On the surface, an ecommerce business seems like it would come with relatively few costs. When starting an ecommerce venture, what else do you need besides a computer, an internet connection, and your product or service?
As it turns out, you need quite a bit more than that. Ecommerce business expenses are varied and often hidden, and business owners need to be prepared for every possibility. Neglecting to plan ahead for these costs can result in logistical snafus, legal headaches, and outright business failure if you aren’t careful.
The line between success and failure is thin for all small businesses, and ecommerce is no exception. Keep an eye on the following 15 expenses if you’re planning on selling your product or service exclusively online:
Website building and hosting
Here’s the expense you knew you were going to have — or did you? There is much more to creating an ecommerce site than simply starting up a WordPress blog. Online shoppers expect ecommerce companies to have robust web pages, but even a “just the essentials” site will need to pay for a domain name, an ecommerce platform for handling payment processing, SSL certification, and hosting.
There is much more to creating an ecommerce site than simply starting up a WordPress blog.
Building out your website with a beautiful design, great copy, and customizable widgets can cost extra as well. Therefore, the true cost of a website is variable, but a good one likely won’t be cheap.
As mentioned above, you’ll likely need to enlist the help of a third-party ecommerce platform if you want to sell products online. In fact, you may forgo your own site altogether and simply sell your wares via third-party platforms. But if you do, you’ll have to pay to be listed.
Each platform will ask for either a flat monthly subscription or a percentage of each sale, plus additional final value fees or referral fees. This can range from tens to hundreds of dollars per month per platform.
Just because you operate online doesn’t mean you’re exempt from the permits and licenses that brick-and-mortar businesses need.
Permits and licenses
Just because you operate online doesn’t mean you’re exempt from the permits and licenses that brick-and-mortar businesses need. Your online business will need a general business permit (good for your city or county), which ranges in cost depending on your state and industry.
You may also need to pay for a Doing Business As (DBA) license, professional trade licenses (for businesses like financial planning and insurance), and health inspection certificates if you prepare and sell food products.
Don’t forget that as an online business, you’ll need strong, around-the-clock access to the internet, and you may put an additional strain on your electric bill as well. Every extra dollar you must spend here is a dollar you can’t spend elsewhere.
When you’re just starting out as an ecommerce business shipping products to customers, count on your shipping costs and capabilities being unpredictable. Only larger businesses, dealing in bulk with more established shipping histories, can typically cut deals with carriers. So until you reach that point, you’ll have to account for large shipping bills.
Count on your shipping costs and capabilities being unpredictable.
In the meantime, hit up your ecommerce platforms to see what kind of bulk deals they can secure for you, and look into cutting costs by getting free packaging from large carriers.
Returns and refunds
Another now-expected perk of online is shopping is easy, and often free, returns. If you’ve got a generous return policy (which is highly recommended if you’re competing with the Amazons and Targets of the world), you’ll have to allow for people to make those returns for a variety of reasons—and sometimes foot the bill for restocking or even disposing of it entirely.
Return costs are bound to be higher for ecommerce businesses—the rate of return is about 20% for ecommerce purchases, almost double that of brick-and-mortar.
Equipment and asset maintenance
What are the “fixed assets” you use every month to maintain your business? If you’ve invested in full-scale production equipment for your products, or purchased new laptops, business will take a hit if any of those assets go offline at any point. Paying for maintenance, disposal, and replacement of your assets is an oft-overlooked expense.
Your inventory will shrink — it’s just a part of doing business. Inventory shrinkage is when you lose products to damage, theft, misplacement and other issues before it can get to the customer. You can reduce shrinkage by investing in inventory management software that tracks your products from origination to a customer’s front door, but that’s still an expense to consider.
As your inventory expands, you’ll need to spend more and more on that inventory.
Another inventory-related cost is what you need to spend to keep your inventory on warehouse shelves while you wait to sell it. As your inventory expands, you’ll need to spend more and more on that inventory — the carrying costs include rent, insuring your products, and even opportunity cost as you tie your liquid capital up in unsold inventory.
Marketing and advertising
If you’re starting a venture from scratch, marketing and advertising can end up costing way more than expected. The average marketing budget is about 7-12% of revenue, but some prefer to spend a fixed amount.
Your marketing efforts are limited only by how much you want to invest in them.
Marketing and advertising for an ecommerce business takes many forms: blogging, combined with SEO efforts; social media marketing; targeted ads on social networks; email newsletters; hiring designers to work on your branding such as logos, colors, and packaging; writing persuasive copy on your website; and much more. Your marketing efforts are limited only by how much you want to invest in them.
There are many helpful subscription software services that an ecommerce company might enlist. Subscription services are useful because they are cloud-based — accessible from anywhere while remaining secure — and can scale as your business does.
There’s Quickbooks or TurboTax Self-Employed for accounting, Slack for communication, Trello for organization, Intercom for customer service, and HootSuite for social media management, among many others.
As an ecommerce business, you will accept payments entirely by credit card or via online wallets. And that often means paying some sort of transactional or processing fee for each purchase. This cost of securely routing a customer’s payment from their card to your account is often included in packages offered by ecommerce platforms, but read the fine print to ensure you know what you’re getting.
More than 60% of small businesses have experienced a cyber attack.
Cyber attacks against small businesses on the rise: More than 60% of small businesses have experienced a cyber attack such as a malware infection or hack. That’s likely because small businesses have more vulnerabilities that are easier for cyber criminals to expose and exploit.
The cost of getting hacked can be crippling, so ecommerce businesses should invest in security measures apart from what ecommerce platforms offer such as a firewall, encryption, and training employees (and themselves) in best practices.
Again, you may feel that because you don’t operate in a physical space, you don’t need insurance. But you will still need general liability insurance, product liability insurance, and perhaps business interruption insurance in case a disaster messes with your supply chain.
As a small business, you will of course need to file and pay your federal and state income taxes on whatever you make. Between understanding your tax rates after recent law changes, and figuring out whether or not you need to collect and file sales tax (different states have different rules for collecting out-of-state sales tax and those rules go into effect at different times), you may want to enlist the help of a CPA.
As you can see, an ecommerce business is hardly without its expenses. You’ll need to cover myriad costs and fees to stay compliant, efficient, and operating. Be sure to build these expenses into your model, and you’ll find your cash flow much more stable and predictable in the long run.
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