Costs of Adding Ecommerce to Brick-and-Mortar Retailing

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Great scalability and customer reach at a relatively low cost (compared to traditional, brick-and-mortar stores) are the promises of ecommerce retailing. Day-to-day expenses are generally lower as a percentage of the opportunity for customer reach. If you’re running a traditional retail store, you may be able to avoid certain expenses and use existing infrastructure in the ecommerce start-up phase. As your business grows, though, you’ll find that expanding via the web will be less expensive for certain P&L line items but require extra spending in other categories.

Space

Sales space for e-retailing is cheap compared to premium prices for high-traffic retail sites. Domain name registration and hosting services can be had for less than $100 while storefront leasing expenses might run $40,000 annually.

But site design and maintenance, equivalent to merchandising your space, can add significantly to operating costs. And, capabilities critical to running a highly visited site with lots of product images, such as a dedicated server and 24/7 technical support, can mean extra expenses.

Eventually, you’ll need space to store inventory as well as pull, stage, package, and ship orders. Industrial space is suitable for these purposes and costs about one-quarter of rent for similarly-sized retail space. In the early stages of your ecommerce business, though, you could pull items from the sales floor and prepare orders for shipment in the stockroom.

Marketing

The money you save from not having to lease a high-visibility storefront with drive-by and foot traffic can be unleashed on digital marketing efforts. Driving web traffic often requires spending on search engine optimization, pay-for-click programs with Google Adwords, search engine marketing, direct email marketing campaigns, and more.

Both brick-and-mortar and ecommerce businesses can benefit from social media marketing. Engaging local customers with whom you have face-to-face contact should involve fewer resources than building relationships with customers worldwide. The money you don’t spend on mass media advertising can be redirected to social media.

Inventory

Your ecommerce business can carry lower levels of inventory than your brick-and-mortar store. Traditional stores need to be fully stocked in order to convey the message that the business is able to serve its customers for a sustained period. For each merchandising department, store displays require sufficient inventory of core items, along with complementary SKUs, to create attractive presentations.

Items carried in inventory for ecommerce sites don’t have to be displayed but can be stored compactly in a distribution center. And, you can more readily sell items that aren’t inventoried at all but are drop-shipped directly from vendors (the brick-and-mortar equivalent of the special order). So, rather than offering visually pleasing mixes of products, sizes, colors, etc. that are refreshed often, you can focus on stocking high volume, high margin items.

Payroll

Staffing needs differ. Ecommerce retailers need people to handle order fulfillment and customer service, mainly during regular business hours (8 a.m.-5 p.m., five days per week). Brick-and-mortar retailers need sales associates who may also perform customer service duties as well as cashiers, stockroom staff, and store managers. Collectively, they need to work retail hours, which can extend from 9 a.m. to 9 p.m., six or seven days per week.

In a brick-and-mortar environment, customers do much of the order-fulfillment work. They peruse physical displays, inspect items, place them in real-life shopping carts, bring selections to the cashier, make payments, and take purchases with them. Out-of-stock conditions are inconvenient but generally don’t disrupt order fulfillment. And, with exceptions such as special orders or deliveries of large items, customer follow-up isn’t necessary.

Order fulfillment for an ecommerce business involves:

• receiving orders from customers;
• pulling requested items from inventory located in the stockroom or distribution center;
• transmitting order information of non-inventoried items to vendors;
• managing orders for out-of-stock items (communicating with customers regarding delays and filling orders when inventory becomes available);
• grouping customer items into an order;
• packing orders for shipment; and
• arranging shipments for pick-up and delivery to customers.

To an extent, the sales function is embedded in the site design and content for ecommerce businesses. Navigational tools such as search boxes, product categories and subcategories, and filtering tools allow customers to locate relevant products. Detailed product descriptions and customer reviews provide information that is similar to that offered by brick-and-mortar sales associates. Customer service representatives can augment website content via live chat, email, and telephone calls, softly closing sales.

Shipping

A significant per transaction expense for ecommerce that doesn’t exist for brick-and-mortar stores is shipping. Adding small-package shipping charges to the customer’s total order is a simplistic way of passing along this expense. But Internet shoppers are accustomed to “free shipping” offers and chafe at paying these charges. You can raise your product prices to disguise shipping expenses but competitive pricing pressures can make this solution problematic. So, you may need to absorb some shipping expenses as a cost of doing business.

Bottom Line

If you add ecommerce to your brick-and-mortar store with the intention of growing this business, you’ll likely spend much less on real estate and inventory, similar amounts on payroll and marketing (depending on your location, product line complexity, and need for expert sales staff), and more on shipping.