Financials of an E-Commerce store – Read this before starting your own
Have you ever wondered the kind of financial commitment required, right from selling your first product to making it into a profitable business and later on – a brand? We believe that armed with this info – one could start off and plan their business in an entirely different way for specific goals under different circumstances.
Startup Costs for eCommerce
Your costs/expenses running an E-Commerce store will come down to these things –
- E-Commerce Platform(Your Online Storefront)
- Paid Acquisition(Ads, Sponsorships)
- Product development, research
- Inventory(Manufacturing/Sourcing), Packaging
- Shipping, Payment processing + TaxesEmployee Payroll/Benefits(NA – in case of a single member operation)
- You also should be factoring in the variable nature of these expenses, which at times might rise due to various related reasons, Eg, Shipping costs and Customs duties to fulfill orders from a new country, Change in tax laws, Ad conversion rates going down, etc.
E-Commerce Platform –
Creating a store is one of the first things to be accomplished while setting up an E-Commerce business. Setting up a store can be further divided into a few sub-tasks.
Choosing an E-Commerce Platform
For a first step – this could get fairly complex. For starters – read Forbes’ feature on Choosing E-Commerce platforms, they’ve listed out various scenarios and reasons to choose any particular platform.
Shopify, WooCommerce, and Magento are the Most popular E-Commerce Platforms in terms of their Market share. While Shopify comes bundled with Hosting for all its plans, WooCommerce and Magento need to be hosted separately even though the basic version on both of them are free to use.
Lowest monthly cost to start off –
- Shopify – $29
- WooCommerce – $5(hosting)
- Magento – $5(hosting)
- Design and Content
Another important and impactful bit for building an E-Commerce store which ends up being ignored by the majority of new sellers that are going live, the design is a very crucial element contributing to a store’s success. It has to represent the brand’s ethos which in turn makes your store, your products look trustworthy and worth paying for.
Costs when it comes to Design depends on the knowledge and experience you possess in web development. If you don’t have any, the only option you’ll have is to buy themes on these particular platforms – which will lend designs and layouts to the store as per the theme, content can be modified as per needs. Costs can vary on many factors such as the platform for which it’s built, the complexity of the theme, functionality, etc.
- Lowest cost of a theme on Shopify – $150
- Lowest cost of a theme on WooCommerce – $0
- Lowest cost of a theme on Magento – $50
Acquiring customers for a new store organically isn’t easy, hence paid acquisition is the next best way to get yourself out there – the turnaround’s rather quick and you don’t have to keep waiting to build an organic audience for your store. What’s really crucial when it comes to paid campaigns is how and where you spend the resources. The key lies in identifying the channel that brings in the best results – which only happens through extensive testing. Below you can find a blueprint to test and scale Facebook Ads, courtesy XOR Labs.
Paid Acquisition doesn’t necessarily convert into sales – Acquisition can only buy you the customer’s attention, sales are brought in by wants/needs and trust. If your Ads are seeing good engagement rates and conversions to website visits, yet you don’t see good enough sales, there’s a good chance something’s wrong with the product itself or how it’s positioned.
Product research/development is possibly the most overlooked aspect of launching a successful E-Commerce store. It’s important to confidently be able to project/spot demand for the product you’re trying to sell, even before you get started with the process of setting up the store, minimizing the risk and cutting losses.
Bonus bit: How to narrow down on product using data
The goal behind all the research on a product idea that makes sense for you to sell(is easy to source, enough margins, clears regulatory standards across countries) is to be able to find a gap in the market where you can position your product. There are three steps to this –
- Find if there’s enough demand for the product
- See what existing products are like, pricing and customers complaints with it
- Draw out clearly where you’re better and can own that segment of the market.
- Pretty self-explanatory – Use tools like Google’s keywords planner and check for the number of searches the product you’re trying to sell. If the volume is greater than 10,000 with a bunch of relative keywords also exceeding that count, it means there’s enough demand for the product. This isn’t true for small-ticket products, in which case the number needs to be >100,000. Once you see enough search volume, you need to move on to see if where the competition lacks fulfilling that demand, be it quality, price or features. This can be done by scraping product reviews from marketplaces and other websites that sell competing products. Running sentiment analysis on this dataset will reveal how people feel about the product – you’ll end up finding more insights than you could imagine with that kind of data, which will then help you make crucial product decisions.
Once you’ve zeroed in on the product you’re going to sell – next thing you need to figure out is how to have the first set of prototypes built – this will be used to create marketing collateral for your website and emails featuring your product and needs to be done before the website goes into production.
Two ways you can get this done –
In case your product is fairly complex and not readily available with OEMs, you need to create a 3D model and have molds built as per specification, Googling this will give you the info you need
If the product is readily available with OEMs with small changes needed, you could approach OEMs(preferably in the same country)
Costs = < $100 for the first few prototypes(In case sourced from an OEM)
>$5000 to set up own manufacturing
Depending on the volume of orders on a rolling basis – you’ll have to stock the goods in advance to be able to ship them on time to your customers. Inventory costs will depend on variables like the demand for different products and variants during the time of the year, the number of variants and products your brand has, etc. The cost here will be a certain fraction of the order total for a week.
Costs = Variable
Shipping often is the biggest contributor to costs after the product itself – it’s for this reason some companies decide to charge shipping extra from the customers, as the cost widely varies as per the delivery address. Customers like the option of being able to shop from websites across the world – and store owners don’t necessarily want to take on a volatile cost component as it’d most likely shrink their margins. But according to research, extra shipping fees is the biggest reason for customers to abandon items in cart. Hence it makes sense to check of shipping costs of the geographies you’re looking to cover and price the product factoring in free shipping costs. Use integrated shipping tools like Shipstation, Shiprocket, etc., that aggregate multiple shipping providers and give you alternatives. Costs mostly vary depending on size and weight of the package and shipping priority/speed. Packaging costs also need to be factored in here – and should be done keeping your brand’s standards in mind.
- Domestic – $2 – $10
- International – $15 – $100
- Payment processing & Taxes
Payment gateways and processors charge a percentage of the transaction along with a fixed fee for accepting and transferring payments from your customers. Standard fees are anywhere between 1% – 2.5% of the transaction and $0.1 – $0.3 in fixed charges, depending on the volume of transactions and number of accepted payment methods, payouts to the seller accounts, etc. Taxes are a variable component, with rates totally dependant on the geography of the manufacturer. For bigger ticket products shipped internationally, customs duties might be applicable and to be paid by the consignee.
Author Bio –
Nikunj Thakkar – I am the CEO and Co-founder at Dataone Innovation Labs, currently building Shoppr, an AI-powered Analytics platform for E-Commerce. As a passionate technologist, I love giving back to the startup community and lead Headstart and Google Cloud Developer communities in Ahmedabad.