Fixed Costs: The Enemy of Success

The following is a guest post by Kyle James.

Online companies that have high fixed costs, especially when those fixed costs are associated with office equipment, inventory, warehousing, and high distribution costs have the hardest time making money. A company that fit into this category was WebVan, an online grocery delivery service that went bankrupt in 2001. WebVan spent an enormous amount of money on infrastructure which greatly exceeded sales growth. This is a true recipe for disaster in the online world. For example, they bought 100+ high end office chairs at over $800 each when $30 Office Depot chairs would have sufficed. Online companies can’t survive the early stages of development making decisions like WebVan. They placed incredible financial pressures on themselves unnecessarily.

WebVan did things backwards. The first thing an online entrepreneur should do is see if their service or product is actually in demand and can be sold or marketed. When I started my online affiliate marketing website, I spent a total of $100 developing my website to the point of being able to test it. Then when I was getting positive feedback and user where excited about it, then I spent some money advertising and further developing the website’s features. I did not quit my day job as a Pharmaceutical Representative until my online business was making enough money to support myself and my family. That day finally came, and the feeling of being your own boss and having creative freedom was unlike any other.

I did all of this with an original Pentium computer, 30 GB hard drive, and a dial-up connection. I did not go out and buy a fast computer and DSL connection until I was making some money with my business and could afford it. I was determined to not get into debt and dig my own grave. I learned search engine optimization (SEO), taught myself HTML, and figured out how to get links to my site that would increase my search engine rankings. All free things that just take time to learn how to do. Unlike WebVan, I could learn how to do these things without huge bills hanging over my head like a sharp ax waiting to fall. Although I bet those $800 office chair sure were comfy. I guess I will never know, and on the flip-side, WebVan will never know what operating debt free feels like!

Kyle is the owner of an online coupon website, He lives in northern California with his wife and three children. You may contact him via e-mail at [email protected].

Photo by macoggins.

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