Lessons learned from a failed internet cafe business

Several months ago, we finally closed our little internet cafe business. I wrote about the viability of the net cafe business many years ago and actually started one about 2 years ago. Despite its eventual failure, I learned a lot of lessons from that little experiment.

I’d like to share these lessons with my readers and, hopefully, it will also help them decide when they want to get into the business in the future.

• Price Competition is the biggest killer. Filipinos are a very price-sensitive bunch of people. They will look at price as the top consideration. As such, internet cafe owners will bank and fiercely compete in this front to the point that they will almost always operate at a loss just to get market share.
• Home-court advantage. A lot of the community or baranggay-based internet cafes operate under the hood of their houses to cut down on the expensive rent. They then pass this “savings” to offset the cost of operation (DSL subs, electricity, labor) leaving renting competitors at a dis-advantage. I’d stay away from locations where this is a very likely scenario, unless otherwise it is to your advantage.
• Reliability of internet connection. You need the best connection uptime as possible. Otherwise, you’ll bleed. In the two years we’ve operated, we encountered a number of downtimes. A single downtime would last several days to a week. That’s already a huge blow to the bottom line. Instead of getting a single huge pipe, I’d suggest getting a redundant connection that can be combined or load-balanced. That way, if one connection is down, there’s a backup to take over.
• Forces of Nature. Natural disasters are to be expected but the most common of them all is the yearly typhoon and floods. During Ondoy, a lot of the shops near our location were closed down due to the flood waters that remained for several weeks. We were fortunate our place wasn’t affected and we benefitted from the influx of displaced customers. This year, we saw a lot of typhoons and floods that a single incident can take 2 to 5 days operational downtime. Next time, I’d pick a better location where there’s less likely to get affected by these.
• Business Intelligence. We struggled with how to make the best margins. Will operating 24/7 make us better returns? What’s the optimal number of workstations needed to maximize customer traffic at peak hours. How do we effectively manage bandwidth to improve internet experience between gamers, chatters, surfers and YouTube streamers.
• Preparing for upgrade cycle. Our first upgrade was in 2009. The work stations needed to be upgraded after two years. This is to cope up with faster processors, RAM and graphics cards. That does not include the already busted and out-of-warranty computers and monitors. By the end of the cycle, you should have enough funds to do the upgrade. If not, then it’s a losing proposition.

Lastly, and this is my biggest lesson — invest in money you are willing to lose. That way, you are able to make a sound and objective judgement when it is needed. You are not too emotionally attached to the business and you can easily let go when it’s time to let go.

Will I go back and do this again? Absolutely. When that happens, I think I’ll be wiser and hopefully succeed.