Many merchants looking into adding an ecommerce channel to their retail business are experiencing sticker shock. Various changes in the online space contribute to higher than expected costs of doing business online. While it is still considerably less expensive to set up and operate an ecommerce store than a physical retail space, it is helpful to look at the whole picture to get a sense of what the costs of ecommerce consists of and why they are such.
To compare costs, we're going to use the case outlined in the Inc. article The Cost of Starting Up a Retail Shop.
Cost of Retail
Before deciding on a budget for ecommerce, it is important to understand the costs of traditional retail. Why is this important? Because ecommerce shares many of the same costs.
Rent / Operating Costs - $4,889
- Deposit - $1,877
- First month's rent, Taxes, Shopping Center Fees - $1,877 +$835
- Utility deposits - $300
Improvement Costs - $7,650
- Build out - $4,000
- Fixtures, displays - $3,500
- Handyman, supplies - $150
Miscellaneous Operating Expenses - $1,560
- Hangers for clothes - $1,000
- Liability insurance - $185 / quarterly
- Accounting set up - $25 / month
- Association fees - $250
- Office supplies - $100
IT - $6,165
- Computer, laser printer, and cordless phones - $900
- IT Consultant and tech support - $600
- Telecom services: high-speed Internet via cable modem and digital phone - $100
- Domain registration - $15
- Google services, including the store's e-mail - $50
- Website hosting, design, and development - $3,500
- Specialized POS software for the resale industry - $1,000
Marketing - $8,900
- An exterior sign and center pylon signs (2) - $4,500
- Interior signage and décor - $600
- Trademark registration and legal services - $500
- Logo design - $1,500
- Business card design and printing - $1,300
- Flyer design and printing - $350
- Coupon design, printing, and redemption costs - $150
Public Relations - $1,670
- Grand opening event, including food and beverages, entertainment, and signage - $750
- Public relations/media relations around the grand opening - $800
- Advertising around the grand opening - $120
Inventory
In the case of our reference store, there is no additional cost for inventory, as it is a consignment store. There are few business models where inventory does not carry additional cost, but since inventory costs will vary widely based on the product line and be essentially the same for a retail location and ecommerce, so it's safe to skip that for now.
Total - $30,834
In this case, there are a few key items that most retail businesses need to account for that this case does not. In addition to inventory, most businesses have a huge additional expense, labor.
Cost of Ecommerce
For this case, we're going to assume the same business wants to start selling their product on their Website, accept credit cards and calculate shipping. We're also going to assume they will support their Ecommerce store with the same marketing and administrative costs. For our final assumption, the ecommerce solution is a fairly standard shopping cart set up.
Miscellaneous Operating Expenses - $210
- Liability insurance - $185 / quarterly
- Accounting set up - $25 / month
Marketing - $3,300
- Logo design - $1,500
- Business card design and printing - $1,300
- Flyer design and printing - $350
- Coupon design, printing, and redemption costs - $150
Public Relations - $920
- Public relations/media relations around the grand opening - $800
- Advertising around the grand opening - $120
IT - $17,165
- Computer, laser printer, and cordless phones - $900
- IT Consultant and tech support - $600
- Telecom services: high-speed Internet via cable modem and digital phone - $100
- Domain registration - $15
- Google services, including the store's e-mail - $50
- Website hosting, design, and development - $15,500
Total - $21,595
Difference - $9,239
As we can see, there are significant start-up cost savings with ecommerce as compared to traditional retail, and the savings continue month after month by not paying rent. Additionally, a retail store will have higher labor costs over time.
What is Shopping Cart Software?
Website shopping carts are the category of software that include such features as are required to complete an online transaction. Over the years, shopping cart software ( Websites ) have improved the functionality to include just about anything a seller might want for their online store.
Core features of shopping carts include:
- Ability to add product and inventory information,
- Allow for visitors to browse a catalog,
- Selecting items and options ( like color, size, and quantity ),
- Collects the information required to deliver the product,
- Receive payment.
A typical shopping cart will have many more features that improve both the selling and buying experience, such as:
- Calculate shipping based on properties of items selected by the customer,
- Customer account management,
- Automated emailing of invoices, etc,
- Sales, inventory reports
And many shopping carts include much more than that, making it possible for even small e-tailers to run very successful online stores.
What Goes into the Cost of a Shopping Cart?
Each Shopping Cart setup is likely to have unique requirements, but many aspects are the same no matter what.
The absolute minimum set up of a shopping cart will include things like:
- Design
- Store settings and information ( address, email, shopping and cart preferences, etc )
- Setting up products and adding inventory
- Interfacing with third-party providers ( shipping, payments )
- Hardening ( adding security features, such as SSL, captcha, etc )
More customized stores may include things like:
- Suggested / recommended / related products
- Social sharing
- Newsletter signups
- Customer product reviews
- More detailed product information, with options and variations
- Bulk purchase prices
- Coupon code, sale pricing
- Search Engine Optimization
Obviously, the more customized, the more variation between products, the more product categories, the more specialized the shopping experience, the more time is involved in setting up a Web Store.
Some Hidden Costs
Many people unfamiliar with retail underestimate the cost of payment systems, and if they are familiar with taking credit cards in a retail setting, there are still a few surprises as it relates to online commerce.
The first thing to realize is that your fees for processing credit cards can be significantly higher online, as the processors consider "card not present" transactions to be higher risk. Normally, a retailer will swipe a card at the point of sale, the magnetic strip ensures that a physical card is present at the register. Online, someone is typing in the card numbers, and it is much more difficult to prove it is actually the card holder ( as opposed to a thief ) entering the card.
Then there is the PCI-DSS compliance aspect. Years ago the payment card industry enacted a set of security standards that every merchant must adhere to in order to prove in good faith that they are protecting card holder information. This included steps in the checkout process like encrypting transactions ( SSL ) and not storing the card numbers in the merchant's database. There was a fairly large whole in these standards that allowed small merchants to implement a processing system where by the card numbers are sent to their Webserver and a behind the scenes communication with the payment gateway was used to complete the transaction. As long as the few basic steps were followed, this was considered to be compliant. Not so any longer.
Today, running a compliant ecommerce site is a much more complicated undertaking. Shopping carts set up under the old techniques are no longer considered compliant, the payment card industry now expects for the entire technology stack to meet PCI-DSS security guidelines, which is nearly impossible to achieve on typical low-cost shared hosting that many small merchants use to house their Websites. And for those who spend the extra money on hosting ( opting for Virtual Private, or dedicated servers ), there is a significant cost to certify their application meets the standards. According to Network World, the annual cost of a PCI audit is $225,000, simply out of reach for most small merchants.
While the payment gateways have been slow to implement new processing systems that remove the burdens of PCI-DSS, few shopping cart payment modules have been adapted to these new systems. We've developed a custom payment interface that does leverage the new gateway payment systems, but at this time each implementation is a completely custom set up, which drives up the cost. ( More detailed information is about the new PCI-DSS standards )
There are, of course, alternatives, such as PayPal and other off-site payment portals, but these all suffer a similar limitation, high shopper abandonment rates. What are abandonment rates? This is when a customer adds products to the shopping cart, but when they reach the payment screen ( or any screen really ) and decide not to complete the transaction. While this can occur for a number of reasons, one common reason is these off-site payment processors. The way PayPal and similar systems work is when it is time for the customer to enter their payment information ( credit card ), the customer is sent to a different site to complete the transaction. This is great for the merchant as they no longer need to worry about PCI, but it is not so good for the customer. See, when a user is on your site and want to purchase your product, there is a level of trust. But when they decide to enter their payment information and are sent to a site they don't recognize, they get suspicious, and many people don't know or don't want to share their credit card with PayPal. And they go to another merchant's site.
However, it is important to note implementing PayPal can have some real cost savings for the merchant. Most shopping carts include PayPal as an option by default, saving thousands over a custom solution and practically removing the security / compliance issues. PayPal is a well recognized brand, probably more so than your own company, and is trusted by millions. Their checkout process is very streamlined, which is very important when considering mobile customers. Finally, PayPal has a flat rate cost per transaction, which is often less than you would pay for an online credit card, and there is no monthly fee or minimums. So if you want to significantly reduce your costs, definitely consider PayPal.
Shopping cart abandonment costs merchants real money, and it happens for a myriad of reasons throughout the shopping experience. Here are some of the top reasons why customers abandon their shopping carts.
Mobile Commerce
It is impossible to talk about Websites now with out considering mobile users. Today, smartphones out sell computers world wide and are expected to continue to increase in popularity as will tablets. But while shopping cart abandonment rates average around 67%, mobile abandonment rates are typically a much higher 97%.
Why does mobile commerce have such ridiculously high abandonment rates and what to do about it?
It all boils down to usability. Mobile customers are like any other customer, only their challenges are magnified. A computer user may find it challenging to find an essential link or button, but on a small screen, it can be totally frustrating. Long checkout forms and processes are a real hassle with virtual keyboards on smartphones and tablets. Even forcing customers to create or log into accounts may not be worth the hassle.
This leads us to the importance ( and added expense ) of good design and testing. The design is the first thing your customer notices, it is how the customer interacts, it is part of your message and marketing, and it is not to be taken lightly. It takes an experienced hand to create an effective design that will adapt to the needs of your customer, regardless of the device they use to visit your site.
Final Thoughts on Ecommerce Costs
As is probably evidenced by the length of this post ( I really didn't mean to go on so long ), so many things go into the cost of an ecommerce Website. In general, ecommerce is significantly less expensive than a rational retail store front. There are lot's of choices that go into the cost, such as how the merchant chooses to handle payments. But there is one choice that makes the most significant impact on both the cost and success of your Web store, the developer you choose.
This may be hardest choice to make, there are many options and it is hard to compare based on proposals. Developers range from students and armatures, freelancers, to small and large companies, and their prices will range from next to nothing to 6 or 7 figures. Just because a student's price per hour might be much less than an experienced company, doesn't mean the product will perform as well.
I say that proposals are a poor indicator of your best options because businesses mostly choose based on price. People who write proposals are motivated to make the price as cheap as possible, but that won't tell the whole story. Many businesses find that after choosing a provider, the proposed price is really a starting point and by the time the site is launched, it can cost 2 - 3 times what was in the proposal.
It is important to choose a provider you can communicate with, who you feel confident in their work, one who comes with solid recommendations and a portfolio.
If you are interested in launching an ecommerce Website, or redesigning your dusty old site, please contact us. We've built more than a few and would be happy to connect you to customers we work with.