I may be one of the few weird people who enjoy looking at financial dashboards and playing with complicated Excel files. I find it fascinating to change a number in a cell and see the whole spreadsheet, charts, and tables change. And you know what? It actually helps me wrap my head around different aspects of the businesses I deal with. I may be a nerd, but I understand that finance, numbers, and ratios may look scary to rookie entrepreneurs. Here’s the deal: understanding and managing cost structures is a key to success, whether in the Ecommerce world or other industries. Some of the costs related to an online business are similar to what you’d find in any other business, while some are unique and tied to online businesses. Others are much more important than in other business models.
I can’t talk about every component of every business; this would take the whole book, and I know a lot more about Ecommerce than other business models anyway. The aim of this section is to focus on costs related to Ecommerce. Cost structures are a very important part of a business. They are key to crafting the best pricing strategy, effective financial planning, and ultimately maximizing growth and profits. So, let’s get started and look at each category.
Product development costs
Product development costs are associated with creating, designing, and testing a new product or service. While most of these costs are similar to what you’d find in most businesses, there are three key points I want to discuss.
Product and packaging size and weight
As you know, selling products over the Internet involves shipping the product to the customer. And, of course, the bigger and heavier the product is, the more carriers will charge to ship it. While shipping costs are not directly part of product development costs, it’s still crucial to think about those shipping expenses during the research and development phase.
Let’s talk about how shipping costs work. Many carriers have different pricing tiers based on weight and size. They might have a set price for a regular-sized package weighing between 8oz and 1lb and a higher price for items weighing between 1 and 2lbs.
You know how selling stuff online means you’ve got to ship it to the customer, right? Well, the thing is, the bigger and heavier the product, the more those couriers will charge you for shipping. Now, I get it, shipping costs aren’t directly part of product development costs, but hear me out—you must envision shipping expenses during the research and development phase.
Now, here’s a practical example: Let’s say you plan to sell candles that weigh around 1lb. It makes sense to limit the total weight of the product (container, wax, and packaging) to a little under 1lb rather than exceed it by a little. This small adjustment can save the company a small amount on shipping per item, and these savings quickly scale with sales volume.
In a similar manner, working on product packaging can be a good way to minimize costs. Using flat packaging rather than a cube can help save on shipping in some cases—flat envelopes are sometimes cheaper than boxes for the same weight. Optimizing product packaging can also help you pack more items per pallet, minimizing shipping costs between warehouses and distribution centers.
Finally, it is important to ensure packaging will be sturdy enough to protect the item during shipping. Customer returns are expensive to process, and products damaged during shipping can hurt your reputation.
Product photography and videos
While some may count professional product photography and videography as a marketing expense, I see it more as a product development cost. These materials are needed from day one. Product photography is needed for any sales channel but is especially important when selling online. Customers want a good idea of what the product looks like. Good photos and videos can not only increase sales and conversion rate, but they will also decrease the item return rate (customers are less likely to receive an item different from their expectations).
Think of online sales like online dating. You need pictures that accurately represent your product while highlighting its best features. You don’t want to “catfish” the customer by lying to them, but you want them to see what’s good about the product you sell. It should be considered an important investment; taking pictures with a smartphone is not good enough these days (except for UGC—User-Generated Content), and bad pictures can kill a product launch. In terms of cost, and if not done in-house, product photography can range from $50 for very basic pictures to a few hundred per product at professional studios. The cost can increase drastically if you require lifestyle images that involve models, accessories, and specific locations. For product videos, costs can vary from a few hundred for basic videos with little editing to thousands or even tens of thousands for more elaborate videos.
Keywords research
Just like product photography, I think keyword research should be done early enough that I see it as a product development expense more than purely a marketing cost. Of course, keyword research needs to be done frequently, but I think doing it early in the process and gathering data can really help make a product launch successful. Keyword research can cost anywhere from a few dozen bucks if using a dedicated software for quick results to thousands of dollars if working with specialized consultants and agencies.
Logistics
Online sales involve shipping items to the customer and sometimes back to the company in case of product returns. Like most companies selling physical goods, logistics costs involve warehousing, packaging, transportation, and more. While I won’t go over every single expense, I would like to discuss those that matter the most when selling online.
Order fulfillment and shipping costs
Fulfilling and shipping orders are often the most important expenses for an online business. That is why these costs should be carefully monitored and optimized. We mentioned considering weight and size during product development, but there are other things businesses can do to lower their logistics expenses. In a previous article, we discussed free shipping <add link to blog> and the idea that even though customers expect free shipping, businesses can sometimes charge them the full or portion of the cost. Finding the right 3PL partner is another way to reduce costs, as there are large differences between each company. For tiny one-man businesses, or those that are very large, it may be more profitable to fulfill orders in-house.
Packing Materials
Packing materials are another source of cost, but these should not necessarily be reduced to the bare minimum. As explained above, products damaged during shipping give the company a bad rep, and returns are costly to process. Additionally, packaging is a good opportunity to add packing inserts, free samples, and other marketing materials. As explained in an older blog, some companies may benefit from providing a unique unboxing experience <add link>.
Returns and Reverse Logistics
Returns and reverse logistics can be costly, and the average product return rate is estimated at 15 to 20%. That is almost one order out of five! As discussed in this blog post <add link>, there are many reasons why customers return their items and many ways to lower this product return rate. Most companies have to deal with returns, but when doing business over the Internet, customers can’t always drive to a physical location to return their items. They have to ship their items back to the company and often expect to do it for free, which is an important source of cost.
Order Management Systems
Ecommerce entrepreneurs should ensure that their products are effectively shipped to the customers and reach their destination on time. Having an efficient Order Management System (OMS) is necessary to limit the risk of errors, have visibility on stock status and inventory levels, help with customer service and returns processing, and provide useful reporting and analytics. The cost of an OMS varies based on the functions offered, the volume of orders, the support provided, and the ability to scale. The costs can range from a few dozen dollars per month to several thousand. The most expensive solution is not always the best, as each business will need the right OMS, depending on its size and business needs.
Marketing costs
Have you ever heard “You’ve got to spend money to make money”? Every company spends money to promote their products and services to their target customers. When people think of Ecommerce, they immediately think of digital marketing. And it is true that the strategies, channels, and budgets can differ from traditional businesses. But there is more than that. Let’s discuss four expenses that are especially important in Ecommerce.
Website development
An Ecommerce website costs money, no matter what technology is used. There is usually an upfront investment for development and setup costs, recurring expenses when updates should be made, and additional costs for software, subscriptions, domain name, hosting fees, etc.
The main option for Ecommerce entrepreneurs, other than joining online marketplaces like Amazon or Walmart, is to either build a website from scratch or use a platform such as Wix or Shopify. I have talked about the pros and cons of both solutions in my book. Basically, using a platform is less expensive but less flexible, and it won’t cater to every single need. A fully custom website made from scratch gives a ton of flexibility and options, but it will be a lot more expensive to build and maintain. A decent-looking, functioning website using a platform can start at around $100 to $200 a month, while some of the more complex websites can cost millions to build and tens of thousands to run. Starting small makes sense for small businesses, but keep in mind that scaling up can be costly, especially if it requires migrating to a new platform or solution.
Paid advertising
As you know, businesses are spending more and more money to advertise all over the Internet, from search engines to social media. There is one specific type of advertising I would like to mention that is becoming increasingly important for Ecommerce entrepreneurs. Selling on marketplaces is becoming highly competitive, and marketplaces tend to dedicate more space to sponsored posts than ever. For example, Amazon used to dedicate 20% of search results to sponsored ads before covid. In 2023, about half of the page is sponsored posts and listings. Selling on marketplaces is becoming a pay-to-win situation, and businesses should expect organic sales to become increasingly difficult. That is why PPC advertising on these platforms is more strategic than ever, and managed campaigns can make a huge difference in terms of returns on investment.
SEO expenses
Unlike bricks and mortar stores, an online business that owns no physical store can only be found online. No one can drive by the store and discover it by accident. That makes digital marketing especially important for online businesses, and SEO should not be ignored.
For the smallest businesses, it can be done in-house, or there are consultants on freelance sites such as Fiverr who can help at a reasonable cost (not all of them are good, especially at low prices, but there are some hidden gems on platforms like Fiverr). For those who can afford agencies, the rate is typically $100 to $250 per hour. Other agencies can charge per project, with prices ranging from a few hundred dollars to tens of thousands.
Conclusion
An online business shares a lot of similarities with other businesses, but there are some expenses that are more important for Ecommerce entrepreneurs. Being aware of Ecommerce specificities and understanding them can help entrepreneurs devise the best strategy for growth and profitability.
