Building an online business has never been easier, more accessible or cheaper. Many existing businesses with physical locations are expanding their online operations or establishing an online presence for the first time. More and more businesses are moving their operations entirely online, finding that physical locations are no longer necessary. A lot of new businesses go virtual early on.
E-commerce has seen steady growth in recent years, with its market share growing at an even faster rate during the COVID-19 pandemic. At its peak in 2020, e-commerce accounted for 17% of total retail sales, according to the US Census Bureau.
Starting an e-commerce business requires both physical and virtual assets, including computers, physical and virtual storage space, domain name registration, and website hosting. Many tools and resources are available to help you start your own e-commerce business. The following provides an overview of the expenses typically associated with starting an e-commerce business, as well as estimates of what you can expect to pay.
You can operate your new business as a sole proprietorship or, if you have business partners, a general partnership. Although this is the simplest business start-up, doing business this way puts you at risk of being personally liable for the company’s debts. Another option is to create a business entity, such as a limited liability company (LLC), which will protect you from personal liability and provide a framework for your business operations. There are several rules and regulations to be aware of if you choose to go this route, you may want to consider the cost of an attorney to help you form your LLC. Lawyers typically charge between $1,000 and $3,000 to help you through the process. You can also try an online LLC formation service. It’s usually an easy setup and the cost starts from $49.
In addition to the cost of the training service, each state has its own filing fee, ranging from around $50 to over $700.
You might need certain government licenses or permits to operate your e-commerce business. Local ordinances may regulate the types of businesses you can operate from your home. State law may require you to collect sales tax from your customers. The federal government regulates certain industries, such as agriculture, so you may need a permit or license from a federal agency to sell certain products online.
The cost of these permits and licenses can vary widely and is almost impossible to predict. You could be responsible for a fairly small amount, like $25-50, or several thousand dollars.
You will need a service to host your website. Many services charge an initial setup fee of around $50 to $100, followed by hosting fees that you pay monthly, semi-annually, or annually. Hosting costs can average between $10 and $300 per month.
The web hosting service consists of two main components:
- Store the code, media files and other elements that make up your website; and
- Management of web traffic generated by your site.
A web hosting company may offer plans with different levels of storage and bandwidth. An inexpensive plan may not provide you with enough bandwidth to handle a large amount of traffic. Plan accordingly.
Your web hosting service may include domain name registration, or you may need to register the name through another company. You must register the domain name you want to ensure that you have exclusive use of that name. The cost of registering a name depends, in part, on demand for the name. This can range from around $10 to several thousand dollars per year.
The Internet Corporation for Assigned Names and Numbers (ICANN) oversees the registration of domain names. It provides a search tool that you can use to see if the name you want is available.
An e-commerce company’s website is usually its most important asset. Your website is the main representative of your brand. It can generate leads for you and retain your customers. A visually appealing and functional website will keep people coming back.
There are plenty of inexpensive tools available to get your e-commerce website started, but this is one area you want to make a good investment in. A professionally designed website can include customizations specific to your business. You can probably expect to pay around $5,000 to $10,000 for a well-designed website that has everything you need to get started. The low cost option will be between $29 and $299.
Costs associated with inventory will be unique to each business. This is usually the most significant cost for retailers, and the cost of purchasing inventory itself is only part of the picture. You need to factor in the cost of tracking orders and stocking inventory and supplies, as well as the costs associated with shortages.
Other factors may come into play with certain types of goods. If you sell crafts, for example, your materials may be cheap, but each item you sell requires hours of work on your part. If you sell perishables, you need to consider what it will cost you to spoil unsold items.
Thanks to digital payment systems, a well-designed e-commerce website will do a lot of the work for you. Once users arrive on your site, the software can guide them through every step of the process, from finding a product to paying. It can handle many steps in the shipping process, such as determining the amount of postage needed and generating mailing labels. All you have to do is package the product and drop it off in the mail.
Payment processing services may charge you an application fee and setup fee. They may also charge a minimum monthly fee if your total sales using this service are below a certain amount. Transaction fees are often based in part on a percentage of sales. A standard transaction fee is 2.9% of the sale amount plus a $0.30 fee. These costs can add up, especially if you make many sales for small amounts of money:
- If you sell an item for $100, a payment processor charging the fees described above will charge $3.20, leaving $96.80.
- If you sell twenty items to twenty customers at $5 each, the payment processor will charge a fee of $0.445 for each transaction. This would take a total of $8.90 from $100 in sales, leaving you with $91.10.
Any e-commerce business that sells physical goods will face shipping costs. Even though you pass the costs on to your customers, you are responsible for ensuring that the goods reach the customers.
Shipping charges cover the cost of getting a product from its location in a store, warehouse, shed, garage, or closet to the customer’s mailbox or doorstep. It includes at least four components, some of which must be paid for in advance:
- Packaging materials, including boxes, envelopes, protective materials, tape and labels
- Work associated with the packaging of items sold
- Postage or other shipping or courier costs may depend on the weight and size of the package, the distance to its destination and external factors such as the price of gasoline.
- Import/export fees for international sales
An e-commerce business has several options for managing shipping costs:
- You can calculate the actual cost of postage or other shipping costs and charge it to the customer.
- You can charge the customer a flat rate for shipping, regardless of the actual cost.
- You can offer free shipping, in which case you pay for it yourself.
Accounting may be one of the most challenging functions for e-commerce businesses, but it’s also one of the most important. An e-commerce business that sells to a domestic customer base may have sales tax obligations in multiple jurisdictions. Failure to charge and remit the correct amounts of tax and file the required returns can result in significant fines.
A bookkeeper and an accountant with experience in e-commerce may be essential. The regular services of these professionals could cost several hundred to several thousand dollars per month, but the cost could be worth the risk of fines for non-compliance. Running an e-commerce business can allow you to avoid many of the expenses typically associated with retail, especially overhead costs like rent. You will still need to invest money to get started, and you will have expenses to keep the business running smoothly. Tailor Brands can help you on your way.
Alexia is the author of Research Snipers and covers all tech news including Google, Apple, Android, Xiaomi, Huawei, Samsung News, and more.