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Which is better, online or offline business?

April 20, 2009

You just finished college. You’ve been interviewing for three months without success. Your money’s running out. The only thing you can do in the meanwhile is set up a business. Your parents agree to lend you up to $20,000 to start one up. You know that for your own survival you need at least $2,000 a month. What would you do with the money?

  • Set up an online business
  • Set up a conventional brick-and-mortar business
  • Do neither. You’ll use that $20k to survive for 10 months and hope you’ll get a job by that time.

This was the topic of conversation I had with a fellow passenger on the flight to Singapore on Saturday morning.

He asked me for an opinion. He’s in his final year in college. He’s skeptical about being able to find a job in these times so he’s thinking of setting up an online business. I won’t get into the details except to say that the main source of revenue would be text and banner ads. He’s also thinking of setting up an ebay store to sell t-shirts.

His parents are skeptical about internet-based businesses and would rather see him spend a few years working before setting up something a little more conventional. Maybe a retail outfit in the IT line or a software company. Its too risky to jump in without any experience, they insist, but admit there may be no choice under the circumstances.

My fellow passenger argues that the idea of a near-zero startup cost makes the idea of an online business irresistable. If the business doesn’t take off, he says, he can always pull the plug. No skin off his nose.

Well, I guess not much has changed over the years. The online guys are still asking the brick-and-mortar guy, “So how much did you spend on overheads last month? $50,000? Why so stupid and waste your money?” And the brick-and-mortar guys are still asking back, “So how much did you make last month from your click-thru ads? 20 bucks? Hahahahaha.”

Each side has a tendency to overgeneralize the other’s business model. The fact is, each model has its pros and cons and there are enough success stories on either side to prove their detractors wrong. Eventually you find that your choices will be determined by capital, gestation period, and your take-home pay requirements regardless of whether its online or offline.

Still, I did have to point out that common misperception. There is no such thing as zero entry cost. From an accountant’s perspective, everything has a cost. Even the time it took you to write a blog post to generate traffic for your ads or ebay site has a cost.

So with only $20,000 to start up and a personal burn rate of $2,000 a month to survive, which business would you go for – online or brick and mortar?

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5 Comments leave one →
  1. April 20, 2009 9:58 am

    I agree that each has its own pros and cons. Online business WAS very attractive with its “zero cost startup” but that was in the past. Now, people need to worry more about competition because due to its low starting up cost, there are tonnes of online businesses selling the same thing. Think you can beat the rest? And I mean the hundreds of competitors out there. If yes, then what makes you think you can beat the rest? If you can’t figure that out, then don’t do it. It’ll waste your time and efforts.

    As for the traditional business, pros and cons again. Some of the products, people prefer to see the physical stuff esp in “3rd world” country like Malaysia. Most people still do not believe in online transaction. People prefer to see the real books, the real clothes, the real furniture, the real food… etc. It’s true that it requires more startup cost, but it also gives customers more confidence to deal with you.

    Also, if your biz is making it big, and going to get listed one fine day. The investors will not look at what kind of ideas you have (not in Malaysia anyway), but what kind of assets you have. Shop lots vs… domain name? Having said that, it doesn’t mean that your company won’t do well in the stock market if you have a solid business model, but well….it’s still up to how our investors see you.

    So in the end, it really depends on your type of biz and your biz model. Pros and cons to each. πŸ˜›

    For every success story about an online business, you know – the ones that scream “I earned $20,000 from Adsense every month!!”, who knows how many millions are stillborn for the reasons you gave and more.

    Unless we’re talking abt models like application service provisioning (asp) or a serious contender to the big three (Google, Twitter, Facebook), I don’t see bloggers walking away with $1 million in hand within a year of startup. Not even thru domain name squatting. But the way it is hyped on the local scene, its as if you can. I see people making a big fuss over pagerank, etc. as if it is the secret to success. But I suppose it depends on how you measure success. One can claim $30 a month as a success. Others don’t see it until they hit that first $1 million.

    IMHO, traditional models have a much higher success rate than online ones not because they’re inherently better but because when real money is involved, people tend to put more careful thought into the business before it opens.

  2. April 21, 2009 1:51 am

    This is like comparing apples to oranges…but in this modern day, it’s possible to combine apples & oranges! Why not have a brick and mortar store + an online shop?

    Especially in Malaysia, where most ppl are still not comfortable with leaving their credit card details online…you can have an option to book online & collect in the store! Start up a blog, prove you know your products and then, if possible push your products!
    This seems to be the major trend in the UK now for brick-and-mortar shops trying to compete with completely online stores!

    Anyway, the basis of a successful business depends on “people flow” either online/offline. Having a small shoplot in a good spot of a popular mall already guarantees that at least some passerby will be able to see your products. Last I heard one of the stalls in the ground floor of KLCC costs about RM10K/month in rental!

    Online-wise, you most likely will have to pay to advertise on popular local sites (which might be cheaper)…e.g. snorgtees (a T-shirt company) which targetted the geeky guys by advertising on tech sites & made them & the model an instant hit where they get about 500K hits per day! Unfortunately, there’s no local site that can boast that kindof traffic. Closest I think is probably kennysia.com which averages about 20K hits/day.

    Yeah, until the day they figure out how to deliver a pizza over the internet, we’re stuck with an apple-and-orange combo.

    I can see where you’re coming from if you are into retailing (I am into wholesaling myself, or B2B). You mention about the trust factor. Very true, considering how the region is notorious for credit card fraud. Despite that, I am sure there are some promising online entreprenuers here. I’m just curious to know how long it took them to hit their first $1 million. If not that, what they consider “success” to be.

  3. April 21, 2009 2:48 am

    to boringest

    sigh..you obviously have no clue wtf you’re talking about ..

    ground floor of KLCC RM10k ? dude .that is dirt cheap wei .

    Whoa, they charge that much? At 30% GP they’d have to turn over at least $1,500 a day or $125 an hour just to pay the rent!

  4. usually here but not today permalink
    April 21, 2009 10:27 pm

    Sorry gotta leave this anonymously… teehee

    “Last I heard one of the stalls in the ground floor of KLCC costs about RM10K/month in rental!” <<< Nope, Gapnap is right, it’s more than double that. Plus you have a really really long waiting time. i have NO idea how those stalls make money because i rarely see anyone buying anything there… it’s kinda dodgy when you know how much the rent is!

    Even a small store at 1 Utama / Midvalley is 20k, lousy bangsar shoplots are the same. A lot of those small retail brick and mortar shops you see don’t actually make money at all.

    That’s why our shop is not in any of those places although our customers keep asking us to go there. We just can’t afford it.

    30% GP is not the norm anymore for most shops, which is why we’re struggling, because it’s OUR norm. Most places GP is at least 40% if not more – which is why you see a LOT of crap out there – because selling high volume of cheap crap at middling prices but high margin is a much faster way of turning a buck than selling low volume of good quality products at higher price but lower margins.

    *shrug*

    As for the original b+m v.s. online – the online game is really really hard nowadays – your products need to be really cheap – i.e. under RM20 each. There are definitely online shops that do very well, usually those that buy parallel goods from China then sell it really really cheap. Otherwise, forget it, people would rather go to brick and mortar stores.

    I bought something from a KLCC stall once. The person said if I wanted more variety, I could go to their store on the 3rd floor. So they use these stalls as frontage in high pedestrian areas. I’ve seen this in Hong Kong where ground floor rentals will blow you away so they rent on the 5th floor and plant proxy stalls at the street below.

    I agree, people find it easier to buy online if the products are cheap, like books and t-shirts. Complicated stuff don’t seem to do as well, like phones. Probably the fear of warranty complications? Only brands like Dell and HP have been able to surmount that, but at great cost.

  5. April 23, 2009 11:26 pm

    well , yeah small shops like 1u pays RM20k ..at KLCC is probably RM30-40k per shop ..

    Open a corner shop at places like ss2 will cost RM20k-25k ..anyway..

    should be okay lah , if you’re had any experience running a retail store ..every hour you have 30-40 potential customers walking in , every hour you can get a sale ..and also , this 30-40 customers that walks in your shop at KLCC , are at least middle class-upper class.. if not , lavish people..

    it is not hard to hit RM5000 sales per day , you can double that on a weekend ..

    Yup, same here in Singapore except you multiply the numbers by 4 or 5. πŸ™‚

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