Guest Post: Don’t Milk Your Cash Cows

Guest Post: Don’t Milk Your Cash Cows

On the Author: If you’re from the South Hills of Pittsburgh you’re no doubt familiar with Rollier Hardware on Washington Road (if you’ve been in Pittsburgh a while you were familiar with it on McFarland Road too); but did you know the family run business has a multi-million dollar e-commerce site called HardToFindItems.com?  The bright guys behind it are my long time friends Brett and Derek Satterfield.  I asked Brett if he wouldn’t mind sharing some of his wisdom through this blog and he graciously agreed, so look for a post, like the one below, authored by him from time to time.

Are you more willing to spend $20 dollars on something you shouldn’t when you have $250 dollars in your wallet as opposed to just $20?

Every business knows they must invest in the future, but sometimes, successful businesses will not be diligent enough with the capital they deploy on new projects.  I’ve made this mistake a couple of times with my company HardToFindItems.com.

HardToFindItems.com is dedicated to bringing unique, high quality products to customers online that are not readily available in brick and mortar locations. Our years of practical product experience, developed through our brick and mortar experience, enables our company to offer unbeatable product knowledge compared to our large eCommerce competitors.

While we attempt to develop a unique eCommerce experience, our fastest growing segment of our business is our third party Amazon.com merchant account.  Our Amazon presence has grown so fast that it can already be considered a cash cow machine after only three years.  While we continue to grow this profit machine, we realize that the barriers to entry as a third party merchant on Amazon are small and that many of the lines of product we purchase could be purchased by a lot of other companies at close to the same cost basis.  Over time this will result in reduced revenue and gross margins on these product lines.  Therefore, we know we have to build traffic along with a unique experience on our own websites to develop a lasting eCommerce presence.

In our journey to develop our online presence we started advertising our domain (website) through CPC (cost-per-click), such as Google Adwords.  Then we started to invest in SEO (Search Engine Optimization).  For those of you unfamiliar with these methods, CPC is paid advertising to drive customers to your website.  You pay for each customer that clicks on an ad, which redirects the customer to your website.  SEO, or search engine optimization, is the concept of optimizing your website on-page by using friendly URLs, title tags (titles to webpages), etc along with back-links (links, or votes of confidence from other websites to your website). We started by optimizing our pages on-page and doing a little link building by publishing articles related to our product lines on article websites and other sites willing to link to us, such as manufacturer websites.

Things were going well, but I got too anxious and wanted faster results.  Around this time I was contacted by a company proposing a website optimization process focused around publishing professional article entries on their client’s websites (blogs).  We had a blog at the time, but I didn’t have the time to be publishing articles everyday.  The company (to stay nameless), proposed a service contract that would produce 50 professional articles on our blog each month to rapidly increase our content base.  They claimed that the constant publishing of content would be treated favorably on search engines, especially for more niche industries/product lines that we carried.  The company had an international presence and presented professionally in every way.  Being a large company, they didn’t take on clients unless they agreed to a substantial contract.  They wanted around $28,000 for a year’s service. I had some doubts because not a lot of other Internet marketing companies sold article-marketing services as their core service offering.  In addition, my other web-marketing consultants didn’t feel they would be able to return enough value to justify their cost.  Despite these question marks, I was just too anxious to expand our customer base for our own website.  I got the company to drop their price 25% and restructure their contract exit clauses to give us some more leverage as to when we could terminate the contract.  I decided to take the plunge, but only because we were making so much money through Amazon.

Well, 9 months later and with only lukewarm results, I got rid of the service and kept another company publishing a few blog entries each week to keep any of the good parts of the service going.

The Lesson: Just because you are making a good stream of profit from one line of your business doesn’t mean you should alter or loosen the requirements or expectations for ROI or payback time for new projects.  However, if your company is sitting on a lot of cash you could argue that since you don’t have to take on debt your WACC (weighted average cost of capital) is essentially whatever you could alternatively invest your money in (supposing a very low risk investment, such as a money market fund or short-term treasury).  In this case, the required ROI of new operations may not need to be as high as if you had to acquire private debt to fund your new opportunities.  Still, due diligence and a commitment to not get wrapped up in the emotion, or desire to expand your business at any cost is a must to maintain solid profitability.