RAW Transcript Of Luke Burgis Interview

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Andrew: Hey everyone it’s Andrew Warner, founder of Mixergy.com, home of the ambitious upstart, and you’re about to learn from a guy who had to close down his business. You know if you only learn success by studying the most successful people, I think you only get part of the story. You need to learn from as many different experiences as possible, which is why I am so grateful to Luke Burgis, the former founder and CEO of Fit Fuel.com for coming here to Mixergy and telling us about his experience and telling us why he had to shut down his business. As you hear his story you will see how he started out doing one thing and how his business morphed into something else, and how it lost focus after that, and you’re going to learn along the way why businesses lose focus and even learn from his experience so that you don’t have to experience it yourself. I’m really grateful to Luke and entrepreneurs like him who are willing to talk about their experiences, who are willing to teach instead of hiding from their experiences. I think we need to be grateful in this industry that people are willing to share this much and I think too that any entrepreneur, any business man or woman who gets into the ring, who takes a shot, who risks so much to start a business; I think we need to admire them, I think we need to cheer them on, and I think we need to pull up a chair and learn from them. That’s why I do here on Mixergy and that’s what we are about to do here with Luke Burgis. Here’s my interview with him:
All right, hang on, before we get into the actual program I’ve got a big announcement to make, and to help me with that announcement, I’ve got my fiancÈe here Olivia. Olivia?

Olivia: Yes, we have our first sponsor here, which is FreshBooks.

Andrew: FreshBooks! First sponsor on Mixergy. All right here’s what we’re going to do I’m going to show you how easy it is to create an account on FreshBooks, how fast it is, and you’re going to be able to use this account to create your invoices, to organize your billing, and so much more. Olivia, can you time me as we do this?

Olivia: I’ve got it.

Andrew: All right here we go. I’m going to click ‘try it free’. All right, let’s do it. I’m going to type in my real company name, Mixergy. I’m going to type in my real email address, “mail at awarner dot com,” as most of you know, and I’m going to hit ‘create account’.

Olivia: OK, that was 7 seconds.

Andrew: 7 seconds to create an account! The account is technically created, but let’s keep going, Olivia. Keep timing me, because I’m going to log into my account. Yes, I’m going to tell Apple to save my username and password.

Olivia: Yeah, and why are you doing this, Andrew? Let’s tell them if they want to find out how much they’re making from this ad, this month, they should sign up for FreshBooks and send you an invoice using it, and you’ll reveal the number.

Andrew: So if they go in, create an invoice, and invoice me, I will — yeah, good idea — I will absolutely, if you invoice me using FreshBooks, I will tell you how much money I’ve made from it.

Olivia: 39 seconds.

Andrew: 39 seconds. Very important, before we continue they have to know to type in my name or my company name, and how did you hear about us. Type in ‘Mixergy’ so I get some credit here for doing this type of marketing for them. This is pretty good Olivia, don’t you think I’m a pretty good pitchman? All right, get started — boom! Timing, how much?

Olivia: 49.

Andrew: 49 seconds to create an account. If you go to FreshBooks and spend 49 seconds, create an account, and invoice me, you will discover two things: how much money I’m making from FreshBooks, and number two, you’re going to see how easy it is to create invoices, and how easy it is to do billing online with FreshBooks, and so much more. But that’s the heart of it right there. All right, congratulations to Mixergy, congratulations to me, congratulations to you.

Olivia: Let’s go to the program.

Andrew: Let’s go to the program. What was Fit Fuel?

Luke: Fit Fuel.com was an online nutrition store, so we sold everything from dietary supplements, to simple exercise equipment, to protein bars; anything you’d need for a healthy lifestyle. We were an e-commerce store, the Amazon of fitness is really what we wanted to be.

Andrew: How’d you come up with the idea for it?

Luke: Fit Fuel was the child of a different original idea. I think a lot of businesses are born that way. I was working on Wall Street at that time, I wasn’t happy with my life as an investment banker, wanted to escape the corporate world, and I’d always been into fitness and health, so the original idea was that we were going to start a healthy vending machine company. We were going to take health foods and put them into vending machines, and put these healthy vending machines in schools, hospitals, office buildings across the country, you name it. So the healthy vending was the original idea, and the way we worked was we just sold the health products to actual vending machine operators that then put the products into our machines, and they wanted a portal, an online portal to be able to buy from us wholesale. So we put up a website, which was Fit Fuel.com, because our company was Fit Fuel Healthy Vending, and our vending machine operators could order from us to stock their machines. Well, the website, which started out as this wholesale site for vending machine operators, we opened it up to a retail audience, and before we knew it, that was much larger than the wholesale vending component. So what started out as a healthy vending machine company turned into an e-commerce company because we opened it up to consumers, and consumers happened to like the site, and they were ordering stuff from us, they were requesting new products that we didn’t carry, and before we knew it we had several thousand SKUs, and we’d basically become an e-commerce company.

Andrew: Wow, was it a self-funded business?

Luke: It was entirely self-funded.
Interviewee: Right. It wasn’t up until 2008 that we received investment and until that point for the first two years, it was, you know, pretty much funded through my savings.

Andrew: And you said that it was your vending machines that suppliers bought healthy food from and stocked.

Interviewee: Right. So we had the vending machine company and we would go and sign up a location. Let’s say a school came to us and said we want a Fit Fuel healthy vending machine. We would sign a contract with that location, then we’d go find a vending operator in that area and say hey, we’ve got a location that wants healthy food in a vending machine, you want to operate our program. And he’d say of course and then he would buy the health products from us and stock the machine according to our program.

Andrew: I see. So it was his vending machine. You didn’t have to put the cash out for the vending machine?

Interviewee: Right, right. There was absolutely no capital outlay. I mean, it’s a beautiful business model and, you know, he bought the product from us because, you know, most vending machine operators have no clue where to find health food (inaudible) not use to shopping at, honestly a lot of them get their products from Wal-Mart, you know, M&Ms and Skittles and all the stuff that you see in vending machines. So we were their distributor basically for all the health products.

Andrew: All right. So Luke, then you create a web site, then you open it up to the public and they start buying. That seems like the idea that every entrepreneur hopes for, but we all know that if you build it, they won’t come. You have to work hard to bring them over. So how did you get customers to come over to the web site and buy?

Interviewee: Well, you know, as you can see it was an accident for me and I learned the hard way that ecommerce is an incredibly complex business. From the distribution to getting products out the door once you get an order to the actual, you know, technology side of it. And I have no background in programming and web development, in anything. You know, my background is in finance so I got a crash course in SEO, crash course in, you know, getting web traffic and building a warehouse from scratch which started out as my bedroom and ended up growing into a real warehouse. A lot of it was through page search, for better or worse. We got 90 percent of our traffic in the beginning through Google ad words and as we grew, we tried to diversify our traffic base as much as we possibly could. But it’s funny, I mean we sat there and we tried so hard, we paid a lot of money to Google to get these customers. And then the first order comes in and somebody buys something that we don’t have, that we just put on the web site and it’s like, oh, great so now we have to find a way to not only get this product but get it from my bedroom initially to this person’s doorstep to make them happy. So in that sense, the logistics side of ecommerce is incredibly complex and especially to be able to scale that with something that we really had to learn quickly.

Andrew: How did you build the web site?

Interviewee: We built the web site, it is pretty interesting, I had a college buddy that offered to build just a very basic web site for us to get up and running. Once the orders started coming in, we realized that we needed a better site and we really got together a patchwork of friends. I even used a (inaudible).com to build parts of the web site. I mean, over our four year history of Fit Fuel, there are probably 100 different random programmers and, you know, people that I found on the Internet that helped to put our code together. I would not recommend that to anybody. If anybody has any background in web development, that gets extremely messy very fast. But we didn’t have the resources to afford an in-house development team so we took it where we could get it.

Andrew: All right. Yeah. So I want to dig in deeper into how you launched the site, how you built it up at first, all the different iterations with all the different coders that you had and then how you marketed it and got people in and then the warehouse so we’ll go in and take every section you just talked about and go in more depth on it. So the original web site, do you know what it was built in? Was it just a standard HTML?

Interviewee: Absolutely. It was actually osCommerce.

Andrew: Okay.

Interviewee: So we took an osCommerce shell and our web developer who is just my buddy who agreed to build it for nothing just as a favor took a osCommerce shell, put a pretty cool looking skin on it and then added some little tweaks to it and sort of customized it, but it was still a very basic osCommerce site without a whole lot of functionality.

Andrew: Did you have a credit card processor?

Interviewee: We did.

Andrew: Okay. So you worked hard to get the credit card processor, he worked like mad to use osCommerce to build out your web site and the first version of the site was up. Now, were you expecting that people would come in or from the beginning did you know that you would have to do a little bit of marketing to get them?

Interviewee: I didn’t know what to expect, but I thought that, you know, I thought that if you put up a web site, you know, people will come. I had no idea. I mean it’s not that easy. They don’t just come and even if they do come, there’s a good chance they’re going to leave. I think our bounce rate was 80 percent in the early days which is not good. We didn’t have a lot of content. We had a very limited product selection so people were coming to our site looking around, seeing all these guys (inaudible) they don’t offer a lot of products and the majority of them would leave. So that’s when we realized that we needed more than bare-bones.

And there were two problems. One was that our site architecture was primitive. And the second problem was that on the back end, we simply didn’t have the product selection that people expect from an E-Commerce site. We simply couldn’t compete with the Bodybuilding.com or Amazon.com, companies with millions of dollars that have thousands of skews to offer. We had what I could fit in my bedroom basically.

Andrew: I see. So what were they coming in looking for. They weren’t coming in looking for a specific product? They were coming in looking for an E-Commerce site where they could buy anything health related?

Interviewee: It was a bit of both. Like I said we used Google Ad Words a lot, heavily. So we would only advertise the products that we actually had in stock. Which at the beginning was 20 skews, 20 products. We would only advertise those. And those are the people that would buy. Because they came to our site and we would obviously only advertise for something we could deliver on. Other people, found there way in, either through word of mouth, or through SEO, that came to our site, and they weren’t direct acquisitions. So they would come to our site looking for just wellness products in general, many of which we didn’t have.

Andrew: Were you doing the search engine optimization that got you to the top of the search results and brought in that traffic? You were actively doing that?

Interviewee: Our web developer knew a little bit about SEO. Not a lot. I think some of it happened by accident. I think we got lucky. I mean I think some of our terms were tail terms. And we naturally rose near the top of the rankings. It wasn’t until two or three years into it that we actually hired a full time SEO expert to come in and do that. At the beginning, a lot of it was luck. I mean I never understood Google’s methods and I probably never will.

Andrew: Okay. So you put up this store. You are selling health products online. You have only 20 products at first. You are trying different ways of getting people to come in. The one thing that works for you, that hits, is Google Ad Words. Google Ad Words though are pretty expensive. And I am imagining that if you are selling health food online that the cost of each item is pretty low. Were you making a profit on Google Ad Words?

Interviewee: Our goal was to break even. Or maybe spend 10 to 15 dollars to acquire a customer and lose on our first sale. And the idea, and really the only way to make money in E-Commerce in my opinion, was the repeat business. So if we had a 10 dollar profit on an item, we’d be okay. You know, paying 20 dollars to get that customer in the door. Okay. So we take a 10 dollar hit to get them that first time, knowing that if we are doing our job, they come back five, six, seven, times. Maybe throughout the rest of their life buying from us and then we’d recoup our loss on that first sale. So we weren’t as concerned in the beginning. And Google Ad Words is very expensive but we were trying to keep a long term perspective. And I think you have to. You also have to have the capital to be able to do that. But that was the main idea.

Andrew: And this was your money. You were comfortable losing 10 dollars an order at first, with the idea that eventually you could hopefully make money on your customers?

Interviewee: I was. I really did have that faith. I mean I think you have to have a long term perspective. And although I didn’t have a lot of money. We weren’t getting so many orders that, I mean, even if I continued to lose money, I still probably had, you know, about a year that I could sort of burn through that. And I was comfortable taking that risk. I mean, that was a risk I was willing to take.

Andrew: I did an interview with Mike Jones, who is an entrepreneur and angel investor and adviser to start-ups, and I asked him from all his experience what did he learn about Internet entrepreneurs and start-ups, and he said that they are data companies. That the guys who do well are the ones who just constantly look at their data. Which makes me wonder, well, what kind of data were you looking at? How were you evaluating the lifetime value of a customer, especially at first when you were just trying to figure it all out?

Interviewee: Right. Well, at first, I wasn’t. I was just kind of keeping my fingers crossed and hoping for the best. As I learned more about it, I mean, Google Ad Words has a lot of wonderful tools that you can use. And if you sort of apply some common sense. I mean, the very simple metrics to look at, you know, what does it cost me on average to acquire a customer? What’s my conversion rate? I mean, simple math. If your conversion rate isn’t above a certain level, if you know what your conversion rate has to be in order to make money. And we sort of worked backwards to figure out what that was, and realized that it was about two and a half percent. Our conversion rate was running at about three percent. So we knew that we were making money. You find out what am I willing to pay for a new customer. And then you keep track. And it takes time to keep track of data. Like you don’t know at the beginning, how many times people are going to come back. So it wasn’t until about a year into the company that we could go look back at our data set, and say, you know mine it, and say okay, we had, you know, 50 percent of our customers bought again, that’s a fact. Our retention rate was about 50 percent which is extremely high for a young company. And that’s….
Interviewee: We were so small that our service could be excellent for every single customer. Now, once you scale you can’t maintain that level of service unless you make a lot of investments in customer service. But it was so good that our retention rate was 50%. And on average those customers bought from us once a month. So we discovered that. I mean, those numbers are excellent. They’re both excellent. Now they went down as we grew because we couldn’t maintain that same level of service. But I think the goal is to keep it or even increase those numbers. But, I mean, those are numbers that I was both happy with. And at that rate, we were definitely profitable.

Andrew: How did you give them great customer service? What were you doing?

Interviewee: We had…you know, the phone would never ring without being answered. Every email was answered within 12 hours. Usually it was a matter of minutes but our promise was 12 hours. At the beginning, it was myself, my business partner personally answering every single phone call. And if somebody called me and wanted to talk to my boss, it was the whole ‘cup my hand over the phone and hand the phone to my business partner’ type of thing. So when the owners of the business are the ones doing the customer service, obviously I would hope that it would be pretty good and we have a vested interest in the business. But that’s easy. It’s when you scale and when you’ve got 15 employees and people making $8 an hour you have to instill that same level of pride into them that I have for the business. And that’s the difficult thing. So we were very responsive to our customers’ needs. We would call them back. We would we go way above and beyond what they asked us to do. If we made a mistake on an order… we had a big joke at the beginning where our best customers are the ones that we screwed up on. Because we would make up for that screw up so well that they would actually be extremely loyal to us. If we sent them the wrong thing, we would give them five times more than they ordered in free stuff and tell them how valuable they were to us. So that was sort of a running joke. I think if you just exceed customers’ expectations, manage expectations, that’s the quickest way to great customer service.

Andrew: You know, that’s interesting. I wonder if you could do that intentionally. When I was in elementary school, the first few days when the teacher would ask us who didn’t do their homework, I would always raise my hand and say, ‘I’m sorry. I don’t have mine with me’. And then get the lecture from the teacher and then pretend…go, ‘Oh. Wait a minute. I did have it this whole time.’ Which would humble them and keep them from giving me a hard time in the future. I wonder if you could do the same thing as an ecommerce site. Can you pretend to screw up a customer’s order, at first, and then overwhelm them with generosity to make them feel reassured that no matter what, you will be there for them? That if you’re this good when things go bad, imagine how great you and how dependable you are on a regular basis.

Interviewee: I really do think… I don’t know if I’d go so far as to intentionally mess up but I think you can apply that philosophy in other ways. We used it to our advantage when we made a mistake. Even though we didn’t intentionally do it. One good example of…I mean, the general concept is exceeding expectations and going above and beyond what a normal customer would expect of a company. A good example would be Zappos.com. So they overnight ship every single order that comes into their website but they don’t advertise it. So a customer comes assuming that it’s going to arrive in four to five days and they get it overnight every single time. So that’s a perfect example of managing expectations and exceeding them. Where a lot of companies intuitively would say, ‘We offer overnight shipping. Let’s make sure that everybody knows about that.’ Well, you have to ask yourself, ‘Is it more valuable to maybe not advertise that and then blow the customers away?’ So that’s just another way to apply that same concept.

Andrew: I like that. I’m sorry. I’m getting a couple of nice notes about the idea of pretending to not do well. You know what? If I were selling anything by mail, I wonder if it would make sense for me to send the wrong item and instantly also send the right one with a note saying, ‘I’m sorry. I sent you the wrong item. Please keep it and here’s what you really ordered.’ Have them both arrive same day. You guys give me feedback if you’re watching this live or if you’re watching this taped. I’d love to hear your feedback on that as an idea and let’s see if anyone tried anything like that. Okay. So you’re buying Google ads. You’re overpaying but you know that… or you’re expecting that eventually it’ll pay off. And people are starting to come to your site just through search engine results. You’re starting to say to yourself, ‘It’s time to grow. It’s time to add more products.’ In retrospect, should you have held steady at the 20 items and added more products slowly or do you feel that you did it right?

Interviewee: I feel like in retrospect we should have grown a lot more slowly. We experienced a period of rapid growth. Every month our sales were increasing by 20 to 30% for the first year, year and a half. So we had the idea, not really thinking through it, ‘Okay. Our sales are really…it’s just a linear product of how many products we have to offer. You know, let’s just try to offer everything in the world and we’ll be the most valuable company in the world.’ I mean, it’s sort of Amazon’s really, like let’s just offer as much as we can.

Well, I think measured growth would have been a lot more prudent for us. Especially being a company that didn’t have a lot of capital to work with. So we did, we grew far too fast. We were basically responding to our customers’ needs, which is good, but they were asking us for everything under the sun and we were trying to deliver that. So they were asking us for ab equipment. Next thing I know we’re selling healthy pet food. I mean, we were twisting pretty much any product that you can think of and justifying it as some kind of wellness product. And before we knew it, we were selling sexual enhancement stuff and saying, ‘Okay. Well that sort of fits into the whole healthy living thing. You’ve got to have a healthy sex life.’ There’s really no limit to how far you can go. And what we were doing also is that we weren’t only selling what we inventoried. And I actually…I think you should do that. What we were doing instead was just-in-time inventory. So we were offering products on our website that we didn’t actually have in stock but that we knew we could get in a very short period of time. So that’s the way that we were able to expand too quickly. We offered a thousand products when we actually only stocked a few hundred. And if you ordered one of the 700 that we didn’t have, we would quick order it from our distributor, get it in our warehouse within a couple of days, then try to rush it out to you. So it was a dangerous formula that actually encouraged to grow faster than we really could.

Andrew: Well, why? Why isn’t it okay to do that? to either do just-in-time or actually have them ship directly to your customer? It seems like an easy way to grow. Why didn’t it work out?

Interviewee: We weren’t able to drop ship. Drop shipping wasn’t an option with the majority of our distributors. We actually had to physically take possession and then get it to our customers. So it was a true just-in-time system. It’s hard to stay disciplined that way. If you can do it and if you have a good system designed, I mean, go for it. But it’s extremely difficult to scale that way. Very difficult. And it’s also very hard to have a high level of customer service because you can’t guarantee that your distributor’s going to be able to get you the products in time. There could be shipping problems, they could be out of stock on something. It really adds a layer of complexity to the business that makes it very hard to scale.

Andrew: Okay. And were you just giving your customers what they wanted? Or were you also imagining that there’s certain products that they’d want?

Interviewee: It was a bit of both. We were definitely imagining that there were certain things that they wanted. Healthy pet supplements, for instance, was something that we went into. That was less of a request by our customers and more of us seeing the size of the pet supplement market and saying, ‘Hey, that’s a huge market. This is the next wave of growth. Let’s get on it.’ And we got 10 to 12 skus and sort of went into that naturally. And it did very well for us.

Andrew: So pet supplements did well? People were buying supplements to give their pets?

Interviewee: They really did. I think people spent more on their pets sometimes than they do on themselves, on their own health.

Andrew: So then there is some benefit to experimenting with all these products to just try everything and see what customers want. Keep the ones that are winners. Get rid of the ones that nobody’s interested in. Why didn’t that work? Because you were taking on too much?

Interviewee: Yeah, there certainly is benefit to experimenting but it’s not a cheap experiment, by any means. In the case of supplements and food — we sold protein bars and different forms of food — it also has an expiration date. And depending on what the rules are your distributors, you can’t always return everything. It gets very tricky. When we moved warehouses about a year into the business, I ended up throwing away about $20,000 worth of product that was either expired or had went bad. So it’s even more complicated when you’re dealing with perishables. But if your vendors have an easy return policy and you think that you’re not taking on a lot of risk, then sure, there’s a lot of benefits to experimenting.

Andrew: I see. So if it wasn’t perishable then it would be okay for you to experiment with all these products? And if you could return them?

Interviewee: I think you also have to keep your brand in mind. Let’s not lose the brand ID in all of this. So I mean, we didn’t want to be an Amazon. We wanted to be a healthy living store, a wellness store. So I think anytime that you take on a new brand — a new brand of product or a new vendor, you have to think about your overall brand. You can never lose sight of, ‘Okay, what’s our company supposed to be in the first place?’ And I think getting into pet products or getting into sexual enhancement, which we justified under ‘health’, can kind of blur the lines a little bit. And I think our customers began to get confused and say, ‘Okay. What are these guys really selling?’ We’re not bodybuilding.com where you think performance body building supplements. It was Fit Fuel, trying to be healthy living to everybody and we got a little bit away from our core mission.

Andrew: Let’s get back to something that you said earlier. You said that you grew 30% month to month. How did you grow that much?

Interviewee: Being a new site. I mean we were growing from a very low base I think which helps a lot. And we were adding new skews, and that does increase sales up to a certain point. And at that point it was still manageable and we were also learning. We were learning a lot so, you know, we were learning about SEO. We were advertising more key words and Google ad words. We were, you know, we were guest blogging. We were doing everything that we could and we were learning more about marketing and, I mean, that just fueled the growth for us in the early stages.

Andrew: Was guest blogging helpful?

Interviewee: It’s hard to quantify it. I think that it was, but I really don’t know like how much traffic it really drove for us but I enjoyed doing it regardless.

Andrew: I see. Can you give me an example of a bad product idea that you took on? One that didn’t work and taught yourself something.

Interviewee: Oh, well there were lots. Let’s see. I think, yeah, I think we got into food products and like grocery items. Things that you would consider grocery items so we went into whole foods and we tried to figure out what are the best sellers in whole foods, maybe this will work on site. And, you know, we went in and we actually talked to the staff at whole foods and we found out some of the things that sold well for them like oatmeals, you know, healthy cereals. And we took some of those products on to test it, and grocery items ended up being one of our worse problems. Number 1, the margin was not very good on them relative to supplements and fitness products. And 2, they have a very low shelf life relative to supplements. Supplements are good for 9 months to 12 months. Cereal, oatmeal, stuff like that you’re talking 3 to 6 months. And we also didn’t have the backend like warehouse management system to manage it so we didn’t even have expert, like when you’re looking at our inventory in our backend, we don’t have an expiration date tied to every item. It’s literally, you know, somebody going back in the warehouse and saying oh, it’s been sitting back here for a while, I hope it’s still good and checking it before we ship it out. So you have to have a good system to manage stuff like expirations.

Andrew: I see. And it sounds like you were just constantly trying new products that you guys figured out that the more products you have, the more money you’ll make and so you were just going out there and trying to figure out how many more products you could have added.

Interviewee: Right.

Andrew: If you stuck with just supplements, do you think that would have been a profitable business?

Interviewee: It would have been, it’s competitive.

Andrew: That’s what I was thinking.

Interviewee: (inaudible). I think that we would have struggled to make a profit. There’s a lot of companies that are doing, bodybulding.com is the most notable one. I mean, the last I heard they were doing around $100 million a year and their brand a lot of people are familiar with. And there’s a lot of sort of new supplement sites seem to be popping up every day. We were trying to sort of get away from that, the pack of upstarts and towards, you know, reputable rent. I think that we did. I think that we positioned ourself somewhere between a bodybuilding.com and the Young Companies, but it was always going to be an uphill battle for us for sure.

Andrew: Of all these products, if there was one category, one group of maybe 20 specific items that you could have focused on, what would it have been that would have been profitable for you?

Interviewee: We would have always found, I think the vendors that you’re working with are very important so different vendors work in different ways and we would have got away from ever buying from a distributor so we would have cut off the middle man. So a lot of times the manufacturer of a product sold to, you know, a national distributor and we would buy from that distributor. We would never sell those types of products because the margin’s simply not there after it goes through (inaudible) supply chain. So we would find manufacturers that we wanted to work with directly that were willing to make us, you know, either their exclusive retailer or close to it or give us all the support that we needed and people that we really enjoyed working with that were going to support us in the marketing side as well that was spending money to market these products. I think it’s important to think about those things. I mean, what is the manufacturer doing to help you as a retailer? What’s their advertising budget and are they tagging you in magazine? Are they letting people know that, you know, you’re a retailer of their product and, you know, we would have cut out all products that were below, you know, a certain threshold margin that we needed to make, you know, the lost liters were great. They brought people in, but it’s just very difficult to run a proper business that way. And also online it’s very important to think about things like how much does this product weigh. There’s some products that weigh 10 pounds and we lose our entire profit shipping them to the customer because we charge the flat rate for shipping. These are all things to think about, and I think that at the end of the day it’s lightweight, highly profitable products from manufacturers that give us their full support with marketing and retailing.

Andrew: Meaning when they buy it out of a magazine, first of all they need to buy it out of a magazine…

Interviewee: Yeah.

Andrew: And when they do, they need to have…
Andrew: Some text on there that says if you want to buy it, buy it from Fit Fuel.com

Interviewee: Right. It really needs to be a mutual supportive of one another. We promote their products and they promote us at the same time.

Andrew: As you’re starting, you can’t get somebody to do that, right? You can’t say, “hey, I’m new in business, I’ve been here for a month, now I’m looking for manufacturers who are willing to put my name on magazine articles or —

Interviewee: No. It depends on which manufacturers you’re targeting. So one of the things that we did in the beginning, and I didn’t mention this, is that we tried to focus on the niche manufacturers; the under-the-radar people. The new products that were just starting out, where they were excited to partner with us because it was personable; they could talk to the owners of Fit Fuel on the phone. It was kind of like, “hey guys let’s grow together. You help us, we’ll help you; we’re going to be a huge company. You believe in us, we’ll believe in you.”

LƒRABAR is a good example. LƒRABAR is a raw food bar, they were bought out by a large company. They’re in every Whole Foods around the country, they’re in Albertson’s, they’ve been a tremendous success. We called them when they were nothing. They had just been in business for a few months. We said, “hey, we think you’ve got a great product. We would like to put it in our vending machines and we’d like to sell it on our website, FitFuel.com, Let’s work something out,” and they were very excited to work with us. And because we reached out to them at the beginning, they were a solid partner for us for several years. And we maintained margins that some of their biggest customers they were getting, simply because we had that relationship with them.

Andrew: I see. So partner up with somebody early on when they’re willing to really work with you, grow with them, some of these guys that you partner up with early on are going to go out of business, but the ones who are going to stay around, you’ve got a great relationship with. Make sure that the products they’re selling are lightweight, make sure that they don’t have early expiration dates, and that the margins are high. And if you can find those criteria, if you can meet them, then you’ve got a product that makes sense to sell online. And if you could do it over again, you’d look for maybe a dozen of those relationships.

Interviewee: Right. Up until the end, we maintained probably 80% of our sales were from 20% of our products.

Andrew: I see.

Interviewee: And I think just focusing on the stuff that make you money is the best way to go.

Andrew: So does it make sense then to experiment almost as much as you guys did, but experiment on a smaller level and kill products off quickly? So if you decide, “let’s go into Whole Foods this week and see if we can find some products there,” do it, look for a small number of products, bring them into your store, warehouse them in small amounts, test it out. If it doesn’t work, kill the whole product line.

Interviewee: I think experimenting in a measured fashion is a great thing to do, but you have to be scientific about it. We weren’t scientific at all.

Andrew: What do you mean by that?

Interviewee: Actually set benchmarks for yourself before you set out in the experimenting. Say, “if I don’t sell X amount of this product within three months, we’re going to kill it.” Have quantifiable benchmarks that you set, because as you grow, those things are very important. And hold yourself to them. It instills discipline in you. Really think through the different things that make a product work. Don’t just take a shotgun approach and try everything – “hey, we’re going to throw everything on the site.” It’s very good to fail quickly in anything that you do, in entrepreneurship, and it’s good to fail quickly with a product, too.

But just make sure that you do that, because in some cases we held out a hope and were a little more optimistic for some products that we probably shouldn’t have been.

Andrew: Can you give me an example of a product like that?

Interviewee: Sure. Let’s see… There’s not a specific product, but I’ll give you an example of something. A manufacturer comes to us, we like these guys, and they say “we’ve got this brand new product coming out and it’s going to be the next big thing. We’re going to give you a killer deal on it, you just need to buy $1,000 from us. Just give it a few months, we’re going to do a lot of marketing.”

We would do that based on our relationship with them, and we’d actually buy $1,000 worth of product and we might not sell a single unit. They would just be sitting in our warehouse for three, four, five, six months, and we’d be hearing from them, “oh, give it one more month, we’re running a national ad.” Okay. “One more month.” This became a trend, and before you know it, the product’s sitting in your warehouse after 12 months and it’s going bad, and the manufacturer doesn’t want it back anymore. So, you have to have discipline and set your own rules. It’s good to have communication with the manufacturer, but you also have to set your own standards and stick to those regardless of what happens.

Andrew: I see. In fact, in retrospect, it seems like those kind of deals would never make sense for you. To buy product from a young manufacturer, hoping that they’ll eventually sell.

Interviewee: Well, we didn’t do that —
Interviewee: necessarily a young manufacturer. These were established brands. Let’s say maybe even a muscle tech. A brand (inaudible) that a lot of people are familiar with, but just because they’re a good brand doesn’t mean that every product they come out with is going to be a hit. You know, it’s still like Venture Capital, I mean even in our industry it’s only 10 percent of the products actually do very well and 90 percent of them are killed off. So there’s a very high churn rate and to take that kind of risk on anything is probably not a good idea.

Andrew: I see. How did sexual enhancement products work for you? I see them advertised all over the Internet. I kind of assume that there’s money in them.

Interviewee: Well, there’s money in them. They’re a good margin. There’s a lot of competition. I mean as you just alluded to, they are advertised all over the Internet and there’s a certain stigma attached to them. You know, I think that it actually hurt our brand when we carried some of those products. I don’t think we were (inaudible) discerning on what we took on as we should have been, and they’re not the kind of customers that were good customers for us. They weren’t the good repeat customers. They were the kind of customers that, you know, they were looking for maybe, without getting too graphic, a quick fix for some kind of problem in their love life. They would try something from a web site and they’d never come back again. So I would say that the retention rate from those customers was a fraction of what it was from the people that were generally just living a healthy lifestyle and were buying, you know, protein powders and, you know, diet bars, breakfast meal replacements from us. Those are much better customers for us.

Andrew: How did you get people to keep coming back to your web site? Were you emailing them?

Interviewee: We used email marketing. I mean email marketing was for us and I believe is for most eCommerce companies the highest ROI form of marketing by far. With affiliate programs being the lowest ROI form of marketing. So we had a pretty strong email marketing campaign, but I think that customer service is our biggest tool for getting customers to come back to us leaving them satisfied.

Andrew: I see. And so they would have to, okay, and what kind of emails would you send them?

Interviewee: We would send, you know, customer appreciate emails giving them, well we also had a rewards program which is also an important part of our retention. But we would send them emails updating them on their rewards points and saying hey you can redeem this many points come back to our site, letting them know about new products that we had available, new features that we’re adding to our site because we’re, as a growing company, almost every day there is something new on our site and we wanted to make sure that our customers were aware of that. If we put up forum, we wanted them to know like, hey you can talk to other people in this forum. Just keeping them up to date on what’s going on with our company and trying to establish, you know, a two-way street. I mean, I think Twitter was a very important tool for us. It’s great for relationship marketing and customer retention. You know, I don’t have a ton of followers, I’ve got a few thousand but most of those are 50-year-old customers and those are people that, you know, feel like they sort of are in touch with Fit Fuel and what I’m doing on a daily basis and they’re much more likely to come shop with us because they have a personal connection.

Andrew: Were the forums helpful?

Interviewee: We never grew a huge forum and I still haven’t figured out the art of growing a forum or social network so they never really took off for us.

Andrew: Even though you had customers, even though you had a list of email addresses of people you could reach out to, you just couldn’t get them in there to form the community?

Interviewee: Well, I think you need critical mass in any community and we didn’t quite achieve that critical mass. I mean who wants to go in a forum when there’s really nobody to talk to. So at the beginning myself and 9 or 10 of my good friends were just having a conversation amongst ourselves trying to get it to look like there was a ton of messages on there and a ton of users so that other people would kind of jump in and join the conversation. I don’t know if we ever got to that point. Somebody told me a good rule of thumb is that you need 500 active users in a forum until it really starts to grow exponentially. Until then, it’s kind of a struggle. You know, it’s very linear just to sign up every new user and you get to a certain point where the growth kind of takes off because people feel like there’s a community. And every time they check it out, there’s going to be people active and online to talk to.

Andrew: You know what I’m hearing is that the forums don’t work as well anymore, but question and answer sites are the way to go. Do you think if you had a question and answer site that people would have come in and interacted there?

Interviewee: Yeah. I mean, I think that’s sort of talks to the fact that in a forum you’re interacting with a lot of people, you don’t really know who they are. They could be people with no expertise. It’s just a lot of opinions being thrown around and I think a question and answer forum is a lot better, especially if you have, you know, qualified, you know, professional people that are answering questions. There’s definitely a lot more value in that and I think that that’s something we definitely…
Andrew: I guess for a Q&A site you don’t need critical mass. If there’s someone with a question and he asks it he’s hoping someone will come and answer it, he’s not looking necessarily for a discussion and he doesn’t mind if you guys, the owners, are answering all the questions at first.

Interviewee:Right, I agree.

Andrew: Let’s see what we’ve got here. Ok, let’s go back to designing the website. So you had your friend, he developed the original version in OS Commerce, which is an open source, I think platform?

Interviewee: Yes

Andrew: Then what happened after that? What was the next step with the website?

Interviewee: The next step was, there’s a lot of things about OS commerce that we didn’t like. We didn’t like the checkout process, so we just scrapped the entire checkout process and he wrote that from scratch. That was the first thing that we did because we thought it was hurting our conversion. The way the website looks and was laid out we, got rid of a lot of things that OS commerce came with, because we thought it was a little too busy. We thought that just a very simple homepage, that was very clear, with clear navigation would be the simplest way so we just got rid of a lot of in the box features that OS Commerce came with. And we gave it a good looking skin, and we had a graphic designer put together some nice looking banners that we put on the home page to get people’s attention. But with that said, most people that came to our site were actually going to a product page, not the homepage. So I think that the homepage is a little bit overrated, depending on how you get your traffic. It’s not necessarily seen by as many people as your product page, or pages deep within your site, so we made an effort to make those as appealing as possible, and to make people sort of click through and add to cart.

Andrew: So maybe, let’s go into the development then, was making so many changes to an existing platform a problem.

Interviewee: It was a problem. I mean our web developer had no end to his complaints of OS Commerce. Not to say that OS Commerce is not a great platform for someone to get started with. It’s free, I love open source. The problem was simply that, we realized that, we really did want a custom platform. And we sort of got so far into it that we had an investment of our time. And it would have been very costly for us to just scrap it and start over. So working with an existing code base, especially when you have a good programmer, is a problem because he has to work within that architecture. And it might not be as conducive with your long term plans as you’d like it to be. So if you have the recourses, starting from scratch, starting custom, really gives you the flexibility to build it however you want to build it. By the time we were done, we had basically stripped OS Commerce down and built it back up again, but we were still left with a lot of remnants of code and a lot of things in there that just it would have been easier not to have in the first place.

Andrew: I See. Wow so, I’ve actually heard this from other people. That they’ll take an existing platform, they’ll adjust it so much that they’re rebuilding it as you say, and one of the problems with that is that you can’t then higher somebody new to come in and take over that site because they can’t figure out what changes have been made. Is it fair to say that one way or the other, based on your experience, you’re either going to use an existing platform, and use it pretty much as it exists, or you’re going to build it from scratch, but you can’t, you shouldn’t, modify a platform that exist. You shouldn’t keep modifying it, you shouldn’t try to rebuild it.

Interviewee: Right, I think that is the way to go. I mean one of the advantages to open source, and an existing platform, it’s a platform for a reason. It’s a platform because, in the case of open source and OS Commerce, it’s updated by a community of users, and this community of users is constantly improving it, Well if you just take it and make it something completely different you loose that advantage, and that really is the advantage of open source. So we were never, after a certain point, able to get the latest update of OS Commerce because we had a completely different website. So yes, if you’re going to use a platform, you should be using it for the things that it offers. In hindsight we definitely should have started from scratch.

Andrew: I talked to Roy Ruben, who was a consultant who worked a lot with OS Commerce, and I asked him why he built Magento and he said because of a lot of the issues that you’re bringing up. He created his own open source, or helped create his own open source e-commerce platform, and I can see why people love it now based on some of the issues that you’re telling me with OS Commerce. How did you find all of the different developers? You talked about rentacoder.com and so on, why actually before we get into how, why did you go from developer the developer?

Interviewee: The main web-developer we ended up bring on board simply didn’t have enough time he was a full-time employee at a big company as a senior programmer so he was moonlighting at night putting in 10-20 hours a week for us and he simply couldn’t keep up with our growth. He didn’t have enough time to build the website as fast as we needed it to get built. So we had no choice but looking other places. So through referrals, he would say I don’t have time this week but my buddy might do referrals through word of mouth. We would put up ads on craigslists, various job sites looking for interns. We actually found one of our best web developers from a community college in [xx] area who worked for almost nothing to just get some experience on his resume. Now that there is definitely some risk with that and we had some problems . We have all these certain relatively unexperienced programmers building a site, but we had a limited amount of resources,not a lot of money to pay web developers probably what they are worth. So we checked the wikigood. Run-a-coder[sp] was actually a great resource for us. So in our early stages we built a lot of our sites with run-a-coder[sp].

Andrew : What kind of rates were you getting with Rent-A-Coder?

Interviewee: It was project based. So depending on the scale of the project, I mean, if you work it out into an hourly basis it probably pays these people 8-10$ an hour for the amount of work that they are putting in. This can be find out from an experience programmer you ask.

Andrew: I use Guru.com and my brother told me about e-lance and both have been great. I am a big believer in outsourcing on a per project basis like you say but you are saying that it becomes a problem when you have all these different pieces built by different people.

Interviewee: Right

Andrew: That they don’t work well together.

Interviewee: Right. To give you one example, we were going through our site not too long ago, several months ago and our programmer found a piece of code that was throwing errors for the last year from somebody that have worked on our site on Rent-A-Coder a year ago. They actually left some debug code that if you went to a certain part of our site it was actually showing up. I mean nobody reported it to us because most customers that would probably see that page are not going to take the time to send us a ticker and say “Hey, guess what! You know one of your program, somebody have left a debug code on your website . They are just never going to come back and say “This company is not so serious. They got debug code on one of their pages”. So you got to be very very careful .To QA, to quality check everything that’s done is the most important thing. So if you are going to use sites like Run-a-coder[sp] ,you have to take the time to go through and make sure that the quality assurance aspect is there. We did not always take the time to do that. It’s not a great of a shortcut as it appears because you have to always check it.

Andrew : I see. If you could have done it all over again, I understand having your buddies start up the site, it makes a lot of sense. But after that what would you have done differently with the development?

Interviewee: Well , I think, in general we run the capital less[?] and I think, to build the kind of site that we wanted to build ,we needed a professional team in house full time, at least one or two people rather than trying to scrap together various people anything that we can get. So I would have started to raise money a lot sooner for web development purposes. I mean there is only two things we needed cash for and that was inventory and web development.

Andrew: Ok so that’s if you wanted to build it out as big as you imagined. What if you couldn’t have done funding? With the money that you have, what would you have done?

Interviewee: Well, we just would have tried to grow a lot slower. It’s sort of [xx] situation. We would have taken our time and just had our main web developer who is still putting in 15-20 hours a week, only had him work on the site or may be one or two other people. Certainly not an army of programmers all over the world and we just would have accepted the fact that “Hey we are going to go slower” but we are going to know that everything that’s done, we have a way to keep track of it. We have the peace of mind in knowing that that is being done by the top notch guy. We just simply would have accepted the slower way to build. It wouldn’t have impacted us that much because lot of the things that we are in such a rush to put in our site didn’t end up doing the [xx] anyway.They were certain experimental features so there’s really no need to do that.

Andrew: Like why?

Interviewee: We put on a video sharing component to our site. I think it was videos.fitfuel.com. This is all about the height of the YouTube craze. We said let’s get some videos shown in our website. So we took six months of development work using run-a-coder[sp] and probably 10-12 people built this big section of our site. It took a lot of time and energy.Sort of,liked the form, it never really took off for us because we didn’t take the time promote as much as we should have. We never reached critical mass and we could have used those resources instead to simply build a code [cuts off]

Note: [sp] – not sure of the right spelling
[xx]- inaudible
Interviewee: ….texture over site. You’ve got to walk before you can run and I think getting those core elements of your site in place. Good check-out, good landing pages, good SEO, is far more important than any fancy Web 2.0 features that you can integrate into your website.

Andrew: I see. From what I’m getting from all of my notes here and I’ve got pages and pages of notes here, as you can see while you are talking, I keep writing down. ‘Focus’ would have been the most helpful word to keep in mind. Right?

Interviewee: Without a doubt. And that’s sort of what I preach now as an entrepreneur. I mean, I got into Fit Fuel.com by accident because I wasn’t focused on healthy vending. I think that was…if I could do anything over again, I probably would have thought long and hard before I got myself into the E-Commerce business. And then once I was in it, certainly, the focus on inventory, the focus on web development, the focus in every area is extremely important. I mean especially when you are dealing with the businesses really as with many moving pieces as E-Commerce. You got to sort of have a purpose. And I think entrepreneurship for the sake of entrepreneurship without a solid purpose behind it, and I’m not just talking about a mission statement, I’m talking about a purpose in your life. And a purpose, of what, really, like, what is your goal? What do you want to do in the world? What are you trying to accomplish? You are sort of like a piece of driftwood, sort of going wherever the market takes you. Wherever the tide takes you. And it’s easy to get blown off course. So I think you need to ask yourself, before you get yourself into anything, what is it that I really care about? And what is my goal, long term? What do I really want to do?

Andrew: I see. That makes a lot of sense. And then before you add, let’s see what some of the other items are, before you add sexual enhancement products, you say to yourself, ‘How does this fit in with my goal?’ And if it doesn’t, you get rid of it, even if there is potential revenue there.

Interviewee: Right. I think that’s just an easy framework to follow. You just keep your eyes on the prize, and you evaluate everything. Just simplifying things is very easy. So just have some corpeteria[?] and it either meets it or it doesn’t. And if I would have been using that for instance to ask myself, ‘Hey, do I really want to take on sexual enhancement?’ The answer would have been no if I’m honest with myself. Because that really doesn’t fit in with the healthy lifestyle site that I wanted.

Andrew: I see. Would’ve it helped to have just one very clear tag line underneath Fit Fuel.com that said exactly what you were? That instilled discipline in you and also told your customers what you stood for?

Interviewee: Yeah. Well our tag line was ‘fueled by excellence.’ So that’s more of a touchy feely broad general mantra of what our customer service philosophy is. It didn’t speak to our tangible products as much as it spoke to the way we do business. And that’s okay. I mean, again, I use the example of Zappos.com just because they are also based in Henderson, Nevada. And I am very close with them. But their tag line is ‘powered by service.’ And that can really be applied to anything. I mean that really doesn’t keep them focused. ‘Fueled by excellence’ is the same way. If you are going to have a tag line like that, you have to have discipline in other ways. I think it can be very helpful to have a mantra whether it’s external or internal. Okay. It doesn’t have to be external, but just internally is probably more important than what your customers think. Cause that’s your sort of guide for what you want to do. Sort of your North Star. Eternally we should have had sort of a goal that was very clearly defined and written down.

Andrew: You know Guy Kawasaki, when he came here on Mixergy said the same thing. He said that mission statements don’t help. I think he’s even against business plans. But he says have that mantra. The one thing that you and everyone in your company and everyone who talks to you can feel. And the people in your company keep repeating over and over as you say. Do you know what your mantra would have been if you started over again?

Interviewee: The ‘fueled by excellence’ is our customer centric mantra. And I wouldn’t change that. I like to have excellence in everything we do. Every single phone call that we take, every single email that we reply to, we try to be excellent. Internally, we would have had a mantra that’s very focused on business decisions. And it probably would have been something like you know, we are going to stand for the utmost in quality and healthy living products. And we are not going to experiment with unproven stuff. And we would have sort of built our company around high quality proven products that speak to our healthy living sort of mantra. And if we would have done that I could have very easily taken sexual enhancement, for instance, and said, ‘Is this really high quality and healthy living focused?’ No, not really. I mean, I really don’t know, if this stuff even works. I don’t think anybody does. And I mean, I think, it’s a real stretch to consider a lot of sexual enhancement products, really the core a healthy living product.

Andrew: Seeing that the time is getting away from me, let’s talk a little bit about the funding. How’d you get funding? Why’d you get funding? Where’d you get —

Interviewee: I got funding in early 2008 from a couple of angels, a couple of angel investors who are very successful and they’re also from the ecommerce industry. So they had a lot of experience and they were…it was much more than money. They were able to guide me and be mentors to me. And a lot of the things I’m talking about and thinking about in hindsight are the same things they told me. Measure growth. Only sell what you have in stock. But they were very helpful to me.

Andrew: How’d you find them?

Interviewee: Just through a mutual friend.

Andrew: What kind of feedback did they give you? What kind of guidance at that stage?

Interviewee: I mean this is already a couple years into the company so the guidance was, basically, your only focus should be on customer retention. In ecommerce that’s the number one factor that determines whether or not you make money. Keep a long term focus and don’t worry so much about what your traffic is and whether or not you’re making or losing money today. That’s what the angel investment was for so I didn’t have to focus as much on that and invest in customer service. Because customer service is really the key to drive customer retention.

Andrew: So don’t focus on bringing in new customers. Focus on maintaining the ones that you have by making sure that they have a happy experience with you and want to keep shopping at your site.

Interviewee: I think if I had to choose I would certainly focus on existing customers more than new customers. In the early stages of the business, you have no choice but to get new customers. But once you’ve got a solid customer base, the most profitable thing that you can do is focus on keeping those customers happy. You’ve already got them. You know? Now you just need to keep them happy and that’s far cheaper than acquiring a new customer.

Andrew: And customer service. Keep investing in customer service is easy to hear but it seems hard to execute. How do you measure how much money you’re spending on customer service against how much money you’re getting back from it? How do you know that you’re doing it right?

Interviewee: We hadn’t put a huge focus on customer service in the first couple years of the company. The focus was on new customer acquisition. We used Skype as our customer service call center and we were sort of nonchalant about getting back to emails. And we just sort of did what’s expected of us as an ecommerce company and people, frankly, don’t expect a whole lot of customer service from most ecommerce companies. I think if you view customer service as an investment and not as an expense, really your retention rate speaks for itself. What percent — that’s really the best metric to understand ‘is customer service working or is it not?’ For the first two years, not a big emphasis on it. After we invested in customer service — we got a real call center. Okay? We hired extra customer service reps so that the phone never rang more than a few times before somebody picked it up. We spent more in training those customer service reps. A year later, our retention rate is higher than it was before. And really the only major difference that we made was an investment in customer service. And customer service takes a while to pay back. I mean, it takes at least a year; I would say even up to a few years before you see the payback from it but you’ve got to have that long term perspective I think.

Andrew: I see. And how did things end up with the company?

Interviewee: We…Fit Fuel ultimately closed down a couple of months ago. We did get angel investment but it was not a lot. And I think we ramped up far quicker than we should have with inventory and let our growth get out of control. And we did — we closed up and filed for bankruptcy two months ago. We simply weren’t able to sustain that level of growth and just didn’t have the cash to do it. We tried to raise more money but at the time that we tried to do it, which was late last year, it was not the best time to try to raise extra capital and we weren’t able to do that. So we thought that the best thing to do was to move on and onto bigger and better things and so forth.

Andrew: I see. And you’re coming here, you’re talking to a lot of entrepreneurs who are often, many of them are just starting out, some have already gone out and built the first versions of their site. What would you leave them with? What would you tell them based on your experience?

Interviewee: I would say that take a measured amount of risk. I went all in. I invested everything that I had. I went $200,000 in credit card debt. I laid it all out there. Take a measured amount of risk and be prepared to fail. Accept it because most entrepreneurs do. I think you really have to come to grips with that.