What are the costs of starting an online business?

Published on August 11, 2013 What are the costs of starting an online business?

Starting an online business requires considerably less startup capital than an equivalent brick and mortar store due to lower overheads and barriers to entry. That does not mean that starting an online business is free and as with any business there are costs involved in registering and setting up your business structure, finding suppliers and acquiring stock for sale, distribution and marketing. There are also a big factors that are often overlooked: training costs and the overall value of your time.

Starting point – understanding your business strategy

There are many common initial and ongoing costs of starting an online business. Two important factors that will determine your overall costs are the way that you set up your business to run, and the way that you manage your stock and promotional activity.

• Costs of different business structures

  Structuring decisions include questions like will you be a “company”, “partnership”, or “sole trader (sole proprietorship)” business (each have different initial and ongoing costs)? Will your business be registered for tax/GST? Will you have employees or buy services from other companies?

  The decisions you make about your overall structure will affect your need to budget for quarterly tax/GST payments and your accounting costs.

• Your marketing strategy will drive stock choices and promotional costs

  Consider the following example: Let’s say that you wish to be the cheapest provider of the products that you sell in the market and plan to undercut your competitors. In a competitive environment, this may require a degree of aggressive pricing and promotions as any existing competitor in the market that currently competes on price may retaliate by dropping their prices further or increase their marketing spend on pay-per-click (PPC) advertising to “drown out” clicks to your website.

  If you haven’t allowed for a large marketing budget and you are following this strategy, you may need to hold more stock on hand in order to keep your per-unit costs lower. The alternative? Follow some alternative strategies that do not compete so heavily on price like bundling, targeting a specific sub-group of customers (market niche), partnering with another complementary online business, or providing some additional service that your competitors do not.

  The cost of this service needs to be factored into your overall costs of starting an online business.

Where do you start in determining your strategy?

You need to do a sound competitive analysis and understand what they are doing and where you have an advantage. This doesn’t have to be a written essay, but some bullet points on a notebook page will help you get it absolutely clear in your own mind as to where you stand and how you will compete.

Where do you start?

Your first step is understanding who your competitors are. You need to think broadly here – you will look at direct competitors who are other businesses selling the same products or brands that you sell online in your country. You should also think about others who are selling those products in a different market, or other products that those customers may buy instead (substitute products). If you don’t know where to start, you could enter your product or service name into Google (by going to your country-specific Google page, e.g., google.ca or google.com.au) and see what businesses come up first for that search topic.

Once you know who you’re competing with, how do you go about researching them?

Researching and Analysing Competitors

If doing market research seems daunting, one easy place to start is to do a quickly jot down your business Strengths and Weaknesses, and along side that evaluate the market opportunities and competitor threats that you can see. This kind of analysis is known in marketing circles as a SWOT analysis – it stands for “Strengths, Weaknesses, Opportunities, and Threats”.

• Your strengths and weaknesses are things about you and your business.
• Your opportunities and threats are external to your business (for example new market directions, areas that your competitors aren’t competing in, the chance that new competitors will come into the market, government regulations).

To research your competitors try visit their websites and see how professional their websites look. Ask yourself questions like do they have clear policies? are their shipping prices fair? who are they targeting? how are they competing? Put yourself in the shoes of that customer: what type of prices would they expect to pay? what impressions would they have? what promotions are they running? All of these things will impact your marketing strategy.

Think also about potential new entrants. If you’re thinking about starting an online business in this industry, will others go through the same thought processes as you? What makes you unique? What unique strengths do you have? How many more people could enter the industry and sell those same products? What would that do to your business? Would it matter? What would it take to make it seem too difficult to new entrants to come into this market?

Creating barriers to entry might cost you something (for example, a trademark or patent on your products and/or services) or you might need to invest in partnering with another company or having more stock than it would be profitable for a similar new entrant to have. What is applicable will vary from industry to industry, but it’s important to understand these factors as they will influence your marketing strategy, inventory costs and overall cost structure.

You may wish to go back and update your strengths, weaknesses, opportunities and threats analysis with this information.

Costs of Online Business

Inventory costs

Where will you be sourcing your inventory? You will have to factor the costs of postage from your supplier to your stock storage location and the way that you will work with your supplier can make a difference on this. It’s cheaper per unit for example to buy stock in bulk, but you might have to hold certain minimum amounts. If you’re buying from overseas and not your home country, there are exchange rate calculations to take in to account as well, and for bulk purchases of stock.

When planning your business, don’t let it overwhelm you. Break it down into manageable chunks as it can save you a lot of frustration and additional cost at a later time.

Online specific costs

In addition to stock and business overhead costs, what are the costs specific to starting an online business? Here is a brief summary of some common costs and typical amounts for a small business:

• Domain Names – $20 to $60 for a two year registration of a .com.au domain – depending on your domain name provider (or $12 to $20 for .com domains).
• Website Design – can be between $500 to $5,000+ depending on your web designer. There are different charging schemes for different designers depending on how much design assistance is provided and whether you are forming an ongoing relationship with the company or not. Some might have no up front design fees but give you no design assistance either – so you get just a do-it-yourself editor and instructions. So know what you are getting for your money and don’t assume that using the free templates that come with a website will give you a website that can convert more visitors than a competitor who gets a unique look for their site.

If you choose a website provider who gives you a do-it-yourself website design tool, you will have to factor in the time it will take you to do your own design or the cost to get someone else to design it for you ($2,000 – $5,000+). If you just go with the free setup and built in templates option, you might not have the time to deliver the exact look that you want or your customers expect and end up having to either buy a website template for your site and then customize it ($200 – $800+ depending on the cart platform and provider), or finding someone else to do that for you.

• Ongoing hosting and support
  Allow $50 – $200 per month including tax/GST for your package costs to cover secure hosting and support. Your hosting costs will vary depending on the amount of disk space that you need and the amount of traffic allowance that you are given every month. If you are using a hosted online shop solution, then your provider will take care of the cost of security updates and maintaining the server including the cost of the minimum quarterly security compliance scanning (PCI DSS) as required by credit card providers and banks. Make sure that your web hosting provider includes emails in their services, as not all providers may do this. You will need email addresses on your shop domain name to present a professional and complete look for your online store.
• Payment and Shipping providers
  Your payment provider and bank will usually take a percentage or fixed fee as part of your transactions costs. This applies whether you have a payment service like PayPal/Stripe/Square or a payment gateway option and merchant bank account combination like SecurePay to accept credit cards through your store. Shipping costs must also be taken into account. Australia Post, for example, charges for up to 500g with tracking are at the time of writing approximately $8 per package or approx. $14 for up to 3kg, with your own packaging. The advantage of using Australia Post (or if you’re in Canada or in the USA, Canada Post or United States Postal Service (USPS)) is its coverage and relative speed, but there are many courier-based options that can give service and pricing advantages, so it can pay to shop around. Make sure you choose a shopping cart provider that supports your payment or shipping provider already, so you don’t have pay extra to have a payment or shipping provider integrated into your store (some providers charge you for Australian providers or do not support them). Our shopping cart, Ozcart Ecommerce, does support the above (and much more) and does not charge extra.
  When items go over 1kg, the cubic weight of the package will usually apply which is a standard weight calculation based on your package dimensions rather than the weight on the scales. Make sure you take this into account if you have large or heavy packages to send.
• Annual SSL certificates
  Allow $70 to $150 per annum, including tax/GST, for your SSL certificate.
• Promotion
  This is a major cost of doing business online and an area you should really focus on. If you want to gain long term visibility in the market, you will need to either invest in your own time in building your search engine rankings through creating quality content for your online shop (through great descriptions, additional pages of content) and through building links to your website through your natural business associations, social media, and others recommending your products. If you hire a third party company to assist you, this can range between $100 – $1,000 per month or more depending on whom you choose, the competitiveness of your market, and your objectives. You need to shop around to make sure you get the best deal for your business situation, so that you can clearly measure what you spend and what you get back. Today’s landscape generally requires some kind of investment in social media marketing, so you need to consider the cost of belonging to any social media services that are relevant to your industry, or the costs of advertising on websites like Facebook.Pay per click advertising like Google Ads, Facebook advertising or listings in price comparison sites like myshopping.com.au or getprice.com.au can be expensive but can give you some early traffic up front to help spread the word about the launch of your business. Many businesses continue to use these services after they grow to supplement the work they are doing to build natural traffic to their site. How much you need to spend on online advertising depends on your industry and its competitiveness and how hard it is to convince a potential shopper to buy your products (complex products may take more visits and therefore cost more). Don’t skimp on your online promotional budget or you could have difficulty breaking into your market niche.Apart from online marketing, try getting a spot in your local or country newspapers by paying for ads or a press release (i.e., get an interview with a journalist). You can also advertise your business in local classified ads (Craigslist, Kijiji, etc.). Early on, it can pay to experiment with different marketing approaches to see what works for you and what gets your company name out there.
• Trust marks
  One of the hardest things to do online is to convince a sight-unseen buyer that your business is a legitimate operator. To help you with this, there are companies like Trust-e, Comodo or GeoTrust and many third parties who can provide your shop with a clickable popup to verify your identity as a legitimate business that really cares about your customer’s security and privacy. These can make a difference – especially in a competitive or well established market.
• Photography costs
  If your product supplier does not provide high quality product photos, or you don’t want to use them (so your competitors don’t recognise where you are buying from), then you may want to engage a professional photographer to take high quality shots, or invest in the equipment and time to learn to do this yourself. Great and unique product photos can help highlight your particular products, and give the buyer more confidence in your website.
• Don’t forget standard business costs
  Many businesses starting up for the first time (whether they’re online or offline) are not familiar with tax, superannuation and budgeting for tax payments. Not budgeting for payments to your country’s tax organisation (Australian Taxation Office (ATO), Canada Revenue Agency (CRA), Internal Revenue Service (IRS), etc.) can cripple your marketing expenditure once your website is already up and running, so it’s very important that you budget for making your statutory obligation payments right from the outset in your initial year of business. You will also have to budget for your standard business costs such as:
  • Business travel – your costs to the post office to post your items incurs extra petrol on your car.
  • Stationery – packaging, packaging tape, printer ink, a shredder, electricity used running your computers or laptops.
  • Internet and Phone costs specifically for the business.
  • Computer software – your Word-processing and Spreadsheet package (Office 365, etc.), photo editing software.
  • Email hosting service – if you opt for a paid service, such as Microsoft Exchange, G Suite, Zoho Mail, and so on. Note: Ozcart includes free email hosting with most plans.

Work out your profits

Once you have a good idea of your overall costs you can estimate how many items you expect to sell online through your store and work out the expected profit. This does not apply to all industries or businesses but as a general rule of thumb, less than 3% of the visitors to an online store will convert into customers, so you need to need to understand how many customers you need to get to your store in order to sell enough products to cover your costs.

Sell for success

Selling online is very exciting and generally has lower overheads than bricks-and-mortar stores, but you should always approach starting an online business with the same level head that you would going into any new business venture: do your planning carefully, know your market and customer, evaluate your competitors, find a great stock supplier, create a compelling and inviting website and out-market your competitors. Understanding your costs and your bottom line will help you achieve this.

You can give Ozcart, our 15+ years tax-compliant, SSL-compliant, hosted shopping cart a go and see how it can benefit your business. Try our demo and let us know what you think!