How to start an e-commerce business
E-commerce. Selling products & services online from the comfort of, well, anywhere you please really!
That’s the dream right?
Monitoring your growing sales from a tablet whilst sitting on a beach somewhere exotic?
Creating a digital shopfront to sell your wares is highly appealing. Overheads are low, the barriers to entry are small and if you’re successful you can scale easily. E-commerce might be the perfect rags to riches strategy to achieving that sand between your toes level of success.
Rather than spending your time, energy and money setting up and competing on a high street, you can pour all your creativity and funding into your products and marketing.
Now, e-commerce is a broad category that covers giants like Amazon to a small boutique micro-business selling home-made soap online. With such a huge variety of business types, how do you get started? What do you do first?
Whilst it is a wide topic, there are a number of characteristics common to many e-commerce businesses.
In this article, I’ll guide you through the key information you need to plan and start an e-commerce business of your choice.
I’m going to go through all the steps you’ll need to consider from your first business idea to preparing a financial plan for funding purposes.
Ideation – what’s the big idea?
Starting an e-commerce business is a sensible move in an increasingly online world. You can sell pretty much anything online these days!
So what’s your idea?
A common e-commerce format is going to be around selling a product or a range of products.
You may have always dreamed of selling unique clothes online but early on you should stay open to possibilities.
You need to find an idea that you can be passionate about that can also become a viable business. In our article on the ideation process, we run through some techniques that can help you find great ideas.
It’s about getting a big piece of paper and mapping out:
- Your skills
- Your hobbies
- Your passions
- Your knowledge areas
Draw out all of your strengths, weaknesses, characteristics and skills to help spot the potential businesses you could be good at.
In the ideation process, you also need to start identifying your USP – your unique selling points.
What is different about you that will make customers buy from you instead of a competitor?
- Sustainably source products
- Uniquely designed packaging
- Your likable personality (No, really! Think about YouTube personalities, putting a likeable face to your products through videos is a strong strategy)
- Your pricing strategy
This is where considering your background and skillset really makes a difference. Perhaps you do have a background in design and have a great idea for packaging that will catch people’s eye.
Perhaps you know the market really well for a particular product type due to working in the industry in the past. Lean on your skills!
You’re also identifying the areas you aren’t so strong at. What gaps will you need to fill down the road? Can you pull in friends & family to help out? Will you need to hire an external designer? If you aren’t making your products yourself, how will they be manufactured?
It’s common to feel like you have to do everything yourself when you first start out. However, starting a business is such a multifaceted affair that you will inevitably need help at some point or other.
Once you’ve pushed ideas around long enough that you have some great contenders, it’s time to move into some more serious market research.
This is where you connect your idea to reality and start exploring it’s viability.
Market research – learning about your customers & competitors
As your ideas begin to take shape, you can start probing the market to see what the landscape looks like. It’s a phase of learning where you are trying to assimilate as much knowledge as possible.
This knowledge is critical for giving your business the best chance of success.
There are two areas you really need to focus on.
Market research is always an area that is tempting to gloss over but it’s really important. Selling online is fiercely competitive and you’ve got to know what you are getting yourself into.
This early phase is about spending time finding viable ideas. Not just a great product, but a product you can sell to real customers who will choose you over competitors.
It’s time to dig deep and really ask yourself – “why would someone buy from me?”.
For an e-commerce business, you’ll spend a lot of time Googling, YouTubing and exploring social media platforms (don’t get distracted!). You’ll be selling through a website, and these are the places that people will find your website from.
They are also the places where your competitors will be peddling their wares. So you can learn about both at the same time. They will be advertising and engaging with their target audience and you should observe and learn from them.
Depending on your product or service, there might be industry-specific websites, forums and platforms that are related to what you are looking to sell.
All these places are a wealth of information about your market.
You can learn about:
- The problems customers have with current products
- What they value the most
- Where they tend to buy from
- What language they use (useful for crafting marketing messages later)
As you discover new competitors, a good way to learn more is to check out the review sites they are on. Looking at 1-star reviews can help you identify problems that customers really dislike, helping you avoid them. 5- star reviews can help you focus on the important areas that customers do value.
You’ll also want to snoop around their website and learn about:
- Their business model
- Their pricing strategies
- Their USPs
Lingering for a while in this research stage may save you a lot of money later on. All of this information will form part of your business plan. Your plan of action covering every area of your business and detailing how you’ll be successful.
Using the information in this section you can start to consider how you’ll compete. How will you find your customers, speak to them and convince them to purchase? This is what all this learning is for. It’ll help you craft your brand messages, know who to target with your advertising and build an experience that will convert them to customers.
Remember, don’t be afraid to get out there in the real world and ask potential customers what they think! Surveys and questionnaires are a highly valuable information tool you should absolutely exploit.
Or perhaps your research will send you right back to the ideation phase as you struggle to find the right approach.
That’s natural and expected. Stumbling upon the perfect business idea immediately is rare.
Finding the right path takes time and effort and a lot of back and forth.
If you are investing your life savings into this (or somebody else’s), then it’s absolutely right to be diligent in all processes.
Choosing an E-commerce business model
A business model is the method by which your business makes a profit. It structures the way you sell and the type of costs you’ll take on.
With e-commerce being such a broad category, you’ve got a huge range of business models to choose from.
Here are a few popular options to consider:
Direct to consumer
Build your own brand and create direct relationships with your customers. This business model involves selling to your customer directly without going through a third party. It’s a rapidly growing option and easier than ever to get started with.
A traditional business model where you purchase products from a company in bulk at a discount allowing you to sell to consumers for a profit. It can require a large upfront investment in stock purchases.
Another common model where one company manufacturers a generic product that other companies can then apply their branding too. It’s a good choice for people with a knack for selling and marketing. You can pick a proven product and put your skills to work.
Partner with a manufacturer and task them with building a unique product that you apply your branding to and sell. A more involved business model where you need to come up with an idea for a new product. Perhaps more complex than white label, but more rewarding if you can identify the next new idea.
Become the middleman between a manufacturer and a consumer. Dropshipping allows you to market the products of another company. Like wholesale or white label, take advantage of proven products with a known consumer demand.
Subscription (product or service)
Deliver a product or service continuously to a consumer through an on-going paid subscription model. A powerful revenue-generating model that can accumulate exponentially if you get it right. Customer care is critical to avoid churn.
Choosing the right model is a big decision as it takes a lot of effort to switch business model once you are committed. Again, your market research will help you narrow down the right approach.
Selling soap through a subscription model? Madness? Or the unique approach that sets you apart? You’ve got to make the judgement informed by your research.
Choosing the right pricing strategy for an e-commerce business
The next layer to establish is your pricing scheme. You might be surprised at this point when I say that you need to look at your market research (did you see that coming?).
I keep hammering on about market research and competitor research but it is the foundation of all your planning!
With competitors identified, you should make a table of their prices to compare. Include relevant information like whether or not they are premium or a budget quality product.
Undercutting your competitors might seem like an obvious way to gain market share but there are a number of ways you can compete:
- Competing on price
- Competing on quality
- Competing on convenience
- Competing on customer service
- Competing by being more niche
Remember if you are looking to sell a premium product, consumers often find a higher price more attractive!
Deciding how you set your prices will be the results of all that has come before in this article and there is a lot to consider.
For example, you might be planning to sell coffee that is of a similar quality to your competitor.
Choosing a similar price point would make sense.
However, you choose a subscription business model, an approach that deviates from your competitors.
If you can get your consumers to commit to a guaranteed period of sales through a long term recurring subscription, you might be able to afford to sell at a lower price.
I mentioned what you can afford. Of course, deciding on price is not just about a personal preference or by market influence.
It’s also about whether the combination of price, predicted sales volume and costs will yield a profit. Will you be able to make enough revenue to cover your operations?
Don’t worry, if financials aren’t your thing, we’ll make it easy for you. Financial forecasting is our business after all.
Creating a marketing plan
As an e-commerce business, your shop front is your website. You’ll need to spend considerable time creating this key aspect. It’s got to convert a good proportion of your visitors to paying customers.
Crucially, you need to consider how you’ll get your first customers to discover and ‘walk in’ to your digital store.
With millions of people worldwide searching the web every second, this shouldn’t be a problem, right?
Well, it’s a little harder than you might think. Without a clear strategy for how people will discover you, your website will be lost in the depths of the internet.
So, head back to your market research and make sure you have the answers to:
- Who is my ideal customer?
- Where do they hang out?
- What messages do they engage with?
- What do they value?
This is how you start to work out where you customers spend your time giving you ideas for how to target them. With this information you should start to build a list of activities, for example:
- Engaging in relevant Facebook groups
- Creating Facebook adverts
- Sponsoring relevant industry blog posts
- Guest interviews on relevant podcasts
If you are struggling to come up with marketing channels – we’ve got an article dedicated to it explaining just how you can find the right channel for you.
You’ve got to pick activities that will spread awareness of your new brand as well as bring more specific customers into your site.
This is just a small selection of the possible online channels you could choose. When you launch, you’ll need to experiment with channels and messaging to find the most effective methods.
Treat your early advertising spend as a budget for experimentation. An investment in knowledge and learning that will make your future marketing spend far more effective.
Just because you are on the internet with potentially global reach, doesn’t mean you should ignore local activities.
When it comes to your financials, you might calculate that you need 100 sales per month to cover your initial cost base. You could find those 100 people all within 50 miles of you or you could more broadly look for them across the country or world.
You’ll have limited budget and limited knowledge initially so you can’t target everywhere. The advantage of local marketing is that you might know the area in much more detail. You know the people, the problems, the culture far better than anywhere else in the world. It’s the perfect place to start with some highly targeted messages to groups you know about already.
Remember that your online activities can be highly targeted by geographic location too. You don’t need to post flyers around everyone’s doors. If you know the local business LinkedIn group, you can go straight to the source.
Setting up and running your e-commerce business
As you move closer to launch, it’s important to build a checklist of the operational parts of your business so it can run smoothly. It’s easy to get lost designing marketing campaigns and forget about little things like tax.
- Do I need insurance?
- What sort of taxes will I need to pay?
- How will I manage my inventory?
- How will I deliver my goods?
- Do I need to apply for any patents?
- Do I need to set up a business bank account?
- What terms & conditions do I need my customers to agree to?
- How do I ensure I am GDPR compliant?
- How will I pay my employees or contractors?
- How will I keep a record of my financial accounts?
Keep an on-going document running with all these questions and anymore you can think of as you go.
This is certainly the more mundane side of running a business but no less important. Some of these items can catch you out and cause serious problems if you haven’t prepared for them in advance.
If you’re planning on holding an inventory of products, you’ll find questions around inventory management will eat up your time initially.
How large should your first order be? Too small and you won’t be able to meet your initial orders. Too large and you’ll consume too much of your limited funding hampering your ability to grow.
With little information about how successful your sales will be it’s always tricky to judge.
Every business will have some difficult operational questions to grapple with. It’s important that you don’t let them hold you back, but don’t hide away from them either!
Creating a financial plan
The rest of this article is going to be spent on your financials. I’ve mentioned a lot of ‘crucial’ areas so far but this one really takes precedence over them all. If this part doesn’t make sense, you’ll be pulling the plug on the whole endeavour.
You need to have some assurance, before you spend a lot of money, that your idea is financially viable.
Can your business make a profit?
You can’t go into this blind, you’ve got to have some impression of the figures. Even if you don’t feel confident in the world of finance, you must try. Don’t worry, whilst some accounting can seem a bit arcane at times – with a bit of guidance, it’s not as hard as you think.
So, let’s take a step into the future as we begin forecasting your business finances.
To start with, you’ll need a tool. You might start by noting down costs on the back of a napkin, but you’ll soon grow beyond that.
However, I’m going to demonstrate this through our easy to use financial forecasting software, Brixx.
Brixx is perfect for startups planning their finances and business ideas. It takes away any need to be a financial expert and allows you to easily experiment with business ideas.
Section 1 Setting up your Brixx plan
Your first step is to start a new plan:
We’re going to create a 3 year forecast.
Now, you might not know what lies ahead in the next 3 months let alone 3 years!
However, when looking strategically at your business, you’ve got to think long term. Many startups aren’t even profitable in their first year, so you’ve got to think ahead. Banks or investors will often require a full set of financials for at least 3 years, sometimes 5.
Now, you might not think you can forecast accurately over that period. That’s almost certainly going to be true.
However, long term planning is about demonstrating your ambition and potential. It’s also about making you think today about the plans you need to put into place to achieve your goals in the future.
Goals that might take years to come into fruition. If you just focus on the next few months, you’ll miss the big picture!
So, here I am in my empty plan. A blank canvas ready to be filled with my vision for the future:
You begin in the area on the left hand side where you see all the activities your business undertakes. Brixx plans start with some placeholder income and cost components. Your first task is to organise it into a structure that reflects your unique business.
You’ll add all the sources of income and their associated costs, your running costs, asset purchases and funding sources and organise it into groups.
It’s a complete picture of everything your business gets up to.
Let’s begin with your sources of income.
Section 2: E-commerce income forecast
For the purpose of this article, I’m going to demonstrate the forecast for an eco-friendly soap e-commerce business.
I’m working with a hypothetical local manufacturer who is creating a set of products to my specification. A ‘private label’ business model from earlier.
Initially, I plan to sell a variety of soap fragrances in bars:
- Aloe Vera
They are large, premium products with great looking packaging and a positive eco message behind them.
So I’ll be going in at a premium price of £3.99 per bar. They cost £1 per bar from my supplier with the opportunity for bulk discounts at larger volumes. These volumes are well outside my reach for now so I’ll model my costs at £1 per unit.
I’ll also sell them as gift boxes of 4, 8 and 12 at a time at a discount to the consumer.
So let’s set this up in Brixx. I start with my products that I add as ‘Income components’.
When I click on an income component it reveals its forecast:
Here I have entered my unit price of £3.99 at the top.
Below that is my unit forecast where I estimate how many I believe I will sell in the coming months. At the moment, I’m a little unsure. I enter some basic figures with a simple growth assumption of 2 units per month. As I improve my research and learn how successful my marketing campaigns could be, I’ll come back and craft this forecast further with more accurate estimates.
The next step is to click the +INVENTORY button. This will add an inventory component connected to this income component.
Adding an inventory component to each item means my group now looks like this:
Now, clicking on my inventory component reveals the forecast:
I have set this forecast to be ‘cost per unit’. This means it checks the units in the income component, in this case lavender, to calculate the inventory purchase requirements.
As I work on my sales unit forecast, my inventory requirements will automatically update at the same time so I can keep track of the costs easily.
Finally, I add two ‘Group cost of sales’ components at the bottom of the group. My payment gateway is a charge on all my sales. My postage and packaging costs vary slightly with the size of each order so I have entered an average value to make it easier to model and calculate.
These are set to calculate the costs as a percentage of all the sales coming out of the group.
I also add another group for my gift boxes that has a similar setup:
Let’s take a look at the finances so far. In the first year of my cash flow chart I can see my sales growing over time through my basic growth assumption:
My costs also grow as well since they scale at the same rate as my sales. Later, I’ll need to spend more time considering how seasonality and marketing campaigns will impact this growth at different times of year.
On my Profit & Loss report, I can see my financials in more detail:
The first month is left blank as I anticipate a variety of costs being spent in the first month before I can actually start selling.
Speaking of costs, let’s move onto the next part of our financial plan!
Section 3: Setting up e-commerce operational costs
We already dealt with some costs in the previous section, however these were variable costs that are directly attributable and scalable with each unit you sell.
Now we are moving onto your fixed costs, those that don’t scale with your unit sales directly, or cannot be directly attributed to unit sales.
Most businesses have a large variety of cost categories. I’ve divided mine up into ‘Operational’ and ‘Marketing’ as two top level sections. This will allow me to see them broken down in my Brixx reports.
Operational costs are then broken down into further groups:
My marketing costs are similarly broken down:
The forecast for these costs are generally much simpler than my income forecast. Many are predictable, repeatable amounts that don’t change much over time:
My marketing spend section is the area that will have the most variability. The costs will likely change as I start spending and learning about the effectiveness of different activities.
At this point I’d like to mention employee costs too, which is another category of indirect costs.
I’ll not be adding any just yet as the business I am planning won’t be able to support another salary in its first 12 months. We’ll look at this more in the growth planning at the end.
Let’s take a look at how our cash flow is doing after entering more costs:
Oh dear. We’re well into the negative as our sales aren’t immediately capable of covering the running costs of the business.
It’s looking better over the 3 year period:
As my sales grow over time, they gradually increase over and above my running costs. This highlights why it’s important to view over a long period of time! It also highlights that we are going to need some funding sources to cover our first burn period whilst we grow our sales.
More on that in Section 5.
First, we’ve got even more spending to do.
Section 4: Asset purchases
Asset purchases, otherwise known as capital expenditure are large purchases of items like equipment required to operate your business. In larger businesses they even cover the purchase of entire buildings or land plots.
Every business, no matter the scale will likely have some asset purchases though. A gardening business might need a lawnmower, a mobile coffee van needs a vehicle and a clothing business might need a high quality fabric printer.
These are different from your everyday operating expenses as you physically own the item. It has a value and increases the worth of your business represented on your balance sheet. You could sell them for cash if you needed to so need to be treated differently to your ordinary gas bill.
For my soap business, I’ve outsourced the production so I don’t need any equipment for my products. I have purchased a laptop for my business and upgraded my home office with some new furniture, fixtures and fittings.
It’s nothing major but it still all counts:
Another difference between assets and your typical expenses is that they also change in value over time through depreciation.
I’m modelling that my laptop loses 20% of its value each year. This loss is reflected in my businesses value on the balance sheet and might also have an impact on the sale of this laptop in the future.
This doesn’t have a huge impact on the financials for my particular business. If your business requires a lot of machinery or equipment it will become a key part of your forecasting. Planning when you’ll need to replace equipment or expand your capacity will be hugely important for your cash flow.
Section 5: Funding
My forecast is coming together well. It’s using some basic assumptions but it’s giving me a great impression of the funding I’ll need to start my business with.
I’m not looking to involve an outside investor at this point as I want to prove the business before bringing in outside help.
My choices are my own savings or a bank loan.
I model introducing £10,000 of my own savings into the business:
Which covers my first year just about:
Alternatively, I could use a bank loan. However, this loan will need to be much larger since not only do I have to pay it back over time but it also costs money through interest.
Here I am modelling a £20k loan paid back over 3 years at a 5% interest rate:
This also keeps me afloat in my first year but at a higher cost:
So, with income, operational costs, asset purchases and funding all entered into your financial plan, you’ve covered every area of your business.
You now need to spend some time crafting this forecast. Use your research and planning to get a better grip on your sales estimates. Consider the seasonal effects that could impact your sales and factor that into your forecast.
Projecting sales without any historical data is difficult but there are a number of techniques you can use to make it work.
Make sure you haven’t missed out any key on-going costs too.
Growing your business and running scenarios
Aside from working on your forecast further to make it more realistic you can also start to explore the potential your business holds in the future.
What does it look like to scale up and expand? How do you grow beyond just yourself managing everything?
Let me give you an impression of what this exercise looks like:
Here is my expanded financial plan. I’ve been busy. On the left I’ve expanded my product offering and split them out into 3 sections – Soap bars, Candles and Gift Hampers.
I’m looking to sell more sizes of bars, a new product category in candles and a much wider range of hampers for all occasions and budgets. This is all too much to do on launch though, so I’m looking at introducing them over time:
On my timeline, I’ve dragged the bars out several months into my plan to show the launch occurring at some time in the future.
I’ve also added another new section, this time for employees:
If I want to expand my sales I’m going to need a team. For an e-commerce business it’s going to be around managing the online experience. They will be focused around giving website visitors and customers the support and guidance they need as well as a team of digital marketers working on our campaigns and adverts.
Again, I’ve used the timeline to plan when I might be able to afford hiring new people.
In my operating costs section, I’ve also planned a move to a full office and explored the costs around the rent and bills involved:
It’s also worth running a variety of sales scenarios. I’ve copied my base plan a couple of times:
In my copies, I’ve run simple scenarios like 25% more sales vs 25% less sales. Does your business still look viable in these scenarios?
It might be that your business still works out in the long term even in the worst case but it means you need to seek out a lot more funding in the short term.
That’s what this phase is all about, identifying what your business needs to be viable and highlighting future problems right now so that you can plan for them.
Phew! That’s a lot of information to assimilate! It can be a bit overwhelming but make a plan and tackle your tasks bit by bit.
This article will give you a strong starting point to go ahead and begin planning your dream business.
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