Too often I see people jumping into their online store dream without treating it with the proper preparation and respect it deserves.
Trying to get something done on the cheap, yet expecting quick, big results.
You need to ask, would you be doing this if you were embarking on running a physical shop?
The success of an online business really depends on the right investment of time, money and resources into setting up the most effective e-commerce shop for your business.
When starting up an online business, it can sometimes be easy to forget that the hard earned money you are investing into your new E-Commerce store needs to be compared to that of a physical street front shop.
So what really is the true cost of an online store versus a physical shop? Lets try work that out.
As there are so many variables, in my research I have tried to compare running a small and effective online shop with that of a comparable local small sized shop.
For the sake of this exercise, let’s assume both businesses are selling fishing rods to people in Sydney. And let’s further assume both businesses sell about 500 different products and make a 50% profit margin.
What's the true cost of an online store vs a physical shop?
Ok let’s set the scene...
Business A: Street Front Fishing Rod Shop
Business A employs 2.5 Full time staff to man the shop and rents a $4,000/mth 100 square metre shop on a main road in Sydney.
As it is on the main road, Business A gets plenty of street visibility and loads of walk in customers. It's main customers are really limited to the local area as they rarely get customers from further abroad.
Let’s also say Business A has an annual revenue target of $550,000.
Business B: Online Fishing Rod Shop
Business B, being an online business only needs to employ 1.5 Full Time Staff, runs its business from home.
Having no physical store, Business B also rents out a double car size storage for $400/mth for their products.
Being an online business, Business B needs to put quite a lot of energy into promoting its products online through paid digital marketing. Also being an online business, they sell to customers all around Australia.
Let's say Business A has a smaller annual revenue target of $350,000.
Of course there are a whole range of general costs that businesses need to pay regardless of whether they have an online presence or a street front shop.
Some of these costs include:
Purchase of Inventory
Insurance, Licences, Registration etc
Bank Fees, Workers Compensation etc.
Logo and other Graphic Design
Set Up Costs
So what are the costs to set up each business?
Let’s compare the initial investment both businesses need to make to get up and running.
* Please note, these exclude the above generals costs and for the sake of this exercise I am assuming that Business A is taking over an existing premises, hence doesn’t need to build a brand new shop.
Business A: Street Front Shop
Shop Fit out: $50,000 (Typically $30,000 to $150,000)
Shop Signage: $3,000 (Typically $2,000 to $10,000)
Business B: Online Shop
Website: $12,000 (Typically $5,000 to $25,000)
Monthly Ongoing Costs
Business A: Street Front Shop
Rent: $4,000 (Typically $3,000 to $6,000)
Electricity and Rates: $400 (Typically $300 to $800)
Staff (2.5): $12,500 (Based on $60k/yr per FTS)
Website Hosting and support: $150 (Typically $100 to $300)
Digital Marketing & Promotion: $3000 (Typically $500 to $5,000)
Stock storage rent: $400 (Typically $300 to $500/mth)
Staff (1.5): $7,500 (Based on $60k/yr per FTS)
Here is a summary of how the costs affect each business.
Set Up Cost
As you can see the cost for setting up the physical store for Business A is about $55,000 compared to only $15,000 for setting up an online store for Business B.
That equates to a saving of $40,000 which could easily be put towards promoting Business B online!
As you can see Business A has $17,400 of expenses to cover each month. At a profit margin of 50%, Business A would need to sell over $36,000 in sales every month to break even.
This means business A needs to be doing $550,000 in annual revenue to run a stable business.
In contrast, Business B has $11,550 in monthly expenses, therefore would need to sell only $23,000/mth in sales to break even. This means Business B would need to aim for $350,000 in annual revenue to run a stable business.
As you can see, it is nearly $6,000 cheaper per month to run the online store business. And the annual turnover is a whopping $200,000 less to be a stable business.
As you can see, it is quite important to make sure you compare the costs for your online store with those of a physical store.
Clearly, it can be far cheaper to run your online business than if it were a street front shop.
But you need to remember you will need to put in extra effort into both your website and ongoing online promotion to succeed!