What are the costs of running an E-Commerce Business?
Digital does not necessarily mean less expensive. This is why it is essential to look at the different elements that come into play once you start selling online. In this article, we look at the different types of costs that business owners and managers need to look out for when launching their e-commerce website.
In our previous post about the 4 Questions to Ask Yourself Before Jumping into E-Commerce, we highlighted the importance of breaking down your expected costs in order to ensure a positive return on investment.
Establish your One-Time Costs and your Recurrent Costs:
What’s the difference between one-time costs and recurrent costs? A one-time cost refers to a payment you have to make only once. When it comes to e-commerce these mostly correspond to setting up your platform. One-time costs can include purchasing your site’s domain name, as well as designing and developing your website.
Recurrent costs refer to ongoing payments. Among the recurring costs, it is important to differentiate between fixed costs and variable costs. A Fixed cost is one that does not change with an increase or decrease in the amount of goods sold; this can be the rent you pay for your warehouses, for example. A variable cost is one that fluctuates.
When it comes to variable costs, you need to determine what your cost driver is. Customer service is an example of a variable cost. The driver here is your sales volume and your service-level. The more you sell, the more customer claims you receive. As a result, you need to account for a bigger customer service team. Similarly, by determining your supply chain’s service-level, you will be able to adjust your team’s size according to your expected customer base.
What is My Working Capital Requirement?
Your working capital requirement refers to the amount of liquidity you need in order to run your operations. It is the cash flow needed to pay the bills every month, which include paying your suppliers, your rent, your employees etc. The working capital requirement is not to be confused with investment money needed for growth. Nonetheless, generally speaking, whenever a company grows so too does its working capital.
Now even if a company has a healthy revenue, it can be driven down by its working capital. In other words, if a company does not have sufficient cash to operate its business, its operations can shut down from one day to the next. These operations should be taken into account whenever an important financial decision is made. So it is important not just for your accountants or Chief Financial Officer but more importantly for your managers to understand that whatever decision they make will impact the working capital, which is crucial for the survival of your business.
Launching your E-Commerce Site as a Startup vs as a Traditional Businesses:
The cost of e-commerce differs depending on whether you are a new startup, or an established traditional business. Going into e-commerce can be more costly for traditional businesses than it is for startups. As an e-commerce startup, you have somewhat of an advantage because you are building your organization from scratch. As a result, you can completely invent your own processes and culture. So you can incorporate e-commerce into your company’s ecosystem from the get go. You won’t have to spend money on re-training your staff.
On the flip side, if you are a traditional business seeking to go into e-commerce, you will need to introduce a new way of doing things to your organization. This means you will have to do some change management, which refers to preparing and supporting your teams in making an organizational change. Change management is an additional cost for traditional businesses to take on. Business owners will have to invest in the necessary trainings and education to teach their employees new tasks related to e-commerce: including packing, shipping, managing a website, community management, online customer service… to name a few.
A Smart Way to Cut Costs: the MVP
A way for companies to pace their costs when it comes to e-commerce is to start by building a minimum viable product (MVP). An MVP is a business development technique in which a product with only the basic features is launched in order to gather initial feedback. Once these learnings are collected, you can tweak your product or offering accordingly to be able to scale up in the long run. Collecting insights from an MVP is more agile and less expensive than launching a full-fledged product on the market, which increases costs and risk of failure due to incorrect assumptions.
Instead of burning through your money, starting with an MVP is a more prudent way to go about things. It will help you to determine if there is an audience or market for your product, and how much this audience is willing to pay for it. This will allow you to determine whether your assumptions about your market, product and price were correct. Starting on safe grounds when launching an e-commerce business is priceless. Once your target is set hitting it will be that much simpler.
A quick recap of the different costs that go into launching your own e-commerce platform. First off, you have both one-time and recurring costs. The latter is divided between fixed costs and variable costs, which fluctuate according to cost drivers. Secondly it is important for e-commerce businesses to have a good grasp of their working capital requirement. This consists of the cash flow needed to run operations. Finally, additional cost may arise depending on the nature of your business as traditional businesses have to bear the additional cost that comes with change management. We recommend starting off with a minimum viable product (MVP) as this allows you to test the market and pivot accordingly.
Incorporating e-commerce capabilities into your website can help you test the waters before jumping into a full-fledged e-commerce platform. This can be done with the installation of a plugin or by joining an affiliate program. Make sure to check out Bookwitty’s WordPress plugin and our affiliate program to learn more about these agile e-commerce solutions.