The first year in business is the hardest, because there’s so much you still don’t know. And when you’re starting a new business, what you don’t know can hurt you. One of the hardest, but most important things you need to figure out in the planning stage of starting a new ecommerce business is how much you should budget for that first year.
Even if you’re planning to keep things simple to start and work from your house, starting a new business costs money.
Even if you’re planning to keep things simple to start and work from your house, starting a new business costs money. And if you don’t either have enough in savings or get a loan that covers your needs, your business will fail before you manage to get it off the ground.
Estimating your first-year ecommerce expenses isn’t easy, but it helps to have a list of all the different factors to consider when working it out. We’ve put together a list of the main areas you need to remember when creating your first-year budget:
- Tech and Software
- Inventory Expenses
- People You Hire
- Building Costs
- Permits and Licenses
- Shipping and Returns
- Marketing and Advertising
- Taxes and Fees
This guide will help you do a better job of covering your bases in your estimate, so you’re more likely to set yourself up for success.
1. Calculate your website costs.
The center of every ecommerce business is the website. It’s the main way customers will interact with your brand, so you have to get it right. Creating and running a website comes with a mix of upfront and ongoing costs.
You’ll need to pay for the website’s design, either by hiring a professional designer or subscribing to an ecommerce website builder that makes it easy to do yourself. In addition, you’ll need web hosting and a domain name for your website to be accessible online.
In order to sell products on your site, shopping cart software that powers the checkout process and enables payment processing is also required. And for the sake of keeping your customers sensitive financial information secure, you’ll need an SSL certificate.
You need to fill your website with images and words that will sell your products and brand.
While some of this will overlap with the marketing and advertising we’ll talk more about later, you also need to fill your website with images and words that will sell your products and brand. That includes product photography, a brand logo, and website copy designed to convert your visitors—all of which you either need to pay someone to develop, or do yourself.
Putting a number to all this is tricky, since what each of these things costs depends on a lot of different factors. To figure out what the cost will be for your business, spend some time researching your options to find the products and plans that are the best fit for the business you have in mind. In some cases, as with Volusion, you’ll find a few of these things bundled into one package, resulting in a better price and easier billing process.
2. Consider your tech and software costs.
We’ve already mentioned some of the software products you’ll need for your website, but your needs will go beyond that. To regularly access and update your website, you’ll need a good computer and strong internet connection. To keep track of your income and expenses, and make sure you report everything right come tax time, you’ll want to invest in accounting software.
If you’ll be hiring employees right off the bat, consider if you’ll need project management or HR software products. To track your own productivity and that of anyone working for you, time tracking tools are another valuable resource. Inventory management software will help you stay on top of what’s in stock, and when it’s time to order more. And there’s a whole host of tech tools that are important to different types of online marketing you may want to try, like social scheduling and email marketing software.
Try to work up a list of every type of software you anticipate needing, and start researching the available options to see what yearly costs you can expect.
Try to work up a list of every type of software you anticipate needing, and start researching the available options to see what yearly costs you can expect. In some categories, you can find products that have free versions that may provide what you need when you’re just starting out, and only start to cost you when your business grows to the point where you need more features. If you need to keep your spending tight in those early days, researching which of these freemium services have a good reputation can help you make your budget go further.
3. Figure out your inventory expenses.
The items you sell will cost something. If you’re reselling items you purchase from someone else, then the costs will be fairly straightforward. If they’re items you create yourself or hire someone to make, then your costs will include the materials as well as the labor. And do consider your own time in terms of the cost—running your own ecommerce business won’t make sense if you don’t get anything back for the time you spend on it.
In addition of the cost of the items themselves, consider storage costs. If you’re building a large-scale ecommerce business, then you may need to rent a warehouse. For smaller operations, there are inventory storage businesses that let you rent as much space as you need, or you can look for office space that includes enough room for your inventory.
As your business grows, anticipate needing to invest in somewhere to store your products.
For smaller-scale operations, if you have a big enough house, you may be able to keep inventory in your home or garage in those first few months when you need to make your money go further, but as your business grows, anticipate needing to invest in somewhere to store your products.
4. Consider your workforce needs.
Starting and running an ecommerce business requires both a lot of work and a wide variety of skills. One person can’t usually balance all of it. So figure out what you need to hire other people to do for you.
If your ambitions are big and you have the startup capital, you’ll want to build out a team of employees who can take on tasks like customer service, marketing, and inventory management. For ecommerce entrepreneurs starting smaller, skilled contractors can do some of the work you don’t have the time or skills to do yourself. And make sure you include the costs of hiring a lawyer and accountant in your budget here as well, they provide crucial services every business owner needs.
5. Consider your building needs.
One of the big benefits of starting an ecommerce business is that you can save on the costs of a storefront. That means spending less in real estate and retail workers. But depending on the scale of your ecommerce business and how many employees you expect to have, you may still want to rent an office space for you all of you to meet at.
In addition to the upfront cost of renting a space, consider the cost of utilities, furniture, cleaning and general maintenance of the space.
In that case, you’ll need to research the cost of office space in your area in the size that you’ll need. In addition to the upfront cost of renting a space, consider the cost of utilities, furniture, cleaning and general maintenance of the space.
If your workers can do much of their jobs remotely, you can save the money of a full-time office, but still meet in person occasionally at coffee shops or by paying for coworking spaces when needed.
6. Determine the permits and licenses you need.
In many localities, certain permits and licenses are required to start a new business— even an ecommerce one. The requirements will depend on where you live and the particulars of the business you’re starting. This is one of the areas where hiring a lawyer is important.
The last thing you want is for your business to be felled by legal issues. Learn about all the legal steps you need to take and factor the costs of doing so into your budget.
7. Factor in shipping and returns.
While having an ecommerce business means you get to skip a lot of the big costs of a physical store, the tradeoff is dealing with shipping. You do have the option of passing shipping costs onto your customers, but that leads to higher rates of cart abandonment. Shouldering some or all of the shipping costs by offering flat fees or free shipping can increase your sales, but you have to make sure you factor the amount you’re paying for that into your budget.
90% of consumers expect free returns.
In addition, 90% of consumers expect free returns, so you have to decide if you’re willing to cover the cost of return shipping as well and include that in your calculations. And some of those returns will come back in a condition you can’t re-sell, so be prepared to write off a certain amount of inventory.
8. Create a plan for marketing and advertising.
Before your website can make any sales, you need people to find it. The internet is crowded with ecommerce businesses, so committing to a full marketing and advertising strategy is essential. To start, that means developing your positioning and investing in great copy and design for your website that’s designed to increase conversions.
Ongoing, it means doing some mix of:
- Content marketing
- Search engine optimization (SEO)
- Pay-per-click (PPC) advertising
- Social media marketing
- Email marketing
You can figure out which tactics make the most sense for your business, but know that you need to plan on spending time and money on getting your website in front of the people you want to reach. Research the cost of marketing consultants or agencies who can help you out and look into how much to set aside for paid advertising.
9. Don’t forget taxes, fees, and loan interest.
If this list is making you realize you’ll need to look into getting a small business loan, then that adds one more cost to consider: loan interest. If you’re able to cover your costs between your own savings and money from investors, you still need to make sure you consider how much of your earnings will go toward taxes and ongoing fees.
Make sure you figure out exactly how much the services you use take from each sale, and factor those costs into your planning.
A good accountant will steer you in the right direction when calculating your taxes. As for fees, most payment processing apps take at least 3%. Make sure you figure out exactly how much the services you use take from each sale, and factor those costs into your planning.
10. Add another 20% to your total.
Going through this list will help you create a pretty thorough estimate of your first-year ecommerce costs. But there will inevitably be issues and expenses you didn’t see coming. That’s just the nature of life and business.
To give yourself enough of a cushion, assume your actual costs will be higher than the number you have down now. If you don’t end up needing that full buffer, then you’ll end up with extra money to put back into your business at the end of the year. If you do, you’ll be glad it’s there for you.
Good Ecommerce Planning Leads to Success
Starting a new ecommerce business is hard, but it’s a lot easier if you take the time to create a realistic plan to guide you. Knowing what to expect your first-year costs to be can make a big difference in how prepared you are to face the challenges of running a new business. And preparation is one of the most important ingredients in success.