If you’ve got a great ecommerce venture idea in mind, you’ve probably also started thinking about how much it costs to start an ecommerce business. Most people start by calculating their inventory costs and setting a budget for their website. However, running a successful ecommerce business incurs other costs that may not have crossed your mind.
Here, we’ll take you through:
- What do you need to start an ecommerce business
- What costs do you need to factor into starting an ecommerce business
- What permits, licenses, and insurance do you need to consider
- How to best set up your online store
What Do You Need To Start an Ecommerce Business?
Everyone knows the story about how Jeff Bezos started Amazon from his garage and went on to become a billionaire just four years later.
While every ecommerce endeavor may not be as successful, there are a few key things you’ll need to get started:
- A product/business idea that stands out from the crowd (this is your unique selling proposition or USP).
- A decision on how your products will be manufactured and who’s going to package and ship them.
- An awareness of what permits, licenses, and insurance you’ll need.
- A breakdown of costs you’ll incur, both startup and ongoing.
However, there are probably quite a few expected costs missing from your list. Let’s go through what costs are involved in starting an ecommerce business below.
What Costs Should You Factor Into Starting an Ecommerce Business?
Although online businesses are generally cheaper to run than brick-and-mortar stores, there are certain upfront costs and ongoing costs you’ll shoulder as an ecommerce business owner.
Since no two businesses are the same, each ecommerce business will need differing levels of investment in each “cost center.” Below, we outline the most common ecommerce start-up and ongoing costs you’ll need to factor into your business plan.
Ecommerce Start-up Costs
The ease and cost of building a business website have come a long way over the years. Nowadays, the best ecommerce platforms make it easy for you to build your own website at a low cost.
- Create an online store
- Choose a design theme
- Customize your store’s layout
- Upload your products
- Manage inventory
- Process checkout transactions
- Adjust shipping taxes
- Generate sales reports
Remember: Using an ecommerce platform will help you eliminate costs elsewhere — such as costs for domain names and website hosting — since many of these platforms already offer these features as standard.
Payment gateways are another inevitable start-up cost for new ecommerce ventures. Without one that’s fast, secure, and reliable, your ecommerce store will fail before it’s even begun.
In addition to monthly fees, you’ll also pay processing fees for each transaction. Luckily, there are many payment gateways with a range of pricing options on the market that are a hit amongst small to mid-sized online businesses.
Square, for example, is free to use every month, with processing fees of 2.9% + 30¢ per transaction.
Of course, before you can start selling online, you’ll need to invest in your first lot of inventory, the price of which will be unique to your business model. Inventory is also classed as an ongoing ecommerce cost.
Depending on whether you’ll store your products at home or keep them in a warehouse or another type of storage, you’ll also need to factor in inventory storage costs.
No customer is going to hand over their cash without seeing the goods first. This cost will depend on whether you receive photographs from your manufacturer or whether you’re selling niche products that need their photographs.
Ongoing Ecommerce Costs
Although you should start marketing your store before it launches, we’ll class this one as an ongoing cost since you should always be selling your brand. Whether you run pay-per-click (PPC) ads, email marketing campaigns, or invest in SEO, marketing is a crucial cost to factor into your business plan.
Other Software Tools
If your ecommerce platform doesn’t offer extensive features, you’ll probably need to invest in other software tools like email marketing solutions to keep customers coming back to your store.
You might hire part or full-time staff or freelancers to take on specific business functions as you grow.
Licenses, Permits, and Insurance
Even though you’re not operating a physical store, you’ll need certain licenses and permits before you can begin selling your products. To help you get started, we’ll go through which ones you’ll need, plus the types of insurance you should consider to help you minimize risks.
What Licenses, Permits, and Insurance Will You Need?
Just like brick-and-mortar stores, ecommerce businesses require licenses and permits to operate legally. It can be quite confusing to know which ones you’ll need since the requirements can differ from state to state and according to what you sell online.
Licenses and Permits for Ecommerce
Every online business needs a business license to operate legally. Luckily, ecommerce businesses typically require fewer licenses and permits than their brick-and-mortar counterparts.
A business license permits your ecommerce business to conduct business in your city, county, or state, and they also assist government agencies in tracking you for tax purposes. Almost every ecommerce business will need a business license to operate legally.
To find out how to apply for a business license in your state, you’ll need to check the Small Business Administration guidelines.
Almost all states require ecommerce businesses to obtain a seller’s permit to allow you to sell products or services and collect sales tax. Ultimately, a seller’s permit allows each state to identify a business as a sales tax collector.
The requirements and fees for a seller’s permit differ by state. Since Alaska, Delaware, Montana, New Hampshire, and Oregon have no state sales tax, sellers’ permits in these states are not a requirement. Of the remaining states with sales tax, only businesses in Florida and Missouri are exempt from sellers’ permits.
If you buy products for resale, you’ll need a reseller’s permit (or resale certificate) to avoid paying sales tax on those purchases.
Employer Identification Number (EIN)
An Employer Identification Number (EIN is technically not a license but a federal tax ID number given to you by the IRS to identify your ecommerce business as a distinct tax entity. An EIN is necessary to hire employees, open a business bank account, or if you are incorporated as an LLC.
Doing Business As (DBA) License
A Doing Business As (DBA) License allows you to operate your ecommerce business using a name other than your legal name. For example, rather than operating under “John Applebee,” you may want to operate your business as “Applebee’s Village Brewing Company.”
DBA licenses aren’t required in every state, but since there are implications for opening business bank accounts and signing contracts, it’s a license worth considering.
As a business owner, it’s in your best interests to minimize risks. Ecommerce insurance helps you protect yourself, your assets, and your business. Which types of insurance you’ll will depend on your unique business needs.
General Liability Insurance
General liability insurance is a broad business insurance type covering anything from bodily injury and property damage to third-party lawsuits and advertising injury.
Commercial Property Insurance
Commercial property insurance covers the cost to repair or replace damaged business-owned items such as property, inventory, buildings, and fixtures.
Cyber Liability and Data Breach Insurance
This is an oft-ignored insurance type, but no less important. Cyber liability and data breach insurance protects ecommerce businesses from any resulting losses or damages from cyberattacks and data breaches.
Business Owner’s Policy (BOP)
A business owner’s policy (BOP) is a combination insurance type that covers some form of professional and general liability coverage, business income insurance, and commercial property insurance.
Intellectual Property Insurance
Intellectual property insurance covers your legal costs if a competitor accuses you of intellectual property or copyright infringement.
Suspension and Chargeback Insurance
Suspension and chargeback insurance is a relatively new type of insurance aimed at ecommerce businesses.
Suspension insurance, also known as “Amazon insurance,” protects you should your account be suspended or blocked from selling on an online marketplace like Amazon.
Chargeback insurance covers credit card payment risks arising from chargebacks and credit card fraud. This type of insurance covers you for costs incurred from someone using a stolen or counterfeit credit card.
Forecasting for Fortune
Financial forecasting is an essential part of any successful ecommerce business. Take this list as a starting point for your forecasting and help your business succeed by eliminating any surprise costs along the way.