Online Perfumery Sniffs After Profit

One visit to the Amazon.com Web site and Los Angeles perfume shop owner Farhad Abolfathi was bitten by the electronic-commerce bug.

He saw unlimited online sales potential for his discounted designer fragrances, including scents from Giorgio Armani, Guerlain and Tiffany.

“We thought we could sell $200,000 a month,” said Abolfathi, who had owned the Perfume Connection store in the lobby of the California Mart for five years.

Two years later, however, reality has proved otherwise. Abolfathi, like many business owners who have joined the world of e-commerce, has found profit to be elusive for his Web site, although PerfumeShop.com Inc. has experienced growing sales. He said he now realizes he did not raise enough money in the beginning and underestimated some key expenses.

Abolfathi now faces the reality that PerfumeShop.com is not likely to achieve $200,000 in sales for the entire year.

He calls it the e-commerce “Field of Dreams” syndrome.

“We were building it and we were sure they would come, but sure enough, they did not,” said Abolfathi, who has a master’s degree in engineering from USC. An e-commerce site on the Internet, no matter how elaborate, is “like having a very nice retail store in the middle of the Nevada desert,” he said. One still must build roadways and attract new and repeat traffic to the site.

Consultants say that too many companies eager to score in electronic commerce err by failing to create a thorough game plan or a realistic budget for the venture. Those can be critical mistakes in the fast-moving world of electronic retailing.

“The weakness of every small business going into this kind of environment is the lack of a clear business plan,” said technology consultant Nader Kheyrdan, president and chief executive of Irvine-based CCI Industries Inc., which offers e-commerce packages, including hosting online sites such as PerfumeShop.com.

Even companies that do initial planning, as PerfumeShop.com did, often overlook important components of a successful e-commerce site or do not realize that new competitors have sprung up and changed the playing field.

Determining the components and the cost of an effective site largely depends on a company’s goals for its venture, the size and location of its target audience and the complexity of its products.

A bookstore that wants to supplement sales with an e-commerce site devoted to rare books, for example, may pay considerably less than a company that wants to launch an online-only business selling automobiles.

Although success doesn’t always depend on the size of the budget, business owners need to be familiar with the options available to make a good choice. They range from free sites in online malls to cheap, do-it-yourself software to ready-made packages that cost a few thousand dollars from companies such as CCI, and on up to the multimillion-dollar sites created from scratch for heavy hitters such as United Parcel Service.

Creating or customizing a product database for a site can add considerably to an e-commerce budget, as can marketing and maintenance, two potentially big expenses that are often overlooked.

To begin an effective business plan for an e-commerce effort, Kheyrdan recommends that a business first identify a target market. Even better, find a niche market, said the consultant, who teaches electronic-commerce applications at Cal State Fullerton. Niche markets can be easier to get into and defend.

At PerfumeShop.com, the goal was to attract a nationwide audience for a niche product--discounted name-brand perfumes. One might think perfume buyers would insist on smelling a product before buying, but Abolfathi said 60% to 80% of his retail shop sales were to customers who regularly bought the same brand. That kind of customers would be inclined to use his Internet site, he figured.

Market research, including information gathered by checking competing Web sites, is also a key part of any business plan, Kheyrdan said. It can give a business owner an idea of how sophisticated the competition is and how deep their pockets are.

A timeline is also useful. It can show the business owner and potential investors how much money will be needed and when, as well as projecting the point when sales finally begin to cover costs.

Taking a realistic look at the resources needed to meet a company’s e-commerce goals may be an eye-opener, but it is a prudent step, Kheyrdan said.

For PerfumeShop.com, Kheyrdan recommended an e-commerce package that typically costs between $1,500 and $2,000. That includes an $895 INEX software package that is available through Internet commerce providers such as CCI or other resellers.

Customization costs extra. PerfumeShop.com, which had already been building a custom product database, used the same software developer, Sasan Amini, president of VITech in Los Angeles, to customize software for its e-commerce project.

Customization programming “is probably the heart” of successful e-commerce, according to Abolfathi, who gave Amini a small stake in his online business. It can personalize a site, make it easier for customers to navigate the site and speed up the ordering process. PerfumeShop.com invested an estimated $70,000 to customize its e-commerce software.

Even then, Abolfathi said, he did not get all the bells and whistles he wanted. That’s because Amini advised against too many extras. Software extras that hog memory can cause some customers’ computers to take a long time to load the site, discouraging repeat visits.

PerfumeShop.com also opted to put its Web site on a shared CCI computer server. CCI charges a $199 setup fee to host a site, and $149 a month to maintain it.

For start-ups such as Perfume-Shop.com, the next step is to consider whether or not its site will accept credit cards. If so, the business will have to set up a merchant account with a local bank or Internet company such as CardServices. The latter charges a setup fee of $399. The merchant account for the e-commerce site operates much like a regular credit card-processing service, Kheyrdan said. The business owner pays a small monthly fee in addition to a percentage of credit card sales.

Kheyrdan recommended that PerfumeShop.com go a step further and invest in a secure, online credit card system using a clearinghouse such as CyberCash or Sidnio. CCI provides the Sidnio system for a $149 setup fee and $39.95 each month for up to 10,000 monthly credit card transactions. A secure site allows credit card numbers to be encrypted before they are sent over the Internet to a processing company.

A final twist on setting up the site to handle credit cards: When a CCI customer types in a credit card number on a client’s site, they will be notified that they are on a CCI secured site, which can be disconcerting if they don’t know how credit cards are handled online. A company can get its own name in the “secure site field” for $349 from VeriSign, Kheyrdan said. He charges $50 to set it up.

In addition to customizing a package such as CCI’s, the other significant cost involved in an e-commerce site aimed at the consumer market is the ongoing advertising, marketing and maintenance tab.

PerfumeShop.com placed banner ads on other Web sites but found the cost prohibitive compared with the return and given its relatively small budget.

Maintenance is also an important ongoing part of an e-commerce site. That includes updating the site’s content, writing new software to integrate vendor upgrades and customer service, among other things. The cost to maintain, upgrade and fine-tune a site to keep it competitive can equal 40% or more of the initial investment each year.

“It’s a very live thing, like a plant that needs continual watering, if you are serious about it,” Abolfathi said.

Abolfathi estimated he has so far invested about $250,000 in PerfumeShop.com, including the cost of his own time and resources pulled from his retail shop and a small wholesale perfume business. A friend, Daryoush Dayan, invested some money early on. But the company has yet to turn a profit.

Despite the unexpected costs and difficulties, Abolfathi has not given up on e-commerce. He sold his retail shop a few months ago to focus on his online efforts.

In addition to PerfumeShop.com, he is working on a new e-commerce venture that leverages the database investments he has already made. ExchangeCircle.com will be a business-to-business site featuring an industrywide perfume inventory database, ordering capabilities and an information clearinghouse for distributors. Business-to-business sites typically do not require the extensive advertising that a consumer site needs to succeed.

“It is very exciting. The mistakes we made the first time, we are not doing now, and this time we are going much faster,” Abolfathi said.

Cyndia Zwahlen can be reached at cyndia.zwahlen@latimes.com.

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This Week’s Business Make-Over

* Company name: PerfumeShop.com Inc.

* Headquarters: Los Angeles

* Type of business: Online discount perfume sales

* Status: S-corporation

* Owners: Farhad Abolfathi and Daryoush Dayan

* Founded: October 1998

* Start-up financing: $54,000

* 1999 sales: $120,000 estimated

* Employees: 2

* Customers: Perfume buyers

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Main Business Problem

How to launch an electronic commerce Web site.

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Goal

To realize the Internet’s unlimited sales potential.

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Recommendations

Write an electronic-commerce business plan. Determine hardware and software needs. Devote resources to advertising and marketing. Update Web site content frequently. Allow customers to personalize the site.

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Meet the Consultant

Nader Kheyrdan is president and chief executive of CCI Industries Inc., an Irvine-based information technology company he founded 12 years ago. He also teaches electronic-commerce applications at Cal State Fullerton.