Article: June Campbell

The Small Business Library

September 6, 2000

Pitfalls Of E-Commerce

Is it true that 90% of online businesses don't succeed?

I've heard that alarming statistic tossed around recently. True or otherwise, I do know that there are pitfalls associated with doing business on the Net. The businesses that succeed are the ones that consider the pitfalls and plan accordingly.

If you're thinking of taking your existing business online, or if you're considering an online startup, give thought to the following:

  1. If you are opening an online store, you could discover that large, well-known distributors quote alarmingly high prices to new businesses. Some merchants relate that the good prices are offered to those who have already placed thousands of dollars of orders. In such a case, you will want to look around and find alternative arrangements.

  2. Online sales come with a risk of fraudulent transactions, thefts and chargebacks. Some merchants estimate a very high prevalence of these transactions -- especially when filling international orders. Once an order has been shipped to an international customer, you will have little recourse if the delivery is refused. At that point, you will either pay to have the shipment returned to you, or instruct the shipping company to destroy the item. Depending on circumstances, the latter could be the more economical choice.

    If the customer later processes a chargeback through the credit card company, you will then pay a chargeback fee. Add this to the shipping fees and the wholesale price paid for the item, and you have a considerable loss. If you are selling digital goods by online download, your loss is reduced, but you will still be responsible for chargeback fees.

    To reduce problems, exercise due diligence when processing transactions, and decide whether it is in your best interests to limit the geographic area to which you ship. Asking for payment via wire transfer could be another option.

  3. If you are providing a service such as web development, copy writing, graphic design, etc., insist on a signed contract stating each party's rights and obligations, and stipulating a payment schedule. Many service providers ask for 1/3 down payment, 1/3 payment at half time, and the remainder at project end. When collecting the down payment, ensure that the check has cleared the bank or that the credit card information is accurate before proceeding with work.

  4. Remember that contracts are legally binding, but only if you can enforce them! If a client in your own area violates the terms of a contract, you might be able to use an option such as Small Debts Court. However, if your client lives in another area or another country, the legal costs and the time commitment required to enforce the contract could be overwhelming. Practice due diligence and do your research before signing a contract with a distant customer or client.

  5. Think twice about providing services for "equity agreements." Realize that companies offering equity agreements are usually under-financed and are asking you to take a risk on their behalf. If the other company does not succeed, your work has been for nothing. If you are tempted by an equity agreement, do your research and be very confident in the company's ability to thrive.

  6. Read the fine print when signing up for a merchant account. Look carefully for indications of varying services fees. If addresses are not being verified, some banks will charge a higher percentage, and you want to be aware of this. Remember also, that some banks will deduct chargeback fees from your bank account without notifying you. Will these unknown deductions create a cash shortage when uncashed checks are processed?

And above all, remember that forewarned is forearmed. Be aware of the pitfalls and you can succeed!

June Campbell's writing has appeared in several international print and online publications. Her web site offers a number of resources to small businesses - including guides for proposal writing, business plan development and more. Writing Services by Nightcats Multimedia Productions.