs (those mentioned earlier plus additional labor to receive more inventory, pick and pack more orders, etc.) and fixed costs (rent, utilities, base payroll, etc.) were eating up the entire gross margin of the orders. Translation, we were losing money on a high percentage of our orders because we didn't have enough margin to cover Facebook marketing costs. And without marketing on Facebook we wouldn't have many sales.
Discovering that we simply were not able to grow our way to profitability put me into a panic. I had spent years figuring out how to do something that was impossible to achieve, and I didn't have a plan B. After many months of what I can only describe as desperation bordering on panic, I realized that I needed to drastically change the way we do business in order to stay in business.
It became obvious that we needed to charge more per shirt. But I knew that if we charged more per shirt our sales would drop. And lower sales makes it harder to restock existing products and add new products. But luckily many of our vendors had embraced a printing technology called direct to garment (DTG) printing. DTG printing eliminates many of the hassles of silk screening shirts and allows a print run of 1 shirt to be economical. It's more expensive on a per shirt basis than silk screening, but silk screening generally needs to have runs of 144 units or more to make any sense economically.
Along with DTG printing these same vendors were offering to ship the shirt direct to our customers after we place an order. This would allow me to reduce our warehouse staff and avoid paying shipping from our supplier's warehouse to our warehouse. Eventually it would allow me to shrink my warehousing costs by moving into a smaller facility (we're still working on getting the building sold as of May 2018).
There are tons of advantages to DTG printing combined with drop shipping, but comparing the price of one shirt that is printed via a DTG machine verse a shirt that was part of a silk screen run the DTG shirt is going to be more expensive. That meant our costs per shirt would rise.
But now I had a new problem. In the past we could have one order with 5 shirts and we'd ship them all together. But if I was going to offer drop shipping from a number of different vendors I could potentially have 1 order for 5 shirts that ships from 5 different vendors to my customer. Our website did not have a way to calculate shipping based on those sort of scenarios, so I would have to build the price of shipping into the product price for each item.
That wasn't my only problem, though. Now that my prices were high my marketing costs would be more expensive. Our higher prices would turn off many potential buyers, which would drive up the cost of advertising. So I actually needed to build enough margin into each shirt to cover a higher marketing cost.
So my new business model was going to look something like this. Unfortunately I'd be saying goodbye to many old customers because they simply won't pay the prices we have to charge to stay in business. That left us fewer potential customers to sell to, so we better expand our product selection so that we can sell more products to the consumers who will still see the value in what we offer. Luckily drop shipping has allowed us to expand our selection very aggressively with relatively little cost (just the labor to write the product descriptions and fill in the product data).
In November 2016 we kicked off the new business model. It was a complete operational change to the way we run the business, and ironically in the short term our savings on labor was eaten up by inefficiency in the new way of doing business and software development costs to eliminate those inefficiencies. Here we are in late May 2018 and we've eliminated many inefficiencies but not all of them.
The end result, though, is that once our building finally sells and once our software development to support drop shipping is over we will be as healthy as we've been since 2007 before we committed to buying a huge building that we would never fill up.
I hope this post explains that I didn't raise prices because I'm a greedy SOB who only cares about money. The truth is if we hadn't made all the changes we did and increased our prices we would have gone out of business in 2017. As it stands right now we are on pace to being a very lean company that doesn't have to make desperate attempts to grow sales to try to cover costs.