There is no single formula for starting an ecommerce business. The process is pragmatic rather than theoretical.
Imagine you are driving a sports car along a curvy mountain road. As you speed along, your left foot depresses the clutch, and your right hand shifts the seven-speed manual transmission. Your right foot manages the accelerator and brake as you move in and out of each turn. Your left hand is on the steering wheel, following the road’s contours. Your eyes focus on what lies ahead, helping you to anticipate your next move.
In other words, you’re doing many things simultaneously.
So it is with launching an ecommerce company. If you search Google for “how to start an ecommerce business,” you would find many guides that describe a straightforward process, populated with simple steps such as pick a product, choose a domain name, get a logo, and open up your shop using our platform, software, or tool.
These guides are not necessarily wrong, but they may not be practical. In theory, you do need to pick a product, but in practice not just any product will do. Drop shipping a low-demand item you found on AliExpress is “picking a product,” but few consumers will likely buy it.
At the end of this guide, you will find a checklist of tasks to start an ecommerce business. But I’m going to address how to start a successful ecommerce business. Each section may inspire you to take further action, such as reading an article, studying a book, or examining a tool. The sections are not steps to be done in order, but rather concepts to consider. They are:
- Solve a Problem
- Arrange Funding
- Develop a Plan
- Source Products
- Checklist of Tasks
- Take Action
- Further Reading
Solve a Problem
In 2004, W. Chan Kim and Renée Mauborgne, two college professors, released the book “Blue Ocean Strategy.” For them, the business world was divided into red oceans and blue oceans.
Blue Ocean Strategy
A red ocean is full of competition. The water is red because of all of the bloody fights taking place there. A blue ocean represents clear waters.
“Blue ocean strategy is the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand. It is about creating and capturing uncontested market space, thereby making the competition irrelevant. It is based on the view that market boundaries and industry structure are not a given and can be reconstructed by the actions and beliefs of industry players,” the authors say on their website.
The idea is that a business “sailing” in a blue ocean is likely to be more successful and more profitable than businesses in competitive red oceans. If you’re thinking about opening an ecommerce business, this is a critical concept.
Is the business you’re considering going to face significant competition? Have you solved a problem for consumers that is better than your existing providers?
Consider Uber, the ride-share software firm. Uber’s success is not from being a taxi or limousine service. Its success stems from a software tool that connects drivers and riders whilst securely managing the payment process.
Before Uber, you might find yourself in the back of a taxi at the airport waiting for the driver to run your payment card right there in the car. As a rider, you hoped that this unknown driver would not skim your card number for later use or, worse still, for sale on the dark web. Conversely, the driver doesn’t know who you are or if your card is stolen.
Uber solved this payment problem. It created a blue ocean.
Your ecommerce launch doesn’t need to be this dramatic. But you do need to offer something that helps consumers solve a problem or meet a need.
Consider, also, Balsam Hill. This ecommerce company’s primary product is a high-end artificial Christmas tree.
There was a problem in the market for Christmas trees. Artificial Christmas trees were easy-to-use, unlikely to catch fire, and a lot less messy. But artificial Christmas trees of old often looked ugly or cheap compared to a natural tree.
So Balsam Hill created an amazing artificial Christmas tree that offers a natural tree’s beauty and majesty and the benefits of an artificial one. Customers are happy to pay $1,000 or more for Balsam Hill’s products.
Balsam Hill’s customers are happy to pay $1,000 or more for a Christmas tree.
This is a common scenario for blue ocean businesses.
“We set out to quantify the impact of creating blue oceans on a company’s growth in both revenues and profits in a study of the business launches of 108 companies,” Kim and Mauborgne wrote in their book’s very first chapter.
“We found that 86 percent of the launches were line extensions, that is, incremental improvements within the red ocean of existing market space. Yet they accounted for only 62 percent of total revenues and a mere 39 percent of total profits. The remaining 14 percent of the launches were aimed at creating blue oceans. They generated 38 percent of total revenues and 61 percent of total profits.”
If you can create your ecommerce business in a blue ocean, you should earn more profit than trying to sell head-to-head against established competitors.
For example, it is probably not a good idea to try to start a drop-shipping business selling protein powders. You’d need to compete with big companies such as GNC and Bodybuilding.com as well as a legion of small sellers on Amazon. The only competitive advantage in that market is the price.
However, if you offered custom blended protein powders uniquely created for each customer, you might have a blue ocean. Who knows?
You can address the problem of finding a blue ocean market in several ways.
For example, try to find a gap in the market. Many successful Amazon sellers have done this. They analyzed consumer demand on Amazon using tools such as Jungle Scout to identify opportunities. Then they developed a product to fill that gap and make a profit.
You might also start with a consumer need. Maybe you’re a vegan, and you desire more fresh pasta that doesn’t have eggs in it. So, you start making vegan fettuccine and offering it for sale.
Finally, we have used the example of a “blue ocean” to encourage you to find a way to differentiate your planned ecommerce business. There are other thought models and analogies that can help you understand the importance of differentiation, including the idea of a unique selling proposition (e.g., selling dog food on a subscription), the product-market-fit concept (an appealing product for a strong market), or the simple slogan “differentiate or die.”
Arrange Funding
It is possible to pay about $39 a month for an ecommerce platform and $29 or less a month for a drop-shipping service such as Oberlo or Spocket. Thus you could start your ecommerce business for something like $68.
Some kids spend more on a lemonade stand, and they are more likely to make a profit.
It is going to take more than the cost of dinner to launch your ecommerce business. How much money you need varies based on the particulars of your planned company. But in my experience you will require between $5,000 and $50,000 or more.
The U.S. Small Business Administration recommends trying to estimate your start-up costs, which could include:
- Office space,
- Equipment and supplies,
- Communications,
- Utilities,
- Licenses and permits,
- Insurance,
- Lawyer and accountant,
- Inventory,
- Employee salaries,
- Advertising and marketing,
- Market research,
- Website development.
To this, an ecommerce startup might add:
- Packaging,
- Fulfillment and warehousing services,
- Returns,
- Software.
Before you launch, research each of these expenses. Estimate one-time expenditures and recurring monthly fees. You’ll want enough cash to pay for everything for at least a few months.
You have options when it comes to raising money.
- You can simply save it up. No doubt you’d love to start your ecommerce business now and generate sales immediately. You may have been hoping that this guide included a five-minute plan to do that. But no such plan exists. If you fund the startup yourself, you may need to save patiently. Consider automatically depositing a portion of each paycheck into a savings account to start your business in a year or two.
- You could secure loans. When you borrow money to start your business, you retain full control and ownership, but you will need to pay interest, and you’ll have to convince a banker that your company is viable. The SBA does facilitate loans, so you may want to schedule an appointment with your local Service Corps of Retired Executives (SCORE) office at the SBA. The volunteers there can give you advice both on your business and how to seek a loan.
- You could try crowdfunding. Modern crowdfunding takes a few forms, but in many cases, you are not selling shares in your future company, rather folks are funding your business in exchange for gifts or products. STRØM CITY electric bikes, for example, raised more than $2 million with its 2018 Indiegogo project, which effectively was a pre-order program wherein folks could fund the business in exchange for a bike once the company began manufacturing.
We’ve addressed crowdfunding many times. One entrepreneur shared her experiences at: “Building an Ecommerce Business, Part 14: Using Kickstarter.”
- You could find investors. In this scenario, you would convince individuals or businesses to invest in your startup in exchange for a share of ownership and, often, an active role in the business. The SBA described five steps for doing this:
a. Find an investor. “Look for individual investors — sometimes called ‘angel investors’ — or venture capital firms. Be sure to do enough background research to know if the investor is reputable and has experience working with startup companies.”
b. Share your business plan. “Investors will review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on an industry, geographic area, or stage of business development.”
c. Go through due diligence review. “The investors will look at your company’s management team, market, products and services, corporate governance documents, and financial statements.”
d. Work out the terms. “If they want to invest, the next step is to agree on a term sheet that describes the terms and conditions.”
e. Investment. “Once you agree on a term sheet, you can get the investment. Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally come in ’rounds.’ As the company meets milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.”
For additional funding ideas, check out:
A word to the wise here: Be realistic in your estimated expenses and your funding plans, but also undaunted.
Imagine it was your dream to open a business selling vintage apparel and art. You have a vision of a brick boutique in a hip neighborhood. And your imagined online store is amazing, too, with videos and a photo gallery for every item. When you ship an order, you put it in a custom black box emblazoned with a gold logo.
But when you estimate your expenses, you discover you need $150,000 to launch. Don’t give up. Start small.
What if you opened your business on eBay only? You wouldn’t need to lease a store or build a website. You could even forgo the branded packaging. You could get started with just a few thousand dollars invested in inventory. Later, you could grow the business to meet your dreams.
Beardbrand, a company that sells men’s grooming supplies, didn’t initially sell anything. Instead, it began as a YouTube channel. Co-founder Eric Bandholz, the host of Practical Ecommerce’s podcast, started by building an audience. His low-cost approach meant that when it was time to start selling beard oils, for example, his company didn’t have to be as dependent on paid advertising as a competitor might be. Other successful merchants have adopted similar strategies.
Before launching its ecommerce sites, Beardbrand developed an audience on its YouTube channel around men’s grooming.
Develop a Plan
Yogi Berra, the famous baseball manager known for his witticisms, once said, “If you don’t know where you’re going, you’ll end up someplace else.”
He’s right. You might want an ecommerce business, but if you haven’t taken the time to think about it and to plan it, “you’ll end up someplace else.”
“Many people have business ideas over the course of their careers, but often, these ideas never come to fruition, or they get lost amidst our daily obligations,” wrote finance expert Sean Heberling in an article for Toptal, the freelance marketplace.
“Interestingly, studies support the notion that those who write business plans are far more likely to launch their companies. Data from the Panel Study of Entrepreneurial Dynamics, in fact, suggests that business planners were 2.5-times as likely to [launch a company]. The study, which surveyed more than 800 people across the United States who were in the process of starting businesses, therefore concluded that ‘writing a plan greatly increased the chances that a person would actually go into business.’”
Creating a business plan follows from differentiating your company and funding it. Thus composing a plan can help with those concepts, too.
You don’t necessarily need to follow a template, but your business plan should address these areas:
- A description of your company. Sum up in a short paragraph what the business does, how it earns money, and what separates it from the competition.
- A market analysis. This is not as technical as it might sound. Simply state what you know about the market for the products you would sell. The analysis should demonstrate that you know your competitors and why you could succeed against them. If you’re planning to create a blue ocean, the analysis should explain how and why.
- A customer acknowledgment. Describe the problem your business would solve or the need it would fulfill. Describe your company’s customers and how it would acquire and serve them.
- A financial projection. This section should convince an outside party — think loan officer, investor, or even supplier — that your business is viable. Include projected income statements, balance sheets, and cash flow statements. If you’re unsure of those documents, hire an accountant.
- A business model. There are roughly six ecommerce business models, including four that might apply to you: (i) business-to-consumer, which also includes direct-to-consumer; (ii) business-to-business; (iii) business-to-government; and (iv) consumer-to-consumer. Nuances for each include subscription services and curated buying.
For more, see “6 Leading Ecommerce Businesses Explained.”
- A description of sales channels. Will you sell on eBay at first and add a website later? Will you sell via the Amazon marketplace? Invest the time to understand how each channel works, its benefits, and how your business could compete.
- A marketing plan. You should be able to articulate how your business will attract customers. Will you build an audience first like Beardbrand, or will you rely on pay-per-click advertising? How much would it cost? How will you measure marketing success?
Consider visiting the Small Business Administration’s article on business plan composition.
And don’t get discouraged. Creating a business plan takes work, but it will contribute to your success.
Source Products
In my experience, it’s a bad idea to source your products via a wholesale drop-shipping service. These companies can provide quick access to items to sell, but it will be extremely difficult to differentiate your brand and earn a profit. It’s not impossible, just unnecessarily difficult.
Instead, focus on what successful retail businesses have done for years: establish supply chain relationships. This could take a few forms.
- Buy directly from brands. If you want to sell Nike shoes and apparel, you may be able to buy from Nike. If you want to sell Carhartt, you may be able to buy directly from Carhartt. Those companies will likely have minimum order requirements, but it is possible.
- Buy from distributors. If Hasbro, for example, won’t sell to your company directly, find a distributor that will sell you Hasbro products.
- Manufacturer your own products. If you want to sell handmade furniture, you could build your own inventory in your own workshop. There are many products you could create yourself, including digital goods such as software, ebooks, and similar.
- Use a contract manufacturer. This is a favorite among direct-to-consumer sellers. Many companies will manufacture a product for your business, which becomes the brand.
- Purchase used or bulk products. You can find excellent used items to sell, such as on eBay or classified ad sites.
In each case, do some leg work. Some suppliers will want cash up front. Others may require a business plan before extending credit.
Checklist of Tasks
So far I’ve described four concepts to help launch a successful ecommerce business. The concepts are interrelated to the overall business creation process — remember the car driving analogy from above?
Some tasks, however, need to be checked off a list, regardless of the business’s niche, products, or target customers.
Market research. It’s essential to understand the marketplace if you hope to create a blue ocean or a successful addition to a red ocean. Consider the following steps.
- Estimate demand. Will people or other businesses buy your products?
- Total available market and share. How many people or businesses could theoretically buy your product or service? What percentage use your competitors?
- Timing. Is now the best time to start your business? Are your potential customers going through a downturn? Have they changed their buying habits?
- Price. Could you sell your products or services for a profitable price? Why or why not?
Legal responsibilities. Your new company will have some legal responsibilities regardless of the location, such as:
- Register your business name.
- Establish trademarks, if needed.
- Get a federal tax identification number.
- Register with appropriate state or provincial agencies.
Establish your brand. You’ll need at least a few brand elements. These may include:
- A logo.
- Fonts and colors.
- A domain name.
- Graphic design elements.
- Packaging.
Select software. Your ecommerce business will need software to, at the very least, present your company’s products online.
This is not a small task. You could build something yourself (with the help of developers). Or you could use an established platform, which has the benefit, typically, of free customer support that’s often critical to new entrepreneurs. What about using marketplaces such as eBay, Amazon, or Walmart?
Regardless, here are some of the software services you may need. I’ve linked to Practical Ecommerce’s Vendor Directory, where appropriate.
Take Action
You have reached the end of this practical guide to starting an ecommerce business. Hopefully it’s different than the other such guides in at least two ways.
First, I am not trying to sell you software or other services. I’m offering suggestions based on 20-plus years of industry experience.
Second, I’m not trying to make the act of starting a business seem easy. It is not. It will require you, the entrepreneur, to learn new things and put what you learn into practice.
It is time for you to take action. Start the business that could change your life.
Further Reading
- Eric Bandholz’s 19-part “Building an Ecommerce Business” is essential reading (and listening) for entrepreneurs. Each installment is an interview with an ecommerce merchant around a critical topic.
- “The Web Marketing Checklist” was first published roughly 20 years ago. The latest update, from me, offers 40 ways to generate traffic to an ecommerce site.
- Many ecommerce businesses rely on traffic from organic search results at Google and other search engines. Jill Kocher Brown’s 12-part “SEO How-to” untangles a confusing process.
via https://www.aiupnow.com
Armando Roggio, Khareem Sudlow
