10 Ways To Mitigate Risk When Starting An Online Store Or Business

When most people think about entrepreneurship or starting their own business, the first thing that comes to mind is the risk that is associated with being your own boss. Perhaps that is why entrepreneurship is such an exhilarating and sexy term. It takes guts to go out on your own.

Photo By Better Than Bacon

But the funny thing is that most of the successful entrepreneurs I know are very conservative and don’t like taking risks at all. Ironically, my entrepreneur friends are some of most risk averse people I know! I happen to fall into this same camp as well. Sure, I would risk a good amount of money to start my own business but would I ever bet the entire bank or stake my livelihood on a business idea? Hell no!

Managing Risk

One of key aspects of entrepreneurship is knowing how to mitigate risk. The media portrays entrepreneurs as these daredevils who dropped out of college and risked everything to start their own companies when the real story was that many had safety nets in place in case things didn’t work out.

Bill Gates didn’t initially drop out of college, he took a leave of absence. Plus, he came from a wealthy family that would have supported him if Microsoft failed. Sergey Brin and Larry Page had their degrees and could have easily found a job if the whole Google thing didn’t work out.

The point is that entrepreneurship is not about gambling so much as it’s about investing intelligently. Here are some tips on how I would mitigate risk when starting an online store.

Keep A Nest Egg

First and foremost, don’t risk all of your money on a business venture ever! Make sure you keep a hidden stash lying around somewhere that can bail you out in case things don’t go as planned. Starting a business is difficult as it is and you don’t need the additional burden of worrying about not being able to pay your bills. This may sound like common sense to most of you, but you’d be surprised by how many people are willing to invest most of their entire net worth on a marginal idea.

Keep Your Full Time Job

If you can pull it off, keep the day job. This takes discipline and it can’t always be done depending on the nature of your business, but it is easily the best, no pressure way of starting a business. My wife and I worked on our wedding linens business on the side knowing that if anything ever went wrong, we were still banking two incomes. Don’t think you have the time? If you analyze your day, you’d be surprised at how much time you can salvage in a typical day.

Pick A Narrow Niche

The narrower your niche, the greater your chances are for success. This may seem counterintuitive at first and many entrepreneurs often fall into the same trap of tackling too much at once.

But when you pick a very specific niche to pursue, your business will be focused. Your business will stand out because you will be perceived as an expert in your field. Your search engine rankings will improve because Google can more effectively categorize your website under a specific topic. In fact, your online business should target no more than 2 or 3 topics or keywords. Any more and you risk diluting your search juice.

For example if you want to sell clothing, I would focus my store on a specific type of clothing first and then target no more than 2 or 3 different clothing types total. If you ever decide to expand beyond this, it might be better to start an entirely new website.

Screw Hope! Test The Market

Since I started this blog, I’ve been corresponding with many newbie shop owners. And one of the biggest mistakes I’ve noticed is that most new store owners have already decided what they want to sell without any testing at all.

“I want to sell widget A! People are going to love it”
“No one’s ever heard of widget B! They’ll sell like hotcakes!”

Every shop owner should have an idea of what they want to offer but leave it up to the market to decide what to actually sell. Test the demand for your products! Use Ebay to see if people will buy your product. Use keyword tools to find out how many people are searching for the products you want to sell. Do a competitive analysis of your niche. Are there any competitors? If not, there probably aren’t any buyers either. The ideal market to pursue is one in which there are only a handful of players.

I remember a long time ago when I heard Bill Gross speak about his company Cars Direct back when ecommerce was in its infancy. Turns out that he initially tested the online car buying market by trying to sell cars that he didn’t even have! He just threw up a website and whenever a car was sold, he had someone go out and buy the car from a local dealer. He didn’t invest much money at all until he discovered that selling cars online was a viable strategy. Make sure you assess the demand for your product before you decide to add it to your portfolio of products! In other words, make sure you have buyers before you decide to sell.

Don’t Buy In Bulk With Your First Order

Along the same lines of testing the market, don’t buy in bulk for your first order if you can help it. Take a loss if necessary but don’t risk a large outlay of cash for goods that you may never get rid of. One of the problems I see with most people is that they don’t want to lose any money even in the interests of experimentation. They’d rather buy a crapload of widget A with the potential of making a huge profit rather than buying a few and breaking even or taking a loss.

Don’t be one of these people and don’t be greedy! Most vendors will provide you with samples or will sell you small quantities at much higher prices. Try to sell in small quantities before you commit to a larger purchase. Don’t worry about losing money!

Find A Partner

It can be emotionally taxing to run a business on your own. Looking back, I could never have done it if I didn’t have my wife. There’s more at stake with your business than monetary risk. There’s also mental risk to consider. Having a partner will keep you motivated and will give you someone to bounce ideas off of. Plus, it will make things much more fun.

On choosing a partner, working with my wife has been fantastic but I’m not 100% sure that I would necessarily recommend working with your spouse on a business. Sure, the amount of mental risk is mitigated but the amount of marital risk drastically increases but that’s a topic for a different post:)

Sell High Mental Value Items

The ideal product to sell is one that evokes some sort of sentimental or emotional value outside of the item’s actual cost. And that is one of the main reasons why my wife and I decided to sell keepsakes as part of our product line. If you can get into your customer’s head, you can command higher prices.

If you sell commodity items, getting customers hooked mentally can still be accomplished through effective branding, but in general it is much easier if you start out with the right product. Avoid commodity items and focus on products that are unique or that you can add value to.

Sell Timeless Items

If you carry inventory, there’s always the risk that your products will sit on your shelves never to be sold. That is why it is important to carry timeless items or products that will rarely go obsolete.

That is why I always stress that it’s much more difficult to sell electronics or technology related products. Pick an industry that moves extremely slowly or avoid selling physical products altogether.

The ideal products to sell in my opinion are informational products because everything is virtual. If you have the means and knowledge to create a book or a course, then that is the way to go.

Keep Spending Low

My wife and I spent about 600 bucks to start our business. We used a beat up old desktop computer that we bought from Craigslist, an old digital camera and launched with a small selection of products. We spent pretty much zero on software, zero on furniture and ran everything out of our living room.

The best part of having an online store is that no one can see the backend of your store. All they get to see is the website storefront so why waste any money initially on your office? Keep spending to an absolute minimum and only buy stuff that is a must have.

One thing that my wife and I focused on was reducing the recurring costs associated with our business. We avoided signing up for too many monthly services unless absolutely necessary. If sales suddenly became slow for any reason, we could keep our online store up and running indefinitely. Even today, it only costs us about 100 bucks a month to maintain our website.

Don’t Buy Your Equipment. Lease Instead!

It is often a big misconception that buying your own equipment is cheaper than renting it. But what most business owners neglect to consider are the maintenance costs and the large initial cash outlay that is required to buy. Why risk the extra money when you have no idea whether your business is going to work out?

If your business requires expensive equipment to run, consider leasing your equipment for at least a few years prior to making the commitment to buy. Don’t feel as though you are throwing your money away with renting. After all, if things don’t work out, you don’t want to be stuck having to liquidate a bunch of heavy machinery that you no longer need.

Have A Backup Plan

The number one way of mitigating risk is to have an escape route or a backup plan. When running any business, it’s important to keep the stress level at an absolute minimum. You want to avoid making decisions under duress or making decisions based on avoiding a drastic outcome. Some entrepreneurship sites recommend going all out without a safety net to add an element of desperation to your startup. The idea is that by placing yourself in a sink or swim situation, you will be forced to learn how to swim.

I personally think that’s a bad idea and I would never intentionally place myself or recommend that you place yourself in any dire situation. That’s called gambling. If you have problems motivating yourself to succeed, then you’ve got other issues that you need to deal with.

Everyone needs a backup plan because things will probably not go as planned with your business. As a result, you will need sufficient runway to make the necessary changes. The obvious backup plan for my wife and I was that we would keep our full time jobs and hire a nanny. Make sure you have something in place and it will make running a successful business that much easier.

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18 thoughts on “10 Ways To Mitigate Risk When Starting An Online Store Or Business”

  1. I think you really found the key point when you mentioned that most successful entrepreneurs invest intelligently. A good business owner has to be willing to invest in order to keep a business growing, but it’s just as important that an entrepreneur be able to recognize which of those investments aren’t actually necessary. Mitigating your risk, more often than not, means being able to tell the difference between the necessary and the nice-to-have.

  2. One key point I take from your 10 is to be flexible when you are starting out in a new field and in a new venture. By testing the market before entering, keeping your costs low, and having a backup plan you retain the ability to try tinker, try new things, and let your brand develop over time as you learn more and grow as an entrepreneur. It’s fine to have a plan, but be prepared to revise that plan over and over again.

  3. I think you really found the key point when you mentioned that most successful entrepreneurs invest intelligently. A good business owner has to be willing to invest in order to keep a business growing, but it’s just as important that an entrepreneur be able to recognize which of those investments aren’t actually necessary. Mitigating your risk, more often than not, means being able to tell the difference between the necessary and the nice-to-have.

  4. Joricam says:

    Hi, I’m loving your blog very very much, your information is a brease of fresh air, I to run an online buisness in a tough niche, and started with no money. I hope I can learn with you and share some thoughts too

    Best Regards
    Joricam

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  7. Well, I had bad experience starting my own local business. Bough a sample pack from the vendor (it has the items in various colors & sizes) but find out that nobody wanted to buy it at the price I set (already low margin). I had to sell them at loss at eBay :(

  8. Cassie says:

    Here is my big question insurance to protect against loss …….as accepting well credit cards you have a host of issues of data security either via you, and third party vendors….

    Then their is trademark/ copyright infringements …….I’ve discovered most won’t insure you till they have some understanding what your doing or been in business at least three years.

    Plus people sue over the most stupid stuff ………..like McDonald’s coffee where a lady burned her self trying to put sugar, cream and etc in a moving car got burned and a judge awarded here millions. That is why you now see the hot signage on McDonald’s coffee cups.

    Then their is the issue of product recall and sales in various states so other potentials of lawsuit / logistics on consumer complaints on time sensitive need items and etc……there were lawsuits when UPS went on strike years ago!

    Not to mention product recalls …..if a product manufactured overseas may have issues that you sell. I find it’s much tougher if all you have is a website but the tag on with a brick an mortar store is usually not enough mostly slip n fall or injury on location stuff — any recommendations Steve???

    I can’t find much other than well creative content insurance such as designers or etc.

    1. I’m not an expert in insurance. For our business, we contacted our insurance rep and discussed coverages for our specific business. Every business is going to be different in this regard and its just a matter of finding a company that will insure you. On top off that, we also have an LLC.

      Trademarks are something you should look at before you register your domain. There are databases you can look up to make sure you do not infringe.

      Is this what is stopping you from starting?

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