According to Bloomberg, 8 out of 10 new businesses fail within the first 18 months.
It’s not good enough to have faith in the value of your offerings. You need to know when something isn’t working and take countermeasures quickly. You need to understand what your customers want by measuring how they respond to your products, you need to know whether your marketing efforts are delivering results, and you need data that helps you course-correct.
For entrepreneurs who want to reach a broader audience, one of the issues to consider is: should I begin with an offline business, an online business, or both?
If there’s any way to sell your products and services online, do it.
The beauty of starting with e-commerce is that you aren’t encumbered by the cost of maintaining inventory levels or the physical costs of a retail store. This makes it much easier to change products and marketing strategy while you’re trying to find the right formula for success.
With help from inexpensive online marketing, social media, and analytic tools, it’s possible to create campaigns that increase customer engagement, test different marketing approaches, and monitor how well customers respond to your offerings. Avoid spending tens of thousands of dollars on an idea that may not succeed.
To understand the difference in startup cost and marketing, let’s do a quick cost analysis of offline and online businesses options.
Costs of a Traditional Retail Store
- Monthly retail lease. In major cities, a storefront location will cost between $50-75 per square foot a year. The average retail shop is around 1,000 square feet (remember you’ll need non-public and storage space), so leasing costs at the lower end of the commercial real estate market will run around $4166 in per month. There is usually a minimum lease period of 6 months and sometimes a year.
- Up front investment. You will also have to renovate the retail space to suit your business: create a sign, buy shop fittings and equipment. This can cost tens of thousands of dollars. Let’s go with a moderate figure of $10,000 for renovation, sign creation, lease closing costs and equipment costs.
- Staff. Unless you have family members who are qualified and willing to work for nothing, you’re going to need at least two staff members to cover retail hours of 9:00 am – 7:00 pm, seven days per week. Minimum wage in the province of B.C. is $10.25/hour. Let’s say you pay $12/hour. This adds up to $240/day, $1680 per week and $6720 per month.
Total Cost: $10,000 initial investment and then $10,886 in monthly costs.
Costs of an Online E-Commerce Store:
- Web development costs: A custom e-commerce website costs around $6,000. This includes complete shopping cart functionality, blog, social media integration, reviews and ratings features, and full analytics tracking to track visitors and sales.
- Web hosting costs: This is your business, so find a reliable company to host on high-speed servers. This will cost around $30/month.
- No sales staff costs: However, instead of paying $6,720 per month to sales staff and hoping traffic will walk in the door, you can invest some of that money in highly-targeted pay-per-click (PPC) advertising to drive online traffic to your website. Let’s say you’re willing to spend $500/month on PPC.
- Technical and marketing support: If you are very technical and know all about digital marketing, you can do it all yourself. If not, you will need technical assistance for your website because you’ll be making changes to features, content, and images as you tweak the website for better results. You should also hire someone who can run online marketing for you. Budget $2,500 per month for technical and marketing support. If you don’t want to deal with orders and shipping, you can spend some of this budget on an order fulfillment service at a fraction of what it would cost to pay sales staff working in 10 hours a day in a store. They will charge per order fulfilled and some minimum monthly amount.
- More measurable results: The biggest advantage of marketing an online e-commerce website is that you can track the ROI you get from every marketing dollar spent. Compare this to traditional marketing, which is difficult to track and even more difficult to analyze. A good online marketing resource can manage an ongoing PPC campaign for you and provide insights on how to improve results.
Total Cost: $6,000 initial investment and $2,530 per month in costs; if you are not doing your own shipping and handling, add in whatever a service charges to handle order fulfillment.
Depending on the products you want to sell, one of these options could be preferable. Regardless of whether you go with e-commerce, traditional retail, or both, you still need set aside budget to promote the business.
Startup costs are significantly lower for an E-commerce website and there’s no lock-in to a long-term lease. More importantly for new businesses, an online business model provides a relatively inexpensive, less risky, and easier testing ground to fine-tune your business model. Once you’ve found online success and a customer base, you will have more confidence to expand into retail locations and/or a larger e-commerce system as your customer base increases.