A common mistake is to misjudge the worth of something we cannot touch. It is easy to see a website and imagine it is easy to build, maintain or grow simply because it looks simple on our screen. But, we know this is not true.
The real cost of an ecommerce investment
In reality, ecommerce websites need a well thought out plan. Effective ecommerce websites have budgets for operations, logistics and marketing.
The most well known ecommerce businesses in the world started with a lot of capital and business backing.
Let’s start with Amazon. In 1995, Jeff Bezos raised $8,000,000 and in 1997 he raised more money when his company went public selling at $18 per share. The Amazon we know now is profitable, but it took 9 years in business to turn a profit. Their tremendous growth is due to reinvestment. The company has aggressively reinvested revenue to fuel growth for years.
Chewy.com, the pet industry’s ecommerce giant, received seven different rounds of funding. The total investment reached $451,000,000 to get their business up and running. They are still not profitable.
The publicly traded home goods and furniture ecommerce business Wayfair isn’t profitable. Additionally, Wayfair has been through several investment rounds in recent years. In 2011 the company received $165 million from investment firms. In 2014 the company received $157 million in pre-IPO financing. Then, the company raised $300 million during their IPO. Yet, due to the high cost of logistics, operations and marketing they are not making any money right now.
If you’re in the jewelry space you’re likely familiar with BlueNile.com. This company raised $62 million from investment partners to get started. In 2004 their IPO earned them $76.7 million in additional investment capital.
The list goes on and on of heavily funded ecommerce startups. They usually take years to become profitable. In fact, most of the e-retail companies disrupting traditional retail share a similar backstory. They raised a lot of money and then pursued growth. Often, these businesses operated at a loss for years. Remember, the companies we discussed are the ones that became successful. For all the sustainable ecommerce companies there are many more that failed.
What is your budget?
The goal is not to scare you away from pursuing an ecommerce strategy. It is to identify that there are tangible costs involved in selling products online. As a part of your strategy, think critically about the budget you’re willing to commit to this venture. Prepare and expect that the costs may increase before you ever start turning a profit.
Where are the costs coming from? What should I expect?
The costs vary depending on your strategy. It is critical that you think through your strategy in detail. Identify the specific cost structures associated with your processes. Here are the three most common cost categories associated with managing an ecommerce website.
Customer Acquisition Costs
Getting customers for your online business costs a lot of money. Much more than you are expecting. The customer acquisition cost includes all the money you spend trying to get new customers to buy from your online store. Common forms of customer acquisition cost are:
SEO related services
Direct mailers and print ads
In-store displays promoting ecommerce
Sales promotions, discounts and incentives
These costs all contribute to growing your online customer base. The first step to calculating your customer acquisition cost is to add these costs together to arrive at a total. Then, you can use this simple formula to create a rough estimate of the cost of customer acquisition.
Customer Acquisition Cost = Marketing and costs associated with acquisition / Total number of customers acquired
This is a simple formula to help you get started. As your website grows you will want to use more advanced calculations.
Acquisition costs vary depending on industry, strategy, market size and existing customer base. The cost of acquiring a single new customer can range from a few dollars to a few thousand dollars.
No matter what strategy you use for your business, expect to pay to get customers. Expect this cost as an initial and ongoing cost for your business.
Someone has to run the website. If the store owner runs their own website then there is an opportunity cost. When you’re spending your time running a website then you’re not spending that time on something related to the physical store. If you have a web agency like New Media Retailer running your website you have to pay them. If an employee is running your website then you have to pay them. What does it cost to run the website on an ongoing basis?
- Updating content
- Featured products
- Customer Service
- Customer emails
- Order Cancellations
- Order Refunds
- Troubleshooting order issues
- Customer phone calls
- Customer account issues and changes
- Web Development & Apps
- Installing and troubleshooting apps
- Software licenses
- Improving SEO
- Editing web pages
- Adjusting layouts
- On-Site Promotion
- Discount Codes
- Email Collection
- Marking Sale Items
- Inventory Management & Data Entry
- Price changes
- Discontinued items
- Adding new items
Someone needs to manage these processes. The most successful retailers designate an employee as well as a quality web agency.
Do justice by your business and plan for these costs ahead of time. Figure out the cost of the employee and the amount of time necessary for this project. Also, assuming you do not have a web developer on staff, research the web agencies available to work with you. Calculate their costs and budget it from the start.
Who is going to handle pick, pack & ship? Every order that occurs on your website will need to be picked up from a warehouse or off your shelves. Then someone will have to pull out the cardboard boxes, scissors, tape and box up the item. They will have to drive it to UPS or FedEx (or coordinate pickup) and buy a shipping label. Then they will ship it off to your customer and return to the store.
Are you going to do this? Is a store employee going to do this? Is a dropshipper going to take care of this part for you?
If your process only involves local delivery and store pickup then your costs may be less. Yet, even with store pickup there is still a cost. Someone needs to pull the products off the shelves and set them up somewhere for the customer to pick up.
No matter what option you choose, the process of picking, packing and shipping an order is a part of ecommerce. Be sure to plan accordingly and calculate the cost in advance.
These three forms of cost will be a part of almost any online sales strategy. Remember, this is a basic outline. Think critically about how ecommerce fits into your existing retail business model.
Consider all possible costs and labor necessary before you build and launch a website. You’ll be thankful you did this cost analysis beforehand and not afterwards.