How We Use Pre-Sales to Improve Cash Flow

I’ve written before about how the cash flow cycle of inventory can be the death of e-commerce companies of all sizes. One of the things we’ve done this year with surprising success is pre-selling items before we get them in stock. As soon as we place an order with a distributor, the product goes up on our site. Most of the time the description just says “coming soon” and the picture is just something like this:

DI Image Coming Soon

This isn’t all that intuitive of a practice. I mean, you could argue that it’s not worth the effort of even posting it until you have it in stock, have it photoed, and have a description written. Make it a one shot deal. No one will buy it without a photo or description anyway…right? This is what we did in the past, and often times weeks would go by from the time we got the product in stock to when it was on the site.

After the success of the big Meguiar’s pre-sale back in February, we realized just how big of a deal this could be. Many of those Meguiar’s products were sold out before we got them in stock. Meaning we had collected the money from our customers before we were even billed for the products! All of a sudden we’ve turned a huge cash flow disadvantage into a huge cash flow advantage. We can take that revenue to pay off the bill and order more. As opposed to starting off in the red, we’re starting off using our profits to fund growth. By the time that first bill was due, we had already sold out of the second batch of products and had a third (or maybe even a fourth) batch on order.

Of course, that was a major product launch that had a ton of hype in the detailing world. We were the first in the industry to get the products up for pre-sale. We ran a pretty big marketing campaign along with it. We could have just been capitalizing on being first to market and this could have been a non-replicable one-time fluke.

We decided to commit to continuing the practice (and by “we” I basically mean everyone else in the company – my role in getting a new product for sale is pretty minimal, sometimes I’m not involved at all). Somewhat surprisingly it continued to work well across all brands and all types of products. To varying degrees of course, but it always worked. Almost nothing we’ve put up for pre-order hasn’t sold. The craziest pre-sales were some of the brushes we recently picked up. We named them ourselves so they have no prior brand affiliation, and yet people still bought them without a picture or description! When you compound all of this across a bunch of different brands, it has allowed us to expand products faster and with more confidence.

Now, if you’re sitting at home thinking “cool, I’m just going to start an e-commerce business and do this” there are a few caveats worth mentioning…even if they should be obvious. First and foremost, this only works once you have an established customer base that trusts your product recommendations, something you can only achieve with years of good will and honesty, right down from your product descriptions to the information on your site and your customer service. You also need to have a good buyer. Greg has been essentially perfect this year. Everything he’s decided to pick up has been a hit. That only comes with years of experience and a skillset that combines some mixture of good data analysis and good industry foresight.

This experience has been one big lesson in “you’ll never know if you don’t try”. We all hold assumptions about our businesses and our customers. Sometimes we’re right and sometimes we’re wrong. As was the case with the Weekly Special last year, this is one of those times where I’m really glad to be wrong.

6 comments on How We Use Pre-Sales to Improve Cash Flow

  1. Tim says:

    Very cool practice! While I knew you guys were experimenting with stuff like this I didn’t realize just how much. I think back to when I had a retail operation, with inventory, and despite over a decade in the business, a very loyal client base we could never have pulled this off! I think another caveat for budding entrepreneurs is to know the market, “need” based markets would have a much harder time with this than “luxury” or want based businesses. And in the services arena this would be likened to pre-paid legal services which most regard as a complete scam. In your case it seems like a great, previously unidentified avenue to help with cashflow and inventory management – both of which are very cool areas to bolster.

    • Adam McFarland says:

      Good point on the need based versus luxury products. You’re right – that probably plays a big part in this as well. Detailing is the type of hobby where people like to try what’s new just for the sake of trying what’s new, which is somewhat unique compared to most businesses. Even if you sell high end electronics, most people aren’t going to buy a TV a month after buying a different TV just because it has a new feature. People will do that with a buffer or a $200 wax. The only thing that I’m in to that I can liken it to is tea, although tea is generally cheaper than detailing supplies. I like to order samples of all sorts of new teas just to try them. If one of the sites I like lists a new tea sometimes I’ll order a sample without reading any reviews about it…then again the sample is usually like $5 so that’s a bit different than most of the products we sell 🙂

  2. Dave says:

    I’m curious how you handle this logistically. I’m assuming you only authorize payments that are pre-orders, and then charge the payment when the order is shipped. Are you still using PayPal for the backend? Their authorizations expire after 30 days, what happens if the item ends up taking over 30 days to arrive and all of your authorizations are expired? I’ve found this to be a monster pain as it requires contacting all our customers, finding their expired authorizations in PayPal, etc, etc. How do you get around that?

    • Adam McFarland says:

      Good question Dave. We collect the money up front. We charge every order out as soon as the purchase is made, no exceptions. It’s just a lot easier that way then charging when the order ships. We have had a lot of backorders over the years, between out-of-stock orders and pre-orders, and as far as I know we’ve only had a few customers complain specifically about the order being charged out upon purchase and not upon shipment. I did a quick search of our new customer service shared inbox, which is only a few months old, and wasn’t able to find any.

      On a personal note, it doesn’t really bother me when a company does this. I ordered my bike over the winter and waited ~3 months for it to get in stock and ship. They charged me in January, I received it in late March. I just look at it as holding my place in line for the product when it comes in. That’s just me though. I can see the other side for sure. From a business standpoint, we’ve found it’s just more practical to refund that rare customer who complains rather than deal with all of the issues you mentioned…plus it’s obviously better for cash flow.

      • Dave says:

        Definitely, I would much rather do it this way as well…but I thought there was some sort of law against doing that. I could (hope) I’m wrong, but I’m wondering if any of your readers know the definitive answer to that.

        • Adam McFarland says:

          Hmm interesting. I found this thread about it…no real conclusions though. One person mentioned checking your merchant account policies. I glanced at the Payments Pro ToS and wasn’t able to find anything in there. In the “Commercial Entity Agreement” with the banks, there is one mention of the 30-day rule that is mentioned in that thread.

          We do specify estimated ship dates upon purchase, as well as clearly state in our ToS (which all customers have agreed to) that we charge upon purchase, so my thought is that that’s enough…although I could be wrong.

          Interesting stuff though. Would be curious if anyone else has any experience with this.

          Update 8/9/11 – see “Ship Dates” on the FTC guidelines

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