How Much Does It Cost to Start an e-Commerce Business?

how to set up an ecommerce business

The e-Commerce business is beaming with opportunities in today’s world with an excellent chance at making profits. The independence, flexibility, ease and profitability are what is driving people towards this virtual portal for businesses of all kinds. However, a lot of planning and execution goes into the making of an e-commerce business. To make an e-commerce business profitable, many important decisions need to be made, including choosing the right product, manufacturing or sourcing it, storing and shipping, branding, and last but not least, costing. You have to tread the path carefully as many of these decisions have long term financial impacts too, so

It is critical to know about the costs involved at each juncture, from launching to selling the products. Here is a guide to help you estimate the basic costs of starting an e-commerce business along with some tips to save on unnecessary expenses.

  1. Domain name

This is the website name or URL that you choose for your business. These domain names are quite inexpensive. Very often, portals like GoDaddy would have sales selling domain names of as little as $0.99. Some of the other places to purchase domain names are Cheap Domains, 1&1 or from the hosting provider. Whenever you are looking for a domain name, try to purchase .com domain name as they are the most common and people will always default to the .com version of any website when they want to find it in a browser.

  1. Hosting

This is the fee you need to pay to a hosting provider to host your website. It is vital for any online portal as it will not be connected to the internet without it. There are two types of hosting- shared hosting and private hosting. Shared hosting is cheaper and its costs start from $3.5 per month and can go up to $40 per month. In this format, you share your server with other people on the shared hosting plan. It works out well for a new business that has about 100,000 visits every month. If you plan to expand the business, then you will need private hosting. It will have better speed and less downtime.

In private hosting, you pay for your private server and its costs start at $200 per month. It is much more reliable if you have a large footfall. If you are just beginning your e-commerce business, you can work with an e-commerce portal like BigCommerce, Shopify and WooCommerce as they have their own hosting servers. Shopify charges begin at $29/month, for BigCommerce, it starts at $29.95/month, while WooCommerce is free, but you have to pay for extra features and buy separate hosting.

  1. Inventory

Inventory or product line is the most crucial part of an e-commerce business. After all, you cannot run a business without having something to sell. The amount spent on inventory will differ a lot depending on if you use dropshipping and how much inventory you want.

In dropshipping, you have to take the product offerings that the vendor offers. So when a customer buys from your online store, you forward it to the supplier, and they will ship it directly to the customer as if it had come from you. In this method, you sell products without needing to store, pack and ship the inventory. This means there is almost nil inventory cost. The main problem with dropshipping is restricted branding and no customization. You cannot add any special touches to the product. Also, if your supplier is short of products, you will have no inventory and angry customers.

On the other hand, if you decide to have your own inventory, you have better control over the management and branding. You will know how much stock is available and order more if needed, much in advance. However, you will need ready cash to buy a product and also spend on storing, packing and shipping them.

It is a good idea to know the minimum order quantities and lead times while finding your inventory sources. Also, have a mix of local and global suppliers as the former will have faster delivery times and you will not run out of stock while the global supplier will be great for bulk orders.

  1. Payment processing

To have a payment portal on your website, you need to pay a commission to them. As an e-commerce vendor, you have to accept payments online and for that you need to work with one or more middlemen. They offer technological support for payment processing. They connect with the shopper’s payment medium to clear the payment.

The vendor’s payment processor does this work. The payment processor accepts the payments online and manages the entire transaction. They link to the customer’s bank and see if it is suitable. They also identify who the shopper is and if there is any fraud involved. Every vendor charges a different processing fee, but it comes to 2-3% plus $0.30 per transaction. on average

 There are different methodologies for payment, such as:

  • Interchange fees

These fees are non-negotiable that Visa and MasterCard ask for any payment processing.

  • Transaction fees

These are flat payments per transaction that amounts between $0.5-0.30 per transaction.

  • Processor markup

This amount is over and above the interchange fee that payment processors take for running the business.

  • Monthly fees

These are flat charges that every e-commerce vendor has to make for using the payment gateway. They come to about $10-25 monthly.

You can also go in for a payment aggregator company like Stripe. They are third party processors that let you accept credit cards without setting up any merchant account. The fees include a percentage from the credit card sales and a transaction fee. In this case, you make a single payment to the service provider and don’t have to bother about monthly fees, interchange rates and markups. This works well if you are making less than $100,000 annually.

However, if you are processing more than that, it’s best to get a merchant account as it will be more economical and you will get better customer service. The average rate would come to about 2.2% and $0.10 per transaction.

  1. Permits and licenses

Though you have an online business and no physical store, you still need to get many licenses and permits before starting the virtual store. Most of the licenses come at a cost. These costs depend on the entity type, products being sold and the state in which you are based. Some of the states charge low fees, ranging between $10-50, while others can ask up to a few hundred dollars.

You definitely need to apply for an EIN (Employer Identification Number) to separate your personal and business finances. You don’t have to pay if you apply from the IRS. After that, you have to obtain business licenses and permits to run your business legally. You don’t have to register your business with the state for a sole proprietorship or general partnership. However, you will have to register the company with the state and get a general operating license for any other business entity type.

If your business is home-based, you may not need many licenses, but you might need a home occupation permit to operate legally. Some other licenses you might need for some of the industries are:

  • Professional and trade licenses for specific industries.
  • Health, safety, and environmental permits.
  • Signage permits.
  • Sales tax permits.
  • Building and construction permits.
  1. Software tools

To run the business seamlessly, you will need software tools for marketing, operations, marketing and others. You could consider a plethora of tools, but it is wise to see the requirement and then decide on a few essential ones like for list building, accounting, email marketing and consumer support.

The amount you pay for each tool in each category would depend on the tool. For instance, for accounting, Xero would cost between $20-40 per month. Similarly, for list building, Sumo would be free for the basic services and at $39 monthly for advanced services. Email marketing could be free for basic accounts and go up to $20 per month. Customer support tools with LiveChat could be between $16-50 monthly or at Olark at $17 per agent.

  1. Branding

Branding a company is essential as it represents the company, its values and ethics. You can cut costs and do the branding yourself, including designing the logo, planning visuals, creating the website and its content. However, it would involve having a dedicated team to do this job.

You can simplify this process and outsource it to a branding agent. Though it might be an expensive alternative, you would be assured of quality. You might have to pay between $5000-20,000, depending on the agency. It is best to do extensive research on branding agents and find one between this range. Some of the popular choices are Tailor Brands, Upwork, Canva and 99Designs.

  1. Store design

Web design is an extension of the brand. It is the salesperson of your online store and the better work it does, the more profits you will earn. It would be a good idea to outsource this job entirely or use a hybrid format.

You can get a store design template online and customize it to fit your brand. This would save a lot of money. You can choose Envato. It has a good choice of templates and they cost between $20-60. You could also hire a web designer to make your store look unique and adapt it to the brand. However, it would be a more expensive alternative. You can also go in for a freelance portal like Upwork. It would be a more cost-effective option.

  1. Marketing and advertising

Marketing and advertising is an essential element of having a successful business. It involves using different mediums like social media, emails, SEO, content marketing word of mouth and more to publicize the brand. As per U.S. Small Business Administration, about 7-8% of the gross revenue should be set aside for marketing and advertising. You can break up the marketing budget based on your goals and product niche. It is essential to know how each marketing channel can offer you a return on investment.

If you are a start-up, you can try out different free marketing and advertising options and once your business settles down and you understand what works well for your domain, you can opt for the paid ones. Some of the common marketing strategies and their expenditures are:

  • Email marketing

There are many ways of using this simple yet effective tool for marketing. You can create DIY campaigns without incurring any costs. You can also outsource email marketing and add dynamic content, segmentation strategies, behavioral triggers and more. In such a case, the costs would be more.

  • Pay-Per-Click ads

PPC ads work well but can lead up to a considerable amount, but these ads target individuals looking for certain products. This makes the ads relevant and the chance of getting a new customer is a lot more. The average PPC on Google is about $1 for 1,000 visitors. Thus, a lot of companies end up paying 40% of their marketing budget on this. Google ads come to an average of $9,000-10,000 per month.

  • Facebook ads

These are similar to PPC ads and target only those consumers who show interest in your product. The average cost of Facebook ads is between $0.5-3.5.

  • SEO marketing

This form of content marketing helps bring up your rankings and people can find your portal easily on the search engines. The costs here vary depending on if you are doing SEO optimization or hiring somebody else.

To summarize

The figures mentioned are tentative ones to make you understand the costs involved in starting an e-commerce portal. All these costs should be kept in mind when researching and deciding what product to sell and its pricing. You must make enough money on every sale so that you get a profit after paying for the processing fees, shipping fees, marketing costs, product costs, etc. These costs might increase or reduce depending on the scale of the business. It is best to start lean and check the viability of the business. Gradually, increase the investments as the business begins to flourish.

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