8 Financial Considerations of Ecommerce

By Greg Go on 11 February 2010 (Updated 9 September 2010) 0 comments
Photo: luminis

Selling products online uses the same basic principles and strategies as offline (or "brick & mortar") retailing. Provide a good product, at a reasonable price, with some exceptional customer service. Buy low, sell high. Repeat and profit. Online retailing involves the same principles, but the tactics and mechanics are different. Here's a look at 8 facets of ecommerce that will affect your retail business' finances and processes.

1. Lower prices

When you’re the only widget seller within 10 miles, you can charge list prices. When you’re competing online in a global marketplace, prices tend to fall. Add the additional cost of shipping, not to mention the expectations Amazon’s low prices and fast, cheap shipping have created, and you’ll have no choice but to lower prices.

2. Shipping & handling

New online retailers often experience sticker shock when they start looking at the cost of shipping and packaging. Suddenly, your buyers are paying 20-100% more to get your product, and all that revenue goes to your shipping provider. Here are a few tips for keeping your shipping costs under control and keeping you competitive.

  • Shipping carriers — As the retailer, you want to lower your shipping costs as much as possible to save buyers money (and make buying from you cheaper than your competitors). The cheapest option is usually the U.S. Postal Service. But, you want to balance price with peace of mind. That's where the door-to-door tracking of private, more expensive carriers like UPS and Fedex come in handy. Tip: USPS is great for domestic orders of small inexpensive items (First Class mail) or small heavy objects (Flat Rate); for international, bigger or more expensive orders, UPS/Fedex are better options.
     
  • Packaging — The cost of packaging is not negligible. Boxes can cost a dollar each, or much more for larger or exotic shapes. Then there’s the filler material that has to be sturdy and soft enough to protect your product without adding a lot of weight to the shipment (air bags are good). Tip: get boxes for free from your shipping carrier.
     
  • Shipping insurance — Things get lost. Fortunately, carriers often include some insurance with their premium or international offers, and you can purchase more if you need to cover higher value items. Tip: to offset the cost of packaging and insurance, you can add a couple dollars to your shipping quotes. But don't pad the shipping cost too much — buyers are aware of and hate that tactic.

3. Payment processing

For a transaction with a customer far away, you'll want to avoid troublesome and manually intensive payment options like personal checks, cashier’s checks, money orders, COD, and wire transfers. The much higher chance of fraud associated with these payment options makes them not worth the hassle.

Buyers pay for merchandise online using credit cards or online payment options like PayPal and Google Checkout. Your current credit card processor can probably handle online transaction — for example, American Express Merchant Services. PayPal and Google Checkout are easy to setup and start making sales, but they have higher transaction costs than if you accepted credit cards via your merchant account.

Tip: Even if you accept credit cards, it may be worthwhile to keep PayPal and Google Checkout available as options because they’re easier to use for the buyer. With the online wallets, buyers just need to enter a password to make a purchase (versus typing in all that information with a credit card). Easier transactions reduce cart abandonment and increase conversions.

4. Online store buildout and “rent”

There are basically two ways to sell products online — go to where buyers are, or bring the buyers to you.

If you want your own store at your own website, expect to pay for a hefty up-front setup cost or a monthly subscription. In addition to the cost of software, hosting, and domain registration, there is the human cost of web designers, developers, and webmasters.

Top commercial ecommerce software include Miva Merchant and X-Cart. With enough technical skills, you can use free, open source choices like Zen Cart, Magento and Prestashop. (See this list of 35+ shopping carts at Mashable for more.)

Self-hosted won't cost you a dime in transaction fees, but there are other costs. You’re taking on the significant technical burden of building and maintaining the platform yourself, or hiring help at $50-100+ per hour. Not to mention that nobody will know your store/website exists unless you go out there and tell them.

5. Sales commissions

On the other hand, if you go to the marketplace (i.e., list products for sale at eBay and/or Amazon), expect low startup costs but high sales commissions of over 10%. The combination of huge marketplaces but high transaction fees makes eBay and Amazon great for starting out and marketing, but not as your only primary online outlet.

A middle ground is provided by hosted online stores like Yahoo! or Shopify. They maintain the software (nothing to install or upgrade) and let you have a store at your own website. They charge a monthly subscription plus a 0-2% transaction fee. They're much cheaper shelves to rent, but like self-hosted software, they don't come with built-in traffic.

Tip: Use the strengths of eBay/Amazon and your-own-store to complement each other. Have a "home base" store at your own website to maximize your margins, and also have a presence at all the major online marketplaces to maximize exposure.

By the way, there's a small and quirky ecommerce provider called eCrater. They offer online stores for free. There are no listing fees, no sales commissions. They make money by selling premium listings on the main eCrater.com site. So far, eCrater only has a tiny fraction of eBay and Amazon’s traffic, but since there’s little risk to setting up shop and the admin interface is a joy to use, the product catalog at eCrater is growing quickly. It’ll be interesting to see how the eCrater marketplace is doing in a couple of years.

6. Equipment

Here's some basic equipment you'll need to effectively sell online:

  • Good computer — This is the heart of your online business. A good computer helps every part of your operations; a troublesome or slow computer is conversely damaging to your processes.
     
  • Broadband Internet — I shouldn’t even have to mention this.
     
  • Laser printer — For packing slips, sales reports, etc.
     
  • Label printer — For printing postage.
     
  • Big monitor — You’re going to be spending a lot of time looking at it.
     
  • Scale — Suddenly, you care about every product's weight.

7. Online sales & marketing

There is a ton of material out there about online marketing (the practice of getting people to come visit your online store). Much of it is conflicting, some of it is sales hyperbole, and too many are just flat out wrong. Don’t get sucked in to all the contradictory “advice” — just keep these three fundamental principles in mind and you'll be fine.

  • Search engine optimization (SEO) involves how well you describe your webpage. The better your describe your pages, the better search engines will know how to categorize them. For example, on product pages of your online store, be sure to describe your product well and mention any related words or phrases that people might use when talking about the product.
     
  • Search engine marketing (SEM) is when you buy text links at the top and to the right of search engine results. You can use Google’s AdWords (or Yahoo! Search Marketing or Microsoft AdCenter) to bid on search phrases (called “keywords”) that will trigger your ad to be shown. More lucrative keywords cost more. The dream is to rank in the organic search results using good fundamental SEO, so you don’t have to pay to get your store in front of searchers.
     
  • Links are the currency of the Web. Search engines rank results based on the number and authority of links pointing to your site. It’s also how people refer to you online, whether they post the link on their blog or as a helpful pointer in a forum reply. You want more links, more relevant links, and more links from bigger websites.

In addition to the mechanics of online marketing, it’s helpful to understand some best practices.

  • Permanent record. When what you “say” online lives permanently, whatever you post will either help or hurt every sale after that moment. Be mindful of what you post on your blog, in comments, on forum replies, in Twitter, etc.
     
  • Transparency. Internet shoppers are very forgiving of honest mistakes, but they absolutely will not tolerate even a whiff of shady business practices. If you screw up and try to hide it, you’ll be crucified. If you screw up, but come clean and do everything to make it right for the customer, you’ll win a sale every time that story is told.

Tip: these fancy new online marketing tactics should be employed in addition to good old retailing best practices. Coupons and sales still work. Unbelievably helpful pre-sales service still closes sales. Exceptional customer service will still be spread by word of mouth (or email or blog post or tweet).

8. Huge market

The Internet is, by definition, the largest marketplace in the world. It allows buyers and sellers from halfway around the world to conduct business. If you're not already selling online, start soon. There are customers across the country or even around the world that want to buy from you.

Tip: if you're a mom & pop retailer, and can't figure out how to compete with the rock bottom prices you're finding online, consider serving a very narrow niche. Become an expert in one product line or category, and be the go-to retailer for that niche.

If you're already online, is there anything you can do to improve operations? The software you used to setup shop 5 years ago may be antiquated compared to modern shopping carts — take a look around. How about exploring new marketplaces, or perhaps you can streamline fulfillment to reduce shipping costs.

Ecommerce is still evolving, and we could all learn from each other. So please share your ecommerce experiences and best tips in the comments!

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