Location: Comparing Online & Offline Business Costs

Mar 11th

I have went shopping with my girlfriend in San Fransisco a few times, and got to thinking about how most of the businesses in the city pay $4,000 to $20,000 per month for rent. In many cases, with a 5 year term.

You can buy a great domain name for that. You can compete in the search results in most markets for that. Monthly rent to buy exposure in one city is recurring. Many online marketing costs and domain costs are not.

In time, online will be much more competitive than it is today, but many markets are still wide open, and likely will remain so for at least a few more years. As mobile communications and web access move to free, and Google becomes the default homepage for the web, a strong market position on the web will be worth as much or more than any offline real estate.

Published: March 11, 2007

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Comments

Jacob
March 17, 2007 - 8:03am

On the other hand, an algorithm change wont hurt your physical location foot traffic.

March 17, 2007 - 8:54pm

No, but road construction, political pandering, crime, fires, a new Wal Mart in town, etc could all hurt your physical location foot traffic.

March 11, 2007 - 9:15am

You are right to say that the cost of getting a business started and even the maintenance of it is ridiculously low compared to offline. That's why is it hard to start a real world brick and mortar business. It can cost easily the price of a family home just to get started.

Keep in mind what you need to be able to accommodate human customers. You can't sell stuff out of a room that looks like a warehouse or storage. Also the maintenance cost every month include things you don't have to worry about online, cleaning, security system, power and may be gas for heating, lights, running any special equipment such as freezers and fridges, cash registers etc. etc. etc.

It is still easy and cheap to compete with the big dogs online in comparison to offline. The cost of entry will remain low, but the ability to get a far reach for as little as you can today will diminish slowly. Just look at PPC cost developments over the past years and the increased competition in the organic results.

It won't get better and only harder. That's for sure. But it's still early in the game and plenty of opportunity for anybody with the right stamina and persistence to make it.

March 11, 2007 - 3:50pm

Sure, its still a good time to launch a site.

I see a lot of people get wrapped up in the idea that their business needs to act radically different online. They'd rather spend $1000s on adding social networking to their site rather than spending the money on advertising/SEO and building up a customer base.

Once more people have the experience and know-how to run an online business, we'll see more to that real estate money move online.

March 11, 2007 - 5:56pm

For the most part, 85% to 90% of purchases happen offline, and it has been this way since Penney & Sears rapidly evolved their retail presence eighty years ago.

Multichannel businesses quickly learn that once a retail presence is established on a national basis, at least eighty percent of sales will happen offline, even when the cheap online presence exists 24/7/365.

Actual customer behavior dictates the high cost of rent.

March 11, 2007 - 6:39pm

You didn't even mention the other problems and expenses of storefront businesses such as:

permits
licenses
signage
utilities
liability insurance
workers comp
cleaning services

We have a physical store and it costs us 12-15k a month and we're lucky each month to just break even. It's funny because I opened the store as my "backup" plan in case the dot com bubble burst again. But now, I need the online just to keep my backup plan in business :-)

March 11, 2007 - 8:21pm

As a company that closed a physical store and moved all its business to the web a little over a year ago, we anticipated a drop in overhead, which occurred.

What we did not anticipate was the even more significant drop in sales that accompanied not having display cases to show our merchandise and human staff to help people understand why to buy.

We also were not very wise about the cost of PPC as the sole "assured" source for a search presence - especially with the SEs hiding their PPC charges behind the green curtain.

So, having just completed our 2006 P&L for IRS purposes, we were shocked to see how much money we lost in our first full year of web-only marketing. (We had been on the web successfully for 5 years prior.)

We obviously have some rethinking to do about how to use the web in a less costly, more profitable way.

March 11, 2007 - 9:47pm

Adding to what William said ...

A LOT of people like that "warm" feeling they get when buying something from a real person. They like to get there hands on something to see how it feels. They also like to know that it is coming from a physical building that will be there to accept the potential return. I for one like the stores that also have a website. That way you can goto the store and get your hands on it to see if you really like it, then if you want it buy it on like if you can save some $$$...

Dave

March 11, 2007 - 11:47pm

That's a very good point Aaron, I've never actually thought about it like that. It could also mean that domain names should be worth a lot more..., and, if someone's buying a domain name - that they should consider paying a lot more too...

March 12, 2007 - 2:45am

Bollocks to opening an office in San Francisco.

I almost did in 1999 and it was way too prohibitive just for a one room place with a SOMA vanity address (close to LookSmart)

I think it is much easier to do it from home. For the warm inviting feeling - especially Internet Marketing - I like people to visit my home office and see how I do it without the address

David

March 12, 2007 - 11:13am

Shawn, you also forgot to add to your list taxes. If you are the one that owns the real estate taxes can be just as much of a burden.
David is also correct in stating that people like to get the warm fuzzy from buying from a human being but they also like to know who they can get a hold of and choke the life out out of them when things go wrong with their purchase. Not being able to be directly in from of someone who wishes to buy something can be costly. I use web conferencing with great success and the $30 per month I pay for the service sure beats the cost of full time hired help.

Matthew Shuff
March 12, 2007 - 1:41pm

Good point. This is true for any type of business - physical or virtual. Whether you like to buy from a store and talk to people, research shows that a majority of shoppers in several segments are researching and making decisions online before making purchases offline. Online initiatives are also valuable at building brand. I once heard someone say that your "brand is the sum total of all your search results." Pretty powerful statement. I tend to agree in a world where individuals and very small businesses are competing directly with large global companies. There are very few alternatives to internet marketing that can provide such high ROI. Many established companies would be better off investing in the online world rather than a new location, and many companies starting out would be better off doing the same rather than rushing out and adding office expenses and personnel before they are ready.

March 12, 2007 - 3:10pm

There are pros and cons to both types of business. Offline stores are costly to set up and run and overheads can ruin a business but on the other hand they offer (the good one's) a compelling customer experience and you have the opportunity of face to face sales. All those smiling, well groomed faces are there for a reason.

On the other hand you have online stores that are relatively low cost to set up and to run. But they may offer low prices but they don't offer a compelling user expereince. Online you have little with which to engage the customer - the result is they will switch sites with one click. Also an offline store can probably do well with a few hundred customers a day whereas online stores need thousands as the conversion rates are usually low. Add to that the sheer number of online businesses, search for cell phone and google returns 116m sites - which one do you choose? Whereas in the High Street there are lots of phone shops but five is a lot easier to deal with than several million.

Also I would add that generally people enjoy shopping (even me) and it is part of many peoples recreation - they shop, socialise, go to the library and sit in cafes (I'm good at this bit) ;-) Once you have established a good store it may be there for decades and will attract customers without much effort - think big department stores. Finally, they don't serve coffee in cyberspace.

March 12, 2007 - 7:53pm

Prior to the rise of the Web, catalogs served some of the purpose now served by online stores.

Even then, after years of successful catalog tradition, some catalog merchants found that having a "real" place enhanced the appeal of the brand and the increased catalog sales.

Perhaps today's equivalent, if you can't afford to rent or staff a physical store, is the reassuring photo of the owners. It communicates that someone actually stands behind the item(s) being purchased.

March 12, 2007 - 10:15pm

Customer reviews on sites like Amazon.com in many ways might even be more valuable than the value adds offered by a physical store.

March 13, 2007 - 8:20pm

I think people prefer real stores because they can be convinced of the product's attributes by experiencing it in-person. They want to know exactly what they are getting, and a 200x200 JPEG just won't cut it.

That's why offline music stores *don't* work - because they offer the reverse experience by not letting you listen to music (those kiosks mostly suck.)

I am amazed at how brochure-ware designers love flash and rich media, but it's so rarely used on e-commerce product pages where it would actually fulfill a need. Granted, 360's of 10,000 SKUs would be daunting undertaking, but surely the expense would be justified for best-selling products.

That, combined with the abolition of ground shipping charges (a con if there ever was one) would tip the scales in favor of online purchasing.

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