Wondering how to start an eCommerce business that you can launch quickly with a relatively small startup cost? You might be considering an eCommerce business. This guide will walk you through what eCommerce is all about, why you should start one, different eCommerce fulfillment models, things to consider and look out for, and pros and cons of running eCommerce.
eCommerce has been one of the fastest growing businesses due increasing popularity in online marketplaces such as Amazon and Ebay, improved logistics and overall online shopping experience. It has seen a consistent year-over-year growth and continue to grow.
According to the U.S. Department of Commerce, consumers spent 14.2% more in 2018 than 2017, approximately $513.61 billion spent online in 2018. There’s plenty of demand to buy online so if you can combine a good strategy with a great execution, you can certainly take a piece of the pie.
But before you jump in, I’ll walk you through what eCommerce business is all about, and the pros and cons of running your own eCommerce business. This will help you determine if this is a good business option for you and how to better plan ahead.
What is eCommerce?
By definition, eCommerce, or e-commerce, refers to electronic commerce, which is business conducted online. Generally, buying and selling of products online is referenced to as eCommerce, however, buying and selling of services online is also considered eCommerce.
For example, any time you’re buying or selling online, whether you’re buying on Amazon, BestBuy.com, or an online store of your favorite local fashion boutique, you’re involved in eCommerce.
With increased internet availability and enhanced delivery logistics, such as FedEx and UPS, starting an eCommerce business has become more readily available, convenient, and widespread. Some product categories that were historically only purchased in-store, such as heavy furniture or appliances, are now purchased online and delivered right to your home.
As more consumers shop online, so does demand to sell online.
Why start an eCommerce business?
With its growing market domestically and internationally, eCommerce remains one of the hottest businesses to start for new entrepreneurs whether they’re fully committed with investments or simply looking for a side hustle.
Online marketplaces, such as Amazon and Ebay, also enable sellers to easily start eCommerce online with millions or billions of web traffic already coming to their site each month.
Due to the ease of starting, managing, and growing its business, eCommerce remains one of the top businesses to get into as a new business owner.
What are different eCommerce fulfillment models
There are three main fulfillment models: dropshipping, traditional stocking, and the combination of both dropshipping and stocking.
- Traditional stocking
- Hybrid of dropshipping & stocking
eCommerce fulfillment method #1: Dropshipping
One of the common ways to start an eCommerce business is by dropshipping.
Dropshipping, or drop shipping or drop-shipping, refers to a fulfillment method in which the eCommerce retailer does not stock any of its inventory but sends the customer orders to its manufacturer, wholesaler, or another retailer to ship directly to the end user.
Drop shipping is a popular way to launch a new eCommerce business due to its ability to launch quickly at very low cost.
eCommerce fulfillment method #2: Traditional stocking
The second is the traditional method of stocking your own inventory. This involves having your own warehouse space, staff, and order management system.
Although this is a more costly option compared to dropshipping, it gives you more control and better per-package cost as you no longer pay the “convenience” fees. This is also a great way to scale your business as you can expand on your own terms.
eCommerce fulfillment method #3: Hybrid of dropshipping and stocking
The third is a hybrid method of both dropshipping and stocking using third-party logistics company. You can enjoy the advantage of stocking your own inventory, however, the warehousing and fulfillment can be done by another company.
A great example of this hybrid method is Amazon’s famous Fulfillment By Amazon (FBA) service. They allow you to buy your own products, ship the products to their warehouse(s), and they will store and ship orders on your behalf directly to your customers.
FBA or similar services, commonly known as 3PL services, or third-party logistics, can become costly due to additional fees depending on several factors.
The best way to determine which model fits your business is to do your research, get multiple quotes if possible, and estimate what each option might cost you and what your trade-offs are.
Pros and Cons of starting an eCommerce business
As with any business, it’s important to understand and weigh its positives and the negatives prior to starting the business so you can plan and prepare for potential obstacles.
Keep in mind that all these are what may be necessary to get eCommerce business started but they would certainly require more in-depth considerations as you grow.
Here are the pros and top reasons to start an eCommerce business.
Evaluate each point described here to think about how each may or may not affect you. Doing so will help you decide if starting an eCommerce business is the right fit for you.
Quick Launch Time
Depending on the complexity of product sourcing and website building, a starting a new eCommerce business can be done in as little as a week or two.
If you would like to launch an eCommerce store quickly, you can consider a dropshipping model that would reduce the amount of time needed to find a warehousing space and receive inventory from the suppliers.
Some of the important steps to absolutely take prior to launching are:
- Picking the right product niche and products with availability, demand, and healthy profit margin
- Finding reputable and reliable manufacturer and testing their samples
- Coming up with your branding and logo
- Building a website
- Decide if you’ll be selling on online marketplaces such as Amazon or Ebay
- Decide on your logistics, including fulfillment, shipping carrier, drop shipping vendor, and returns.
- Create a plan for each marketing channel and create a budget
Low startup cost
Also depending on the product offering and complexity of the website, your startup cost can range from a few hundred to tens of thousands of dollars.
If you need to start your eCommerce business with the lowest possible startup cost, you may consider a drop shipping model to avoid stocking any inventory without an official website but doing business only through online marketplaces such as Amazon.
While there are certainly pros and cons to doing it this way, you can eliminate many expenses while you slowly build your cash flow to expand down the road.
Optional office or warehouse space and employees
Since an eCommerce business does not require a physical brick and mortar store, or even a physical warehouse in many cases, the cost to start an eCommerce business can be attractive to many to-be entrepreneurs.
You do not need to be a logistics expert, pay for extra employment taxes, or comply with additional laws and regulations involved with leasing an office or warehouse space and hiring employees.
Therefore, this component gives eCommerce business a low barrier to entry.
On the other hand, if you’re able to start bigger with a warehouse and employees to fulfill orders or expand on your marketing efforts, then you have a better chance of growing faster sooner. Having a warehouse to stock your inventory and self-fulfilling orders may greatly increase your profit margin as well.
At the end of the day, it’s important to evaluate all your expenses and sales forecast to determine if that’s the right type of investment at that specific stage of your business.
Easy access to good, affordable manufacturers overseas
eCommerce goes both ways. It allows consumers and end users to have more easy convenient access to many different retailers to buy online but it also connects eCommerce businesses to source their products from many different affordable sources online.
China remains one of the largest sources of goods sold in the US, and thanks to platforms such as Alibaba.com or Aliexpress.com, more eCommerce businesses can now compare, negotiate, and source products directly from Chinese manufacturers at wholesale price.
However, this doesn’t make the process any easier if you don’t do your due diligence to find quality products from reputable sources.
Established marketplaces such as Alibaba and Aliexpress make many of the key information readily available so it’s easier to evaluate suppliers. But you’re ultimately liable for your own business so be sure to evaluate each candidate so you know you’re partnering with someone that’s trustworthy.
Also, if you’re connecting with factories directly either through referrals or conferences, you need to do your own homework and ask the right questions. Many of them may look and sound sizable and reputable when they are not in reality.
Here are some key tips when it comes to finding a good supplier.
– Look for a good size manufacturer, not a broker.
Manufacturer refers a company that owns their own production facility or factory to produce their own goods. A broker is simply a middleman connecting you to a manufacturer, getting paid a commission when you buy. Buying through a broker will certainly add an extra fee to your cost.
Look for a manufacturer that has a decent number of employees. It shows that they have enough business to operate which means their business is more stable than someone who is smaller. I personally like to see at least 50 to 100 employees depending on the nature of the product they manufacture.
– What is their specialty?
They may not volunteer this information. Ask questions to find out what they make and what their production capacity is.
For example, if they’re producing 10,000 units of cell phone cases but 100 units of charger cables, it’s likely that they’re more specialized in cell phone cases than charger cables.
A manufacturer may be producing many different types of products but they’re likely to focus their R&D and support around what they specialize in and make the most of.
– If you need to dropship, ask them if they offer that service and if they charge any fee.
Aliexpress is one of the largest marketplaces to find dropshipping manufacturers directly from China. They may charge a higher product price than wholesale price but you most likely won’t pay any additional dropshipping fees. Take a note of their delivery lead time or shipping time.
Also, don’t forget about domestic dropshippers as well. They offer a huge advantage of shorter lead time and possibly better customer service. You may be paying a lot more but depending on your margin, it may be worth accepting a lower profit while you build your customer base.
– What are their production and shipping lead time?
Production time refers to how long it takes a manufacturer to make the products to get your order ready to ship. Shipping or delivery lead time refers to how long it takes their shipment to arrive at your destination.
The eCommerce trend has been changing to shorter lead times to get the products to end users within 2-5 days. Depending on the price point, your customers may be willing to wait longer.
Be sure to research your competitors to see what they offer in lead time and price.
– What is their minimum order requirement?
Some manufacturers may require a minimum order. If you won’t be stocking a large inventory, it’s important to check their minimum requirement is small enough for you to buy consistently without any delays.
Realistically, a high minimum order requirement relative to your sales may lead to stock out situations.
– Do they offer any price break or discount?
Generally, you’ll receive some form of discount with a bigger order volume. Be sure to know if there is any discount and how you might take advantage of it.
Generally, it’s less likely to receive any other form of discount if you’re starting a new relationship with a manufacturer and you don’t have a big volume.
Be sure to reach out to multiple suppliers to get a sense of what a fair price might be for you.
– What are the shipping options and cost?
International shipping can be a big expense so this is another point to negotiate. You can either use the shipping method provided by your manufacturer or have your own freight forwarder to handle the shipping, customs, and clearance.
If you use your factory’s freight forwarder, they may have a better pricing due to their overall volume. However, you might lose your direct communications and control over your shipment as you have to go through the supplier.
I recommend shopping around to get a good idea of what’s a fair shipping price and lead time so you can possibly better negotiate with your supplier.
If your order volumes are small when starting a new eCommerce business, your options may be limited and expensive using carriers such as DHL.
Multiple marketing channels to promote your site and products
You will not get a big web traffic to your new site unless you promote and focus on marketing. There are many ways to market your website so it’s important to define and strategize your marketing for each channel before you spend your time and money.
Some of the common marketing channels or methods include Pay Per Click (PPC) via Google or Bing, Search Engine Optimization (SEO), online marketplaces such as Amazon, Ebay, or Etsy, social network marketing via Facebook, Twitter, LinkedIn, etc, and more.
It’s important to choose the right marketing channel and strategy that fits your target audience.
The key to marketing campaigns is to attract the right audience at the right time. Understanding your customers, especially your best customers, and making sure your efforts are focused around attracting those that resemble your best customers will help you increase your Customer Lifetime Value.
And depending on where those prospects are in their buying cycle, you can nurture those leads to make sure they choose you and your products when they’re ready to purchase.
Relatively low level of expertise
You don’t need years of technical experience in order to start an eCommerce business (although it certainly would help). Modern technology and abundant online resources allow you to invest some time for you to learn the basics to get it going.
More technical skills such as marketing or website developing would certainly require more training and practice as you go but it doesn’t mean you can’t start.
Relatively low time commitment. Passive income opportunity
Depending on its volume, an eCommerce business can be seen as a way to make passive earnings. You can start as a side hustle and slowly grow it to a bigger business. It also makes money even when you’re away from your desk, sleeping, or taking a vacation.
Scalable to grow through up/cross-sell, international expansion, and marketing
eCommerce is a scalable business which means you can grow it as big as you want as long as you’re able to put the right amount of resources, including funds and staff, at the right places.
You can also up-sell or cross-sell to your prospects and clients depending on their interest to increase their order volume. The beauty of this is that this process can be automated using email marketing so you don’t have to do it for each customer. You define the process and automation takes place to make sure it happens wherever applicable.
If you’re doing well in a specific marketing channel, you can increase your budget to get an even bigger return.
Going international is also easier now than ever and is a great way to expand your business. Be sure to know the local laws and compliances as well as the cultural differences in their shopping behavior to adjust your business to their needs.
Easy to collect data for retargeting and personalization
One biggest mistake new eCommerce businesses make is not collecting the right data to use it to their advantage. Having an eCommerce business means you have all, or at least most of, your data digitally. This helps you not only collect data more easily but manipulate them to make it work for you.
And with the right data, you can use it to retarget the most relevant audiences at the right time with the right message that is personalized.
Multiple eCommerce platforms or channels to sell
We can’t discuss eCommerce without mentioning the eCommerce giants like Amazon, Ebay, Etsy, and other online marketplaces. They attract so many online consumers that some eCommerce businesses choose to operate out of these marketplaces only without their own website.
A couple of things to consider starting your eCommerce business only through online marketplaces:
- You won’t own any customer data because the marketplaces own the customers. You can’t freely email your customers or track their activities to retarget them. Although marketplaces do their own remarketing and email marketing, they’re not promoting your products so they might return and buy from your competitors.
- Your privilege to sell in these marketplaces are contingent on their approval. If you knowingly or unknowingly violate any of their terms, you may be suspended or even blocked from selling. There are many cases of sellers getting suspended for unknown reasons, leaving those sellers in a difficult position when their main or only source of revenue depend on those channels.
Difficulty with product quality
If you’re sourcing your products from someone else, whether it be from the US or Asia, it is your responsibility to make sure your product quality is up to par.
When you’re sourcing from overseas, it becomes especially difficult to control your quality. Be sure to test your samples prior to launching your business and also randomly check the product quality yourself to evaluate its continued quality.
Risk of Product IP
One of the biggest and most serious problems in any business can come from a legal issue. If you’re buying any product, be sure you’re okay selling that product.
Even if your competitors are selling the same products, it’s ultimately your liability if it becomes a problem. Your manufacturers may not be completely honest with you so be sure to do your due diligence and talk to the right people.
If you receive a cease & desist letter for what you’re selling, immediately pause your sales on those items and talk to an IP lawyer before you take any action with them.
Low expertise in marketing
This is one of the advantages of starting an eCommerce business, however, it’s also one of the disadvantages if you’re not experienced in marketing.
Marketing has a very low barrier to entry due to many available resources online, but doing it well and efficiently involves a lot of knowledge, practice, and experience.
If you have low expertise in marketing, your learning curve may be bigger when you initially start an eCommerce business. The time it takes you to see the results or even the amount of money it takes you to deliver the same results may be higher than others.
Many times, it’s difficult to see a marketing channel’s potential for your business if you don’t have the right strategy and execution that fits your business.
If you’re not sure if you’re doing it properly, have an expert evaluate your campaigns. Many will offer an audit at no cost to you and even provide valuable insights.
Higher cost with more marketing
As scalable your eCommerce business may be, so is your marketing budget. Especially with eCommerce business selling products, you may be spending more in advertising and optimization to attract new customers than you should. Being able to manage that and effectively grow with a healthy return is a challenge for any eCommerce business.
Sometimes it makes sense to invest in extra marketing upfront to build your base when initially launching your business. Be sure to look at your numbers, including the conversion rate, average order value, traffic, etc, to evaluate whether your investment might make sense for you.
Consider using Search Engine Marketing (SEM), or also known as Pay-Per-Click (PPC) to attract traffic and new customers that are searching for your products or services. Google is the biggest search engine and offers Google Ads (formerly Google AdWords) to allow businesses to advertise to them. See more resources related to Google Ads.
Some eCommerce business models, especially the easy dropshipping model, generally see a much lower margin than a traditional retailer. Depending on your sourcing, shipping, and marketing models, your profitability can vary.
Remember that your profitability is what will fuel your growth so if you’re losing money now, you need to think if your existing model can sustain your business.
Higher cost with professional website & services
As much as eCommerce business can be started with a relatively low startup investment in a short amount of time, a brand-new eCommerce website that is optimized to convert with a professional design can cost you quite a bit.
If you want to start with an appealing, professional-looking eCommerce website that functions and converts well, prepare to pay at least $10,000. And after you launch your website, you may also need to pay them to update and fix any bugs which would be additional ongoing maintenance cost.
Dependency on third-party channels such as Google ads, Amazon, Facebook, etc
If you choose to sell on any other platform or channel such as Facebook, Google, Amazon, Ebay, and etc, always remember your selling or marketing privilege may be taken away at any time for any reason.
For instance, even if you unknowingly violated any of their terms, they could possibly suspend or block your privilege at any point. The important thing is to not focus all your efforts in any given platform so your business isn’t jeopardized with any one incident.
Constant monitoring, testing, and optimizing
If you’re serious about your business and its growth, you’ll need to invest a good amount of time in monitoring, testing, and optimizing many different parts of your business.
Some examples include testing and optimizing your website, advertisement copywriting, landing pages, email subject line, email format, email timing, blog titles, and many others.
In other words, testing and optimizing should be part of every process so you can always make improvements.
In conclusion, starting an eCommerce business can be a great option due to its low barrier to entry and startup cost. However, it’s important to fully understand its pros and cons before launching so you can properly plan what type of business model you’d like to build and set the right marketing strategy to promote.
While starting a new eCommerce business can be quick and inexpensive with multiple marketing and sales channels with minimal resources while being scalable, it can also be challenging to manage its product quality and intellectual property with high marketing and website costs if you want to scale your business quickly.
It’s important to evaluate each of these pros and cons. Also, evaluate your chosen product, logistics options, and marketing channels to know their associated costs and trade-offs.
If you’re still considering an eCommerce business, what is your biggest challenge or concern and how do you plan on overcoming it? Comment below to share your thoughts!