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PayPal - The E-Commerce Starter Kit, Part 3. The Downside Dr. Ralph F. Wilson Web Marketing Today - Aug 11, 2009

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PayPal Website Payments Standard has a lot going for it that can help new online merchants. In part 1, I explained how their order buttons have become much more sophisticated over the years. In part 2, I described some of their shipping and order management features. PayPal has come a long way.

But it has serious weaknesses if a growing online store were to rely on PayPal as its primary e-commerce tool. These aren't fatal flaws, just limitations. You must realize that PayPal is primarily a money exchange system, not a shopping cart. It is excellent at its core business. But it's important to know what PayPal is not, so you can assess how you to use it in your business.

1. Not a Database-Driven System

First, PayPal is not a database-driven ordering system -- at least not a database merchants can easily access. Let me explain the implications.

Serious online merchants with 25 to 500,000 products for sale online set up a spreadsheet or database that contains their product information. More likely they create such a database using specialized software. On a desktop computer they make changes to the database, such as price increases, inventory on hand, adding or deleting a product, altering color choices, initiating special sales, etc. These changes then show up on the website when the new product database takes the place of the older product database, usually (for smaller merchants) by uploading the new product database to the website.

PayPal stores your order buttons in an online database of sorts, but you can only access it by using the web interface. It works okay if you're only making one or two changes. But if you have a lot of products, you'll be making changes constantly -- and their web interface will drive you nuts. It's slow!

2. Not a Content Management System

Second, PayPal is an ordering system with some shopping cart functions. It is not a Content Management System (CMS) that will create product pages and manage your whole store. This is not a weakness in PayPal; it just describes PayPal's limitations.

Small merchants often create product pages one at a time -- writing product descriptions, adding product images, and placing them on a product webpage. The PayPal order button code is pasted below the description and picture. Such product pages can look very nice, very professional. As a matter of fact, that's how I produce product pages for my limited number of e-books.

Such a system works well for a few products, say up to 25 products, give or take a few. Changes are made on individual pages. So far so good.

But when you have 50 or 500 or 5,000 products, you'll go crazy trying to maintain the system. You need an e-commerce system that will not only handle the ordering functions, but also manage the product pages. At the core of such systems is a sophisticated product database.

Above, I noted PayPal's limitation in not having an easily accessible product database. To show you what I mean, observe the product parameters that affect order buttons on the left side of the chart below. What PayPal lacks are the database fields that enable you to construct template-driven product pages that can be produced by a built-in Content Management System. (Below, I have vastly oversimplified the merchandising sophistication offered by the better software, but you'll get the idea.)

A product database that includes both types of fields allows you to do automatic product page generation, enabling you to maintain a large online store in much less time.

Again, this isn't a criticism of PayPal, only a description of what they offer and what they don't. As a small merchant ordering system, they do quite well. As store management tool (which they don't really try to be), they're weak.

3. Inflexible, Hosted Ordering Interface

My third point is that PayPal has a rather inflexible ordering interface that can be confusing to shoppers. Merchants can customize it a bit by adding their logo, selecting background colors, and border styles. This way a customer isn't completely shocked when arriving at an order page that is visibly different from the merchant's site.

But your ability to customize the order page is merely cosmetic. The basic functionality and wording can't be altered. Yes, you the merchant can designate which types of payments you will and will not accept. (For example, you may not want to accept e-checks, since they take several days to clear the bank.) You can select which currencies you will accept (a feature more powerful than nearly any other ordering system). But you can't change the basic configuration of the order page.

PayPal's order interface is inflexible. But, in PayPal's defense, most hosted shopping cart ordering systems are fairly inflexible, too, since flexibility produces complexity that can overwhelm merchants who aren't familiar with the many options. You only get real flexibility when you have an ordering system with open code that a programmer can manipulate to suit your particular e-commerce needs. Some of the strongest conversion rate gains can be made by testing and streamlining an order interface in this way. But with PayPal you can't change it.

PayPal formerly required customers to open a PayPal account in order to make a purchase. Now they only offer that as an option. But even asking some newbie customers to make this choice can cause confusion.

In my opinion, PayPal's order interface is clunky and can be confusing. There, I've said it. But, yes, it's workable. Millions of transactions a day are processed through it. But I still think it's clunky.

4. Inadequate Order Management System

As I discussed in part 2 of this series, PayPal has some basic order management functions, especially shipping interfaces that are improving.

But overall, PayPal's order management functions are quite limited. (So are those in many shopping carts.) If you want to run a growing, active e-commerce store, you'll need a more robust order management system than the one included within PayPal itself.

5. Claims of Arbitrary Policies

I hear complaints from time to time about how PayPal has shut down a merchant's account arbitrarily and won't listen to reason. While early on, PayPal had pretty bad customer service, I think they've improved dramatically. When I hear complaints about PayPal, I am aware that I'm only hearing one side of the story. I also know that there is a small but active PayPal-hater community out there that overstates the evils of the "tyrant" -- just as there are rabid Microsoft-haters and Google-haters. Here's my view: PayPal works very hard to keep its system secure and fraud-free. When it sees merchants doing things that skid along the edge of its policies, it may shut them down. Hurrah! It keeps the system honest. I don't believe that legitimate merchants have anything to fear from PayPal.

PayPal as a Payment Method

If you're using a third-party shopping cart system to manage your store (recommended), PayPal can work well as your sole payment method -- for a while. Your shopping cart software manages the products and pages, and (hopefully) provides some degree of order management. But when your customers get ready to check out, they are taken to the PayPal order page, then sent back to your store when their order is complete.

Though PayPal's pricing has improved for merchants with revenue under $10,000 per month, I think you should consider getting a merchant credit card bundled with a payment gateway when you reach about $2,000 to $5,000 monthly sales revenue. [PayPal has calculated this revenue tipping point to be substantially higher.] The transaction is now handled on your own site and can be controlled more easily. In addition, there is more order management software equipped to handle traditional merchant credit card payments than software compatible with PayPal-only payments. Note that PayPal offers their own merchant account and payment gateway products: PayPal Website Payments Pro and PayPal PayFlow Pro (acquired from Verisign in 2005). I've used PayFlow Pro for more than a decade with great results.

But even after you get your own merchant account and payment gateway, I strongly urge you to include PayPal as one of your payment options. An increasing number of people prefer paying by PayPal because it doesn't require them to disclose sensitive credit card information to every merchant. Make it easy for these customers and you might even gain a few more sales, since some people keep "mad money" in their PayPal account, ready to spend.

Summary

For the reasons I outlined in part 1 of this series, PayPal Website Payments Standard is an excellent place for small merchants to get their feet wet with e-commerce, while avoiding any up-front investments in merchant accounts and payment gateways. Its shipping features will help small merchants get their packages prepared for shipment with handy tools.

However, for a growing store with 25 or more products, you really need to be looking for a database-driven shopping cart with a Content Management System. While PayPal's simplicity is an advantage when you're first getting started with a few products, its simplicity will frustrate you if you try to extend it beyond its sweet-spot.

But even though you outgrow PayPal's payment buttons in favor of a database-driven online store, you'll want to retain PayPal as one of your payment options. PayPal is at heart a marvelous, innovative, and powerful money transfer system that you shouldn't ignore.

Dr. Ralph Wilson is one of the early pioneers in Internet marketing and e-commerce. He has written a dozen books on topics such as shopping carts, search engine optimization, landing pages, local Internet marketing, e-mail marketing, etc. which are available online.