- What online and brick and mortar businesses are
- Why it matters to favor one over the other
- What criteria to use in making your choice of purchase
- The pros and cons of online businesses
- The pros and cons of brick and mortar businesses
When you’re in the market to buy a business, you’ll be faced with two basic kinds — brick and mortar businesses and online businesses.
One is the regular business of old times while the other is a recent invention of the dot com era. Even though online businesses are relatively new, they’ve created several millionaires and billionaires in the past couple of decades. But does that phase out brick and mortar?
Let’s take retail, for instance, traditional retail businesses located in a physical location (AKA brick and mortar) saw their sales grow by 6.9% between 2019 and 2020. eCommerce (those that sell over the internet) grew by 14% in the same time.
Are these numbers alone sufficient to make a case for buying an online business over a brick-and-mortar one? If you’re faced with a choice between the two, which should you opt for?
The answer: Perform a comparative analysis of the specific business and industry. Identify their pros and cons.
For instance, when you’re buying or starting a new dental practice, its distance to your target customers is an important factor. But this logic doesn’t exactly apply to a bookstore. That’s how Amazon took off.
Don’t make up your mind yet. Let’s explore this deeper.
What are the Two Options for an Acquisition Entrepreneur?
As we advanced with tech, many businesses have put effort into their online presence as they’ve done with their physical storefronts.
There’s no denying the fact that the internet is a vital ingredient in business today. COVID-19 added more emphasis to that point. Today, 16% of companies across the globe are 100% remote and online. However, this hasn’t put a dent in the importance of physical storefronts.
So, before you make your choice, understand your options better.
A brick-and-mortar store
A brick-and-mortar store or business has a physical location or storefront where customers can visit, make purchases, and interact with the brand. The customers have to commute to visit the store for shopping.
Brick-and-mortar stores have some pros and cons from the owner’s perspective as well as the customer’s perspective. Many of them also work on establishing a presence on the internet while maintaining their physical location. Think about Apple’s website and their Genius Bars.
An online store
An online store, business, or company is usually a small business that is leveraging the connectivity of the internet to operate. In fact, many online businesses are started by a single individual, then expand their operations and staff with time.
In essence, an online business executes its operations online and usually has no physical storefront. Having no physical storefront does not imply that the business has no office or operating unit. Instead, the public dealings and customer handling of such a business are remote.
Why Does the Mode of Business Matter in the First Place?
1. The type of product or service provided
The type of product or service is an unquestionably primary deciding factor. Think of a vet working online. They can book appointments and carry out some prognosis online but cannot render treatment services unless the pet is brought to the vet in real life.
But is it possible to run a business without having a physical facility? Actually, yes. Consider the fact that 47% of total apparel customers buy from large retailers.
However, if you think of an accounting services firm, a digital marketing agency, or even a podcast company, they can work 100% remotely.
2. The availability of resources
Access to resources is another deciding factor when an entrepreneur is starting a business.
For instance, if an accountant wants to start an accounting firm, the skill set will most likely be available, but labor resources and land for a physical office may be lacking. So the entrepreneur could decide to render those services as a one-person online business.
3. Proximity to the target audience
No business in the world can run profitably without customers. Therefore, the supreme factor in deciding the mode of business is the target audience. For instance, 30% of the direct-to-consumer brands consider physical presence as the current priority for them.
In the U.S. alone, 65% of shopping budgets are spent in physical stores. However, at the same time, 96% of Americans shop from eCommerce websites. Therefore, no matter what type of business it is, entrepreneurs will have to work on the physical and online presence alike. However, books, movies, music, and games are services most Americans prefer to buy online.
Now that we’ve established why it all matters, here are the pros and cons of brick and mortar business vs online businesses.
Pros and Cons of Brick and Mortar
Let’s start with brick and mortar…
1. Higher customer loyalty and retention
The customer is the ultimate boss of any business, and personalized experiences are critical for satisfying this boss. A satisfied customer is more likely to develop loyalty to a brand.
A study by Waterhouse Cooper revealed that 73% of shoppers value a good customer experience over any other service attribute.
A face-to-face encounter with the brand fosters this personalized experience and makes the customer feel connected to the business and staff. As a result, customer retention and loyalty usually go up. Besides, a physical location is more likely to be stumbled upon by local customers.
For instance, if you have a physical store, a window shopper passing by can sneak in to check your new arrivals. If they feel connected and your brand resonates with their needs, they might convert.
2. Customers love the convenience of a physical visit
Many customers prefer to buy a product after physical testing or hire a service provider after a meeting. One example of it is beauty products, shoes, and apparel. Although many online cosmetics stores provide a virtual try-on, nothing beats testing it on your actual body.
For home service businesses, there will always be a physical location. But that doesn’t rule out the fact that marketing such businesses today requires an online presence.
A study conducted by KPMG on the importance of retail stores in present times also highlighted similar results. That’s why physical locations are vital for home services like plumbing, HVAC, and electrical services.
3. No lead time
Have you ever been excited about receiving your new favorite headset you ordered online and then having to wait patiently until it arrives?
The lead time is often frustrating in online shopping for most people. However, it is a reality that cannot be denied. However, with the physical storefronts, you can just go to the store, grab the product, pay the bill, and bring it home.
The convenience of getting ownership of products instantly gives the physical stores the advantage of more customers.
4. Easy return and after-sale services
Returns and after-sale services are convenient for both customers and brands in physical business transactions. As a customer of an online business, you have to pay the return shipping costs in most cases, and the lead time is again a big issue.
In addition to this, when working with a physical location-based business like home services, chances are they’ll be around to help you beyond the time of service due to warranties.
5. A virtuous cycle of satisfaction
The productivity and profitability of a business will go up with increased employee satisfaction. The employees with high satisfaction are happier to serve the customers and show empathy toward them.
And how does this turn into a cycle?
When the customers have a satisfying personalized experience (thanks to satisfied employees), it turns into a virtuous cycle of satisfaction. The customers can talk to the salespeople in real-time to clear any doubts or get questions answered.
Besides, the advantage of trying out gadgets, apparel, beauty products, etc., further amplifies the experience, which adds to customer satisfaction.
A study by Glassdoor found a 1.2% increase in customer satisfaction with a 1-star improvement in employee satisfaction.
Now, the downsides of brick and mortar businesses…
1. Higher overhead costs
Brick-and-mortar business owners have to incur overhead costs they can avoid if they were 100% online. The owner needs additional capital to cover startup and overhead costs.
Utility bills, transportation costs, employee benefits, salaries for additional employees, etc., are extra costs physical businesses will bear compared to their online counterparts.
2. Higher cost of maintenance
Leads instantly abandon clumsy and unmanaged websites. Similarly, in the retail industry, store appearance and facilities provision are big players in the customer’s experience.
This applies to home service businesses as well. An unkempt or poor-looking business premise usually signifies to the customer that they’ll most likely be getting a low quality of service there.
Consumers have reported the influence of the physical appearance of the store on final purchase decisions. So if the store is rented, the rent expense is another monthly challenge for the owner.
3. Insurance costs
Property insurance, liability insurance, employees insurance, etc., are just some of the many insurance expenses a business owner must pay to keep the business running. Therefore, the recurring insurance costs are also a liability.
4. An online presence is still required today
The presence of a physical location doesn’t undermine the importance of an internet presence. This is still an additional expense that brick-and-mortar businesses of today simply cannot ignore, especially those businesses that rely on new customers to survive.
Pros and Cons of Online Business
Do online businesses really have the upper hand? Let’s find out.
1. A wider audience
This is a vast audience to reach out to. And the potential of your business to reach new customers is almost endless if your services or products transcend national boundaries.
We can’t say the same about brick and mortar businesses that can exhaust the population in their immediate area of business. But brick and mortar still have the option to open branches elsewhere. Nothing stopped McDonald's from doing it.
2. Selling online is cheaper
Selling online is also cheaper than physical selling. There are no or very few overhead expenses, employees’ salaries, and maintenance costs. The cost of starting an online business is also comparatively lower than that of the physical storefront. Overhead expenses like utility bills, insurance costs, rent, etc., can easily be bypassed in online business.
3. Marketing is convenient and cheap
When a business is operating online, it mostly depends on digital marketing avenues. And in comparison, the digital marketing channels are more cost-efficient than the conventional channels.
Therefore, online businesses are at an advantage in marketing costs as well. However, brick-and-mortar businesses can rely on geo-targeted digital ads to find customers in their area cheaply.
Of course, it is not always rosy with online businesses. Some disadvantages include:
1. The customer retention is low
The biggest pro of the physical store is higher customer retention and loyalty. The irony of online businesses is despite the wider reach, customer retention is the lowest at 30%. So, easy come, easy go?
This is usually because it’s difficult to dish out personalized experiences (especially with widespread privacy concerns), impossible for physical testing, and one-click availability of many alternatives.
2. Cyber security
Online businesses are the most volatile type of business.
The high volatility of online businesses relates to the dependence on the internet, cyber security concerns, and data integrity. Your business operations solely depend on the internet availability at the customer end and at the business end.
Besides, cyberattacks can violate your data integrity due to high dependence on cloud technologies to centralize your data.
3. Hard to build trust in online transactions
Cyber attacks not only breach and compromise business data but also steal customers’ data, including passwords, credit card numbers, etc. A whopping 58% of consumers do not want to shop online due to privacy concerns about online transactions.
Therefore, when you’re going to buy a business, you must take notes about secure payment channels and data integrity insurance.
4. Shipping time and costs
Therefore, many online businesses prefer the best logistics service providers to ensure a streamlined and seamless process. However, there is a high cost to be shared by businesses and customers in that case. As a result, the customers prefer physical shopping over online.
5. Complicated returns and after-sale services
A survey showed that 58% of the shoppers in the US avoid shopping online because of the difficult return process. As mentioned earlier, the return shipping costs, procedures, after-sale services for an online business and customers are difficult to manage.
6. At the mercy of big tech
This is not just about antitrust law infringement, but the amount of power big tech companies control has a significant impact on how businesses on the internet are run.
For instance, Google controls 92.47% of the search engine traffic. This is basically the primary way people would find your business online. And Google has algorithms (rules) for what search results to show to their users.
Of course, these algorithms are secret, but they’re subject to change and updates that can keep your business on top today and make you essentially non-existent the next. The volatility is just too risky.
Final Verdict: Which One Should You Go For?
Each business model has its own benefits and side effects. What’s great for one acquisition entrepreneur might not be the best for another.
Naturally at Acquira, we recommend opting for brick and mortar businesses, specifically home services because they’re more stable and less prone to sudden changes that affect profitability.
However, the final decision depends on your own needs and preferences. If you’re interested in talking with a member of our team about what type of business you should buy, reach out.
Acquira is a business acquisition in a box service. We help entrepreneurs buy businesses and we invest in them and their chosen businesses. We are here to help ensure that each business we work with is posed to make the biggest positive impact possible for its owners, employees, and community.