Cost Analysis: Starting A Retail Store Vs. An Online Ecommerce Business

In this challenging economy, how you promote and position your business will be key to your success. For many entrepreneurs who are looking to sell their products and services to a wider audience, a common question is should you start an offline or an online business, or both? Statistics show that 4 out of 5 businesses fail. This means that if you're going to succeed in business, you need to understand what your customers want by measuring how they respond to your products. It isn't enough to maintain a blind faith in the value of your products, you need to be quick to act when something isn't working. The unsettling fact is that many great products simply don't sell in the marketplace, but if you're willing to try and fail a few times you'll eventually stumble upon a winning formula. The beauty of starting an online e-commerce business is that you can easily change your products and marketing strategy because you aren't weighed down by the high cost of expensive stock and the maintenance costs of a traditional retail store. Using inexpensive online marketing, social media and analytic tools you can engage your customers, test different marketing approaches and monitor how they respond to your products without spending tens of thousands of dollars on an idea that may not sell. Let's take a look at the differences in startup cost and marketing for offline and online businesses with a brief cost analysis of both options.

Costs of An Offline Retail Store:

  1. Much more money up front.

    In addition to your monthly lease payment and the obligation to rent a storefront for a minimum of 6 months to a year, you will have to pay to properly renovate your storefront, create a sign and buy equipment, which can run into the thousands of dollars. Let's go with a moderate figure of $10,000 for renovation, sign creation, lease closing costs and equipment costs.

  2. Cost of you monthly lease.

    Here in Vancouver, a streetfront store in one of the cities' neighbourhoods costs between $50-75 per square foot. The average storefront retail shop is around 1000 square feet so your monthly rentals costs on the lower end of the commercial real estate market ($50/sq. foot) will be $4166 in leasing cost per month.

  3. Cost for reliable sales staff.

    For a retail store you're going to likely need at least 2 staff members working 9:00 am to 7:00 pm each day of the week. Let's say you pay your sales staff $12/hour, that will be $240 in labour costs each day, $1680 per week and $6720.

Total Cost:

$10,000 initial investment and then $10,886 per month in costs.

Costs of An Online E-Commerce Store:

  1. Cost of web development for your website.

    To get a custom e-commerce website created it will start around $6,000. This would include your entire shopping cart platform, a company blog, social media integration, user reviews and ratings, and full e-commerce analytics tracking of visitors and sales.

  2. No cost for sales staff.

    Instead of paying over $6,000 dollars a month in sales staff, you can spend that money driving traffic to your website using highly-targeted PPC advertising. If you don't want to handle the orders and shipping of stock yourself then you can easily hire someone to do this for you at a fraction of the cost of having sales people working in your store 10 hours a day.

  3. Online marketing is more effective.

    Compared to traditional marketing, which is difficult to track, there are many advantages of marketing.The biggest advantages of marketing an online e-commerce website is that you can track your ROI (return on investment) from every marketing dollar you spend.

  4. Monthly web hosting costs.

    To host a e-commerce website on high-speed servers it will cost you around $30/month. You will then want to hire someone to do online marketing for your website and provide technical assistance if you ever have problems with your website which will cost around $2,000/month.

Total Cost:

$6,000 initial investment and $2,030 per month in costs.

Minimizing The Risk

As you can see the startup costs are significantly lower for an E-commerce website (plus you don't have to get locked into an expensive long-term lease) than a traditional retail storefront. On top of the expenses for both an offline and online business, you will need to spend money marketing and promoting your new business. For some entrepreneurs, depending on the products they want to sell, either one of these options could be superior. However, the lower costs and better tracking of marketing for an e-commerce website provides a less risky and easier testing ground to fine-tune your new business model. For retail business owners that want to expand their operations across Canada, the United States and globally, an E-commerce website can help them dramatically expand their overall sales. Most importantly, for new businesses an e-commerce website allows provides a relatively inexpensive way to test out your products and then easily expand into retail locations and a larger e-commerce system as your customer base increases.

For more information on eCommerce or online marketing, visit Smartt Insights