What Are The Costs Of Starting An Online Retail Business?

Online retail stores make transactions easier for both customer and business owner, but what are the startup costs?

Online retail stores make transactions easier for both customer and business owner, but what are the startup costs?

Startup costs for a traditional retail store can be very high. You have to buy the products, store them in warehouses, hire a lot of staff, and pay rent and utilities for storefronts. Even a small shop can cost around $30,000 to start. Depending on the type of online retail business you're starting, some of these expenses still apply, but overall the costs tend to be much lower. 

How low depends on the retail model you are using, as well as the scale of the business. Creating the next Amazon, the undisputed online retail store for Canadians, will require a lot more capital than starting up your dropshipping company. It’s a totally different journey.

‘Typical’ Costs For An Online Retail Business

Again, it’s important to emphasize at this point that every online retail business will be different, and will therefore have vastly different costs. Broadly speaking, there are three main costs for a typical e-store. They are:

Website – The initial design of a website can cost thousands, but it can also cost next to nothing if you do it yourself. Cheap hosting for low-traffic websites costs around $50 a year, and an SSL certificate for secure transactions costs around $90 a year. You may also want a business email account, at around $90 a year. Startup costs: between $140 - $5,000.

Products – If you are storing inventory, you will need to invest in products. This will involve fulfilling the minimum order requirement from your supplier. The more product you buy, the more likely it is that you can secure higher profit margins. A startup retail store may only need to buy $1,000 worth of products from an international supplier. There are also other options for online retail businesses that don’t involve stocking product. Startup costs: typically around $1,000. (Of course, if you are bringing your own products to market, the costs of product design and development will be significantly higher than this!)

Marketing – The internet is a big place, and your products probably won’t sell themselves. They will need a push, in a form of a strategic digital marketing campaign. There are low-cost ways to do this, such as social media and PPC, but ultimately if you create profitable campaigns you should scale up your budget to gain traction. Overall startup costs: $0 with a decent website.

Wages – Startup online retail stores do not technically need to employ anyone. It’s perfectly realistic to begin the journey on your own, but it will be a lot of work and your skillset will have limitations. If your business grows, you will almost certainly need to employ helping hands who can bring you to the next level. Even startups will want to consider an employee for customer services (a VR, perhaps), and later an accountant. Overall startup costs: $0 - $20,000 per year.

Low-Cost Example: If you are looking to start your online retail store on a very low budget, then you only really need a few components to get going. You could spend $400 on a well-designed website, $50 a year on hosting, and $90 a year on an SSL certificate. You would also use a hosted platform for around $30 a year, with a free shopping cart and payment integration. Total costs: $570. More realistically, most online retail stores should be looking to start with around $1,500 or more.

This is excellent news considering that funding is quite difficult for startups to obtain. Seed funding company Y Combinator has a typical acceptance rate of 3 – 5%, meaning businesses only have around a 1/20 chance of securing funding this way. It often pays to keep overheads low at first, or seek funding from crowdsourcing or asking people who you know.

What is the right model of online retail business for you?

What is the right model of online retail business for you?

Models Of Online Retail Business

There are many business models that online retailers use, and each has its own advantages, disadvantages, and costs. Let’s compare a couple of models. 

Models such as dropshipping are cheap and easy. You don’t have to store any inventory, and there are no product design costs. You sell someone else’s product, and when customers order from you the order is sent through to the supplier, who also takes care of the delivery.

In this case, all you need is a website (which could be a simple template) with hosting and SSL. Of course, effective marketing will lead to more sales. Though this is about as low cost as overheads could be, dropshipping will give you less revenue and less profit per sale.

Compare this to an online store in which you hold inventory. In this case, you will have to pay for (reasonably) large quantities of stock, which means a significant additional cost. If you are storing a lot of product, you will need a warehouse, which causes rent costs and other overheads. On the plus side, you'll have improved revenues and greater profit margins, as well as more control over your deliveries and your branding.

As you can see, the overall startup costs of your online retail store will vary greatly depending on the type of business you are starting, as well as your overall strategy for sales. The good news is, it is totally possible to start an online retail business with very little capital. If you have a bigger budget, you can put more money into your website and marketing to achieve quicker growth.