The Complications of Operating a Low Margin, High Volume Online Wine Store

Posted on  | April 7, 2010  
Written by | James Laurenti

It’s a simple concept: pricing your items lower than your competitors’ provides a simple, reliable way to attract more people and is likely to bring in more sales. But, in turn, by operating your business with rock-bottom prices (and, most likely, thin margins), you also create pressure upon yourself to do a high volume of business to sustain profitability. This is the philosophy that many discount wine retailers live or die by,both in their brick-and-mortar and online storefronts. In my experiences, however, stores often find that while they succeed with this model at their physical location, they run into larger challenges online. A few particular admonishments come to mind:

Having low prices alone won’t make customers loyal,particularly online.

Many brick-and-mortar stores like to brand themselves as the store with the lowest prices in town, and a lot of them find that this strategy paired with a convenient location works well enough. People in the surrounding area gain familiarity with their reputation for great bargains and will stop in while they’re in the neighborhood. As long as the overall shopping experience is relatively pleasant and your prices remain the lowest in town, it often won’t take much else to convince someone to return. However, applying this same philosophy to an online storefront poses some larger challenges. While a consumer may only have three to four available wine stores that he can physically visit, he has the choice to shop at hundreds of wine retailer websites. What’s more, he does not have to commit any time or resources to access them; a two-second Google search is all he needs. In my last blog post, I mentioned how a store should accentuate their strengths and unique personality to stand out, be memorable, and gain customer loyalty. This is relevant to your brick-and-mortar business (think,why would your customers stay loyal to you if a new conveniently-located store emerged with lower prices and you had no other competitive advantage?). However, it’s absolutely critical to your website. While low prices give you a means of attracting customers, it will not in itself retain their loyalty.

Low margins drastically restrict your advertising options.

Typically if a store operates with tight margins, it will find few paid advertising options that generate enough sales to cover their associated costs. Instead a store must rely more on free or low-cost options such as e-mail marketing, social media, and adding or adjusting website content to improve search engine optimization (SEO). However, even these free strategies require the commitment of a store’s resources. Moreover, in the case of e-mail marketing and, to a considerable extent, social media, these tools primarily allow you to reach your active customer base and don’t necessarily connect you with new customers. Since selling at low margins usually means you must generate a high volume of sales, a young store lacking a substantial customer base can find themselves in a precarious situation. They need to carefully leverage what paid advertising they can to grow their customer base while employing free or low cost tools to keep them engaged and make them repeat customers.

Low margins create pressure to do high volume. Can your store keep up with the logistical demands?

Ideally having many sales is great. Each time you fulfill an order you have an opportunity to impress and gain the loyalty of a new customer. However, if you adopt a low margin/high volume model, consider the logistical burdens and how it will affect the rest of its business. Are you able to dedicate enough resources to the site and still maintain a high level of customer service? When a store becomes overwhelmed with business, someone often describes it as a good problem to have. However, if you’re not providing the best customer service possible and find your staff becoming increasingly stressed and frustrated, you still have a problem. You are inevitably losing potential repeat customers. Consider also the physical space of your store. How will you store shipping boxes? Where will you pack shipments? Where will you place those boxes while you wait for Fed-Ex/UPS to pick them up? You do not want to clutter and congest your brick-and-mortar store and negatively affect the shopping experience of your local customers.

Despite these warnings, I don’t mean to suggest that operating a low margin, high volume online wine store is a dead end that can never lead to long-term success. However, do not rely on price alone; distinguish yourself online by expressing your unique personality and your strengths. Moreover, note that as a store’s prices decrease and their need for sales volume increases so will its required resources to operate successfully. Similarly, as your need for sales volume increases so will the pressure to attract new customers and keep existing ones engaged. Ultimately, as a store prices their items more aggressively, it will need a greater budget for advertising (though this likely will bring scant direct profit), a larger staff to handle both the management of the site and marketing strategies, and more physical space to create an environment efficient for handling the fulfillment of orders. Consider all of these aspects first before you set your online pricing. Having the lowest prices online will not bring you long-term success if you don’t have the resources to handle that business model.

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