Do the Math! Ecommerce for Small Business Needs to Add Up!

Do you know the running cost of your ecommerce website?

I have written before about what to spend on a website but in this blog I want to focus on how to breakdown the running costs of a website.

A key part of our sales process at Dmac is an assessment of the resources a client has available to them before agreeing a project.

Areas such as:

1. How many staff, if any, will be involved in the site?
2. How much time, in a given week, will be given to website management?
3. How are you managing shipping and inventory?
4. What kind of digital marketing budget is in place?

These are key questions to answer before taking out the cheque book for a new website as the answers will largely dictate the success or failure of an ecommerce website.

There are still plenty of business owners who look at an ecommerce website as a fixture or fitting in their business.  It has a cost of x and once that is paid I can relax and let it add revenue to my business.

With the internet’s continuing descent into pay for position this is getting further and further from reality.  A website is more like a vehicle.  It only moves if you keep it fuelled.

This blog will focus on the common costs that a business needs to manage when running a good ecommerce website.  We will also show how best to express these figures to keep track of costs on a daily and hourly basis.

We will break it down under the following headings:

1. Product & Category Management
2. Fulfilment
3. Payments
4. Shipping
5. Website Maintenance
6. Promotion

1. Product & Category Management

This is almost entirely a labour cost.  To get the best possible traction for your products they need to be displayed with good quality images, unique descriptions and accurate costs.  This all takes time to do correctly particularly if you write your own product descriptions (literally the best thing you can do for your website)

Adding a new product should take a trained person 10-20mins from start to upload, depending on the web platform.  Once the product is loaded it needs to be monitored for price and stock changes.  If you integrate with your epos system this is automated, but you would be amazed how many SME’s do not have a web enabled epos.

On top of the day to day management of product, you also need to invest time in researching new product trends to influence your buying as well as constantly revising your category structure to make sure it is simple for your customers to find product.

The amount of time spent should be based on the volume of product you want to manage.  The staff time required to do it right needs to be factored into your budget.

2. Fulfilment

This is an obvious one but again time needs to be factored into the administration of orders once you start making them.  Who is looking after customer contact, picking lists and packaging?  Who works with the courier company to ensure they collect & deliver on time.  Every order will have a handling cost which again adds to your labour cost.

3. Payments

If you take credit cards in your real-world business you are all too familiar with the related charges and online payment processors are no different.  They fall into two broad billing categories;

Commission Based, the processor usually provides aggregated processing and merchant account.  They only charge a percentage of the total order which is fine until you start to generate high volumes of transactions and the percentage (somewhere between 3-5%) really starts to sting.

Set Tariffs, usually suited to more established sites with higher volumes.  These providers normally require a separate merchant bank account and have fixed monthly fees (circa €30) The merchant bank will also charge a commission fee on top of that but it is normally much more competitive than their commission based counterparts (Stripe, PayPal)

Whatever your setup these costs chip away at the product margins and need to be considered as part of the whole.

4. Shipping

Another cost each order must bear.  To give a competitive edge many operators go with Free delivery which normally means the actual cost is hidden in the product.  But free or charged you must be sure you count the real cost of delivery.  This starts with getting good parcel rate from your courier or logistics partner, but you should not forget the cost of packaging materials as well as returns charges.

5. Website Maintenance

Like it or not your website ages faster than you can imagine.  To stay ahead of the ever-present security threats to customer data online and to keep up with Google’s incessant changes (over 1600 in 2016 alone!) You need to keep your website up to date.  We recommend that you look at the cost of a website over a three-year period so if you invest €3k in a new ecommerce platform your yearly cost is €1k.

6. Promotion

It is no longer possible to gain traction online without engaging in digital marketing.  Email, Social, Content or AdWords it all must line up to make sales.  This is one area where budgets can run unchecked and is often where profits vanish.  All digital marketing must be looked at through a lens of Cost per Acquisition.

Expressing the figures

Now that you have a grasp of the major costs of operating a simple ecommerce site you need to know how to get this into a manageable figure for you to track.  Over the last decade the we have learned the simplest method is to express everything as a percentage of your average order value.  This keeps the figures small and allows you to spot check your performance at any time without getting lost in P&L sheets.

Let’s break that down.  Look at the total revenue generated from the site over a period (your choice but anywhere from 1-12 months works) and divide this by the volume of orders.  This gives you an average order value.

Now take your total labour costs (under the headings above) for the same period and divide by the volume of orders.  Now figure out what percentage of the average order value this takes up.

Repeat the same exercise for all your costs and you now have the anatomy of an order value.  You can get a surprisingly accurate net profit figure per order but more importantly you have a great picture of the true cost of that sale

Facing the facts

If you do this exercise and realise that you are in fact loss making, then you are already a step ahead of many small ecommerce sites. Many seemingly successful or at least busy ecommerce sites are not profitable.  As a business operator you need to do the math on your ecommerce setup (real or imagined) once you have the numbers you can start optimising what you are doing and get the profit margins back.

The Dmac team are free to talk to you about your ecommerce dreams or nightmares at any time so drop us a line if this article has got you thinking.