Internet Sales Tax Won’t Save B&M From Amazon

internet sales tax will not tip the scales back in favor of brick and mortar retailers

It is said that two things in life are unavoidable: death and taxes. With the advent of the internet taxes became avoidable in the US. Well, sort of. Under the US constitution and commerce laws a business is required to collect sales tax only if it has a presence in the customer’s state. Consumers have taken advantage of this situation to avoid paying sales tax on many online purchases, since giants like Amazon have no physical presence in most states.

Traditional brick and mortar retailers claim that lack of sales tax gives an unfair advantage to online retailers which can offer a better price and unfairly compete for customers. In addition to the complaints from the B&M camp, states are strapped for cash and see internet sales as missed tax revenue. Federal online sales tax legislation is poised to arrive sooner or later. While it will definitely bring more revenue into state treasuries, it is not the panacea that B&M retailers hope will get shoppers back into their stores.

Land Before Internet

In the olden days before the internet consumers had two options when buying a product: go to a brick and mortar store, or use a mail order catalog. If the company selling the product via a catalog had no business presence in the customer’s state then no sales tax was collected. US constitution states that the federal government has the sole legal right to regulate commerce among the states. This means that historically a state could not compel a business outside of its jurisdiction to collect sales tax on its behalf.

This was an important and necessary provision due to the fact that there are literally thousands of sales tax jurisdictions in the country. It is not just states that can impose sales tax. Counties and municipalities have this option as well, which creates a myriad of sales taxes to keep track of without even considering the logistics or remitting collected tax to the appropriate destination. Because of this the US Supreme Court has ruled that it would be an undue burden for businesses to have to deal with out of state sales taxes.

Revenue Too Big To Ignore

Everything was good and well before the internet. Catalog sales were a tiny portion of consumer spending, and neither states nor B&M retailers cared that out of state companies weren’t charging sales tax. As internet sales have grown, the lost revenues could no longer be ignored by both the states and the B&M retailers. It is estimated that states lost $23.3 billion in 2012 to the internet tax black hole. Revenue losses this big are hard to ignore.

B&M retailers are also feeling the pinch. The latest trend among consumers has been dubbed “showrooming“. Showrooming is a phenomenon where consumers go to a B&M retailer to browse merchandise, and then find and order the product for a cheaper price online. Thus the B&M retailer acts as a sort of showroom for the online retailer while losing sales in the process.

Though B&M retailers have blamed their sales tax burden as the primary culprit behind this massive loss in revenue, the fact is that there are far more advantages to shopping online than a mere sales tax discount. The real problem is that retailers are out of touch, and if they want to stay relevant they will need to address their shortcomings rather than blame online giants like Amazon for their misfortunes.

Why Online Shopping Beats B&M

With Amazon now supporting internet sales tax legislation it’s only a matter of time before all major online retailers begin collecting sales tax. B&M companies are hoping that sales tax will even out the playing field, but there are many advantages to shopping online that B&M retailers simply can’t match. As an example, here are some major advantages that Amazon has over B&M stores.

Product Reviews

Product reviews are a staple of almost all online retailers, but none of them do it as well as Amazon. This is a critical piece that’s missing from B&M stores. Sure, there may be sales reps you can talk to at a B&M. The problem is they’re usually clueless or on commission, and in either case you will not get a useful, honest review of a product. There’s nothing that can compare to reading the experiences other people had with a product, and is a major influence on a purchasing decision.

Price History

All products offered on Amazon are cataloged by the web site camelcamelcamel.com. Camel will show you what the price history of the product was since the moment it was offered on Amazon. This lets you decide whether you should get the product right now or perhaps wait a bit for the price to fall. You can also sign up for an alert when the price of a product drops to your desired value.

Same Day Delivery

Currently in its infancy, same day delivery is on its way from Amazon and other online retailers. Currently Amazon offers free two day shipping for fee of $79 per year, with next day shipping an option at $3.99 per item. Now that it will charge sales tax Amazon can build sprawling warehouses right in the metropolitan areas it previously avoided. Same day delivery will then become much more feasible, and ironically make Amazon an even bigger threat to B&M.

Subscription Discounts

Amazon offers a “subscribe and save” program which allows customers to purchase products on a regular schedule that they define. This is quite useful for saving both time and money by automating purchase and delivery of common household items. For instance, instead of lugging a giant 20 roll pack of toilet paper from the supermarket, you can subscribe to have it delivered every few months. It’s possible to get up to 20% off your subscription order in addition to the convenience of free delivery, which more than offsets the sales tax.

The Future Of Brick & Mortar

Will B&M stores die out due to competition from online retailers? Probably not. Some will certainly decline and disappear like Tower Records music stores and Borders bookstores did in the last decade. The ones that survive will be forced to adapt to a new reality that merely putting a bunch of products under a roof and sprinkling them with useless sales people will no longer cut it as a business model.

B&M retailers will have to focus on improving customer service and matching the conveniences provided by online retailers. They will be forced to become more creative and investing more into training and quality of their sales staff. Only then will they be able to reclaim the customers they have been slowly losing over the last decade.

This post includes It’s time to pay tax by Images Of Money used under the Creative Commons Attribution 2.0 Generic license.

Being Better Is Not Enough To Get Customers

getting customers does not have to be an uphill battle

A good entrepreneur is aware that the best way to know if there’s a market for something is to see if people are already buying it. A market with no competition probably doesn’t exist. Once you pick a market with existing competition you start to thinking how to improve the existing products or services. The goal is to build a better mousetrap, which may seem like the best way to get customers to switch. However, unless the competition is incredibly horrible in comparison to your solution you’re in for an uphill battle.

You Know Jack, But Need Joe

You know Jack. Jack is the ideal customer of your competition. The customer that is sufficiently satisfied with what he has. Sure maybe not everything is perfect, maybe there are a couple of things that could be improved. There is however insufficient reason for this customer to scrap the status quo just to switch to a slightly better solution.

Jack is a tough cookie to crack. In order to win over Jack, you will have to create something so amazing that Jack will feel like an idiot for not switching. For instance if Jack is driving a car that gets 20 mpg and you create a car that gets 100 mpg then switching is a no-brainer since fuel costs will go down five fold. However in real life such incredible gains in value are effectively impossible to accomplish.

Now let’s meet Joe. Joe is also a customer of your competition, but his problem is not being solved well by it. In fact, Joe lives in a subset of the market that your competition is focusing on. The needs Joe has are slightly different. Not so different that Joe needs a completely different product or service, but different enough that the existing solution is not cutting it.

Don’t Build A Better Mousetrap

Once you get past the trap of creating a product with no market, you fall into a second trap: planning your product or service by looking at the competition. While it may seem logical at first it creates a big problem because you end up defining yourself in terms of your competition. When you make a better mousetrap and the existing ones are good enough, you have an uphill battle to sell it.

If you use your competition as a starting point for your idea, you end up with a product that targets Jack. Unfortunately Jack is already fairly content with his current solution. You might make a car that can go 100 mph but Jack already has a car that can do 70 mph and gets Jack where he needs to go. While something faster may be nice it’s not worth the hassle for Jack to switch.

Instead of focusing on the satisfied customers of your competition, you need to be focusing on the unsatisfied ones. Unfortunately there is no way you can do that simply by looking at your competitor’s features. The only way to find out what unsatisfied customer Joe wants is to find Joe and talk to him about it.

Sell Ice To People In Hell, Not Eskimos

There’s a saying that a good salesman can sell ice to Eskimos. However, unless you are endowed with the reality distortion field of Steve Jobs then you’re better off selling ice to people who actually need it. When your product solves a major pain for a customer it’s analogous to giving an ice cold drink to a person in hell. This is ideally where you want to position yourself in regard to your potential customers.

Our friend Joe is the proverbial customer in hell. He is using your competition’s product and it’s not solving the problem he has. Your competition in turn is more interested in catering to Jack because Jack is their core business. This is exactly the kind of opportunity you are looking for. Instead of an uphill battle to convince Jack he should switch from “good enough” to “better” you will have Joe running after you to give you his money.

The key here is that the pain Joe has with his current solution is far worse than the pain of uprooting it and switching to a new one. Jack on the other hand sees the pain of moving to a new solution as much worse than staying with the current one. Which of these customers would you rather be selling to?

It is not hard to tell Jack and Joe apart. When you ask Jack how he feels about his current solution he may say “it’s great” or “it’s OK”. You may think that “it’s OK” is a sign of a customer that can be converted, but ambivalence is not a sufficient motivator. When you ask Joe he will tell you that the current solution drives him nuts, doesn’t do what he needs, and he would love to have something that solves his problem. When you meet Joe you’ve hit paydirt: a potential customer.

This post includes Formula 1 by Jose Maria Miñarro Vivancos used under the Creative Commons Attribution 2.0 Generic license.

Waning PC Sales Signal Beginning Of Post-PC Era

PC sales have significantly slumped, post-PC era begins

The PC has had a long and eventful history since its release by IBM in 1981. Due to its open nature it rapidly displaced its proprietary competitors and became the standard for personal computers. The PC market was flourishing and growing perpetually since the 1980’s, but in the last couple of years it has seen a sharp decline in sales. This new period is being called the “post-pc era” of smartphones and tablets, with the PC finding itself in a similar situation to the dinosaurs when the meteor struck.

IBM PC: 1981-2013

The PC is not dead in the traditional sense, but PC sales have completely flat-lined over the last few years. In business this is the canary in the coal mine. When a market stops growing you either become a low margin high volume vendor or you get the hell out.

IBM’s initial decision of an open technology PC allowed IBM to bring the product to market very quickly, but in the end cost them the entire market they had created. The company has slowly been selling off its PC related divisions, starting with the hard drive division in a 2002 sale to Hitachi. This was followed by the sale of its entire PC division to Lenovo in 2004. Currently IBM plans to completely exit the x86 computer market by selling its PC server division to Lenovo as well.

In retrospect these decisions (besides making the PC open) were smart moves for IBM. Hard drives have now switched largely to SSD technology, the PC market is an incredibly low margin high competition business, and the x86 server market is probably going to become a low margin ordeal as well. IBM hasn’t survived for over 100 years by making stupid decisions. Well, mostly not stupid decisions.

A Shrinking PC Market

IBM has figured out its exit strategy (it got the hell out), but other PC OEMs have not been not so lucky. Many years of consolidation have left brands like Compaq and Gateway a distant memory. Compaq was swallowed up by HP in 2002, and Gateway fell to Acer five years later. The big players that remain include HP, Dell, Toshiba, and Lenovo, with Lenovo being the only one experiencing growth.

Dell, once the leading giant of the PC industry is planning to go private. Michael Dell himself wants to purchase a large stake in the ailing company. Rumor has it that a private Dell would leave the PC market behind. This possibility has led Microsoft to throw its hat into the investment ring to ensure that one of its biggest OEM customers doesn’t ditch selling Windows machines. Meanwhile Dell’s biggest competitor HP is attempting to reinvent itself by focusing on its server business.

Despite this major upheaval the PC itself is going to stick around for a long time. There is currently nothing that can effectively replace the PC, but sales and profit margins will never recover. Unlike the rapid upgrade cycle of the 1990’s a modern PC can easily last 5-10 years. This combined with a saturated market and cutthroat competition leaves the PC an unattractive market to be in.

A Post-PC Future

In sharp contrast to PC OEMs struggling with razor thin profit margins the post-PC companies are raking it in. According to the Business Insider Apple’s profit margins for the iPhone were an astonishing 49% to 58% for the 2010-2012 period, with iPad devices falling between 23% and 32%. Though Apple’s profits have fallen somewhat in 2013 they still blow the PC industry out of the water.

The future clearly belongs to mobile computing devices. Obvious winners in the space so far are Apple and Samsung, with both companies having a significant presence in the market. Losers at this point appear to be Nokia and Microsoft whose partnership has not resulted in success for either company.

It’s hard to say how things will play out at this point, though some parallels to the 1980’s computer wars do exist. Back then Apple was the leader of proprietary computer sales with the Apple II and Macintosh, and the IBM PC was the open computer hardware competitor. Today a similar situation exists with Apple again being the leader of the proprietary mobile devices, and Google’s Android platform the open competitor.

If history has taught us anything it’s that the open platform becomes dominant. Android has already overtaken the iPhone in market share. However, Apple retains a much higher profit margin, and this fact is likely to remain for the foreseeable future. Whether Apple will be content with retreating to its classic “premium product, high margins, small market share” business model or whether it will fight for market share remains to be seen. It will certainly be very interesting to watch.

This post includes Computer Sale by Qole Pejorian used under the Creative Commons Attribution 2.0 Generic license.

Software As A Service: A New Corporate Trend

software development in progress

A new trend is sweeping the software industry — providing software as a service. Traditionally software has been stuck in the gray area between a wholly owned or licensed consumer commodity. That is, either the consumer owns the software itself or has a license to use it depending on who you ask and interpretations by the courts.

Regardless of whether software was owned or licensed the bottom line was that you paid for the it once and were able to use it perpetually. Some companies such as Red Hat provide support service as a complement to their product. Subscription based product support has proven to be very profitable for Red Hat, and other companies have taken notice.

I Am Altering The Deal

Microsoft and Adobe are two major software powerhouses that are trying to do away with the software status quo. Both companies have decided to change the way they sell their flagship products. Instead of the traditional pay once, use perpetually model they are now offering software as a service: pay monthly if you want to keep using the product.

SaaS is not a novel concept. Oracle and Salesforce have been doing it in the enterprise space, and massively multiplayer online games have been subscription based since the beginning. The model makes sense when the vendor is hosting the software and providing a benefit to the customer such as managing massive server farms and software maintenance on the customer’s behalf.

For a product like Microsoft Office or Adobe Photoshop the reasons for a subscription based service are less clear. MS Office 365 does offer some benefits for enterprise users such as moving Exchange and SharePoint servers to Microsoft’s cloud. However for home users the only things Microsoft offers with the subscription are 20 GB of storage for SkyDrive and 60 minutes of Skype phone call time per month. Services that are completely unrelated to Office apps.

Adobe is touting the main benefit of their subscription model as access to all their software. However, since most users don’t need the entire suite of Adobe’s software, a perpetual license for a single application like Photoshop would be a better investment (one year of Creative Cloud subscription is equivalent to a perpetual Photoshop license). This is especially true considering that both MS Office and Adobe Photoshop are mature applications which users don’t need to upgrade very frequently.

User + Subscription = Guaranteed Revenue

If you are starting to think that software as a service is an evil scheme for milking more money from consumers you’re partially right. Partially right because the reason for implementing this model is not primarily to make more money. Microsoft and Adobe could easily achieve that by raising prices on their products. No, the main reason these corporate giants are moving to the subscription model is the lure of guaranteed revenue.

With a traditional business model, both companies would release a new version of their software every couple of years. They would get a surge in upgrade sales, and then the sales would level off. The revenue curve would then look like a sine wave. Up, down, up, down. There’s nothing that Wall Street hates more than unpredictable revenue projections, and this in turn reflects on the company’s stock price.

By going with software as a service, the company is able to literally guarantee how much revenue they will bring in every quarter. They can tell Wall Street “we have X subscribers that are paying Y dollars monthly so we will have Z revenue this quarter”. Compare this to “we are going to release a new version of Creative Suite next quarter and we expect to generate X dollars of revenue, but we can’t know for sure how much it will be”. Which sounds better to you as an investor?

The Silver Lining

Despite the fact that there are currently few benefits to consumers in buying software as a service, things may change. Adobe for instance can greatly increase the value of its subscription by going further with its cloud than mere remote storage. One of the benefits of a server cloud is the vast processing power it provides. Adobe’s cloud can allow users to batch process a large number of high resolution images in a fraction of a time it would take on their home computer.

Will Adobe and Microsoft come up with real benefits to offer users purchasing software as a service? It’s hard to say, but the possibility is definitely there. Regardless of whether we will see software giants get creative in how they use the cloud in conjunction with their software, it is clear that the subscription model is here to stay. Companies stand to gain many benefits from this business model. Too many for them to ignore it or go back to the way things were.

This post includes Cloud by James Cridland used under the Creative Commons Attribution 2.0 Generic license.