Starting your own business is a significant endeavor. It takes a lot of courage, patience and determination to launch a company that is all your own. No matter how much research you’ve done and how many people you’ve spoken to, there are some things you just don’t learn until the time comes.
The world of eCommerce has been growing steadily for many years now. Trends, statistics and projections have all led to the same conclusion: customer reliance on eCommerce is growing and thus, so is the market. There are some pretty staggering numbers out there:
- In 2020, eCommerce accounted for 18% of the entire global retail market, and that’s projected to rise to nearly 22% in 2024.
- Retail eCommerce sales globally amounted to more than 4 trillion dollars in 2020.
- A PWC report states that nearly one-third of consumers buy online once a week or more.
- Brands with a social media presence have 32% higher sales volume on average than those that don’t.
While signs point to the growth of eCommerce, nothing has planted them more firmly in the ground than the global experience of the pandemic. With movement restricted, stores closed or limited in their capacity and regulations changing rapidly, shopping from home became the only reliable - and for many, the only safe - way of shopping.
The pandemic has had a noticeable impact on consumer behavior in shopping and leisure activities. Not only are more consumers shopping online, but they’re also shopping for different things. In the second quarter of 2020, online shopping was up nearly 40% over the previous quarter - a sudden and dramatic shift.
Personal care items were in high demand, with more household cleaners, vitamins, hair color, and coffee purchases. Unsurprisingly perhaps, sales went down for things like cosmetics and sun care. People took up new hobbies and spent more time shopping for self-care and entertainment products.
Shoppers tended toward value-based products and those that were longer-lasting, choosing to spend their money on things that would carry them through the ongoing uncertainty. A popular shopping approach was omnichannel purchasing, in which shops allow customers to pick up online purchases curbside or in-store.
Businesses everywhere responded by moving their products and services online, including those available on their store shelves. At the same time, many consumers became inspired to join the market by offering their goods through online portals. The world has relied more than ever on the availability of products online, and businesses new and old are showing up to meet the demand.
For some, the allure of starting their own eCommerce business was the dream of passive income. The idea that you could come up with a catchy name, list some products and have a seller like Amazon or Shopify do the rest appeals to many. Reality isn’t quite as hands-off and guaranteed.
Some entrepreneurs get caught up in the illusion of “low overhead.” There are indeed a number of things that won’t make it onto your business plan when starting a purely online business. Things like renting a storefront (often with a long-term commitment), purchases, renovations to the space, utilities and recurring bills and staff are all less relevant to you as an online merchant.
Of course, that is all true, but low overhead doesn’t mean “no overhead.” You still have the matter of purchasing inventory, accounting for shipping costs with returns or exchanges, digital marketing to reach your customers, hiring staff to perform customer service duties, and more.
This article shouldn’t discourage you from following your eCommerce dream. Quite the contrary, actually. We aim to give you some insight into some of the challenges eCommerce sellers face and help you prioritize your business investment to set you up for success.
Let’s start by looking at some of the unique challenges you will meet as an online merchant.
A Crowded Marketplace
The market is undoubtedly welcoming to new vendors looking to establish themselves. While that’s great news for all who wish to start an eCommerce business, it also means the competition can be a bit fierce.
Did you know Amazon has 350 million products available through its marketplace? They are also by far the leading e-retailer in the US with more than 40% market share. This combination means Amazon is an obvious platform choice for listing your products and that you’ll find a lot of competitors to contend with.
Brick-and-mortar shops are limited to the number of people they can reach and entice to come into their stores but often have very little local competition. As an eCommerce business, your audience is seemingly endless, so you’ll need to stand out by finding your niche and positioning yourself well.
The positioning strategy takes some time and investment into technology built to give you insights on how to work the Amazon system. For one, you need to know you are selling a unique product that people want. If you have lots of competition, you’ll have to determine how to price your product - but that can lead to a race to the bottom where competition reduces their prices to beat yours.
You also want to get a first-page ranking on Amazon so customers will see your products. One study found that 45% of Amazon shoppers say they only shop from the first page or two of results. Like SEO for content marketing, there is a science to getting the first-page spot, and there are specific tools you can buy to help you get the data you need to play the game.
Increasing Customer Expectations
Remember when eCommerce was a novel idea? We were all just so happy for the ability to order a product and have it arrive to use without needing to travel across town to get it.
The novelty has worn off, and expectations have become a lot to contend with. Customers now want products easily and swiftly - almost as quickly as they could get them off a shelf themselves. They want an easy shopping and checkout experience, products that are in stock and ready to ship and they want swift and painless delivery straight to their door.
While not entirely unreasonable expectations, these demands put a lot of pressure on eCommerce sellers.
Stocking inventory relies on a delicate balance. You can’t afford to devote all of your cash flow to stocking products, but lead times may cost you customers and make it difficult to increase sales. A recent report showed that 40% of respondents didn’t complete a purchase because it wouldn’t arrive on time, and 20% reported that they didn’t order because the delivery time wasn’t clear or precise.
Customers expect availability - not only of your product but of customer service staff in case they have questions. Building out inventory is crucial, as is ensuring you have the staff on hand to respond to inquiries swiftly.
Primarily driven by a saturated market and increasing demands, building customer loyalty is challenging. It’s easy for a customer to search for a product and find it online for less or with faster delivery, so delivering products and exceptional customer service is paramount to maintaining your foothold in the market.
Without face-to-face interactions, loyalty is built through price, service, fulfillment and practical aspects of doing business. In lieu of in-person transactions that put a face to the company, eCommerce merchants have the challenge of building loyalty from a distance, making investments in customer service essential.
Whether you’re starting out or well-established, you would likely benefit from additional funds to support business operations. Small businesses can often use a boost to their cash flow, allowing them to stock more inventory, fund marketing activities, cover day-to-day operations and take care of general business expenses in lower sales periods.
When you look for financing options, you’ll often find that those most commonly available aren’t tailor-fit to the needs of eCommerce sellers. Bank loans have lengthy application processes, steep barriers to entry, and significant interest rates. While easier to apply for, credit cards have high interest rates and minimum monthly payment requirements. Many business loans even demand collateral to cover the risk to the lender, which can be challenging to meet as a small online business.
Neither products are built for the short-term, cash flow needs of an eCommerce business. Because an eCommerce business cash conversion cycle is 60-120 days, there’s rarely time to sell enough products to earn the needed revenue to purchase more inventory to ensure you can perpetually fulfill customer orders. You still have to pay a monthly minimum on those loans and credit cards, whether your products are selling or not. This limitation can quickly put you in the red.
While these banking products aren’t ideal for cash flow, they do have their place for other purposes. There isn’t one particular type that will cover all of your bases. Small businesses should leverage different types of financing in their capital stack, each suited for different purposes.
Bank loans are ideal for longer-term investments such as your warehouse, machinery, technology, etc. These loans typically last for multiple years and carry interest. There is a minimum monthly payment requirement, but you can pay it off in whatever manner you choose. Bank loans have lengthy application and approval processes and can take two to three months to receive funding.
Credit cards have a lower barrier to entry than bank loans with a more straightforward application process. Day-to-day operational expenses such as printer ink and office supplies are a great use for a credit card. Credit card limits are reevaluated and adjusted as your credit history builds with the issuing bank.
eCommerce Financing is a tailor-fit option with the unique needs of eCommerce sellers in mind. This type of funding is ideal for cyclical or shorter-term investments such as inventory and marketing expenses. Rather than minimum monthly dues, repayments are directly tied to sales. When you sell inventory, an agreed-upon percentage is devoted to repaying your financed amount automatically so you don’t have to worry about manually making payments. Whether your cash conversion cycle is fast or slow, you have the cash you need to purchase the right amount of inventory.
Strategic Investment and Financial Priorities
Let’s dive more into eCommerce financing because it’s relatively new. These funding options are built for eCommerce businesses and understand the unique requirements of online merchants.
The provider plugs directly into your Amazon Seller Central account to identify the precise amount of cash you need and when you need it. Their payments to you are synced to your sales, and repayments are automatically deducted from your connected bank account based on a percentage of your sales rather than a flat monthly repayment schedule. That means you don’t need to overextend yourself or overcommit to get the funding you need to purchase inventory and reinvest in the company. It’s funding that’s optimized to reduce your risk and ensure smart growth.
Once you have funds available, where do you spend them? Where should you reinvest to build your business? While many have validity, it’s good to be strategic about where you invest in helping your business thrive.
Stocking inventory is paramount to a thriving eCommerce business. Your digital marketing and outreach investments will fall flat without products to ship. Finding a sweet spot of stocking inventory is crucial.
It’s essential to track your sales records and trends for bookkeeping and see sales cycles and plan stock accordingly. Using cash flow to order inventory helps you serve and retain customers and offers you protection from the volatility of the supply chain.
Recently the supply chain has been, well, a mess. COVID-19 has led to a lack of staff, impeding the international flow of goods. Then there’s the uncertainty in the global marketplace. Even the US-China trade negotiations have caused supply chain headaches.
Delays on receiving products for some vendors and suppliers have gone on for months, and transportation costs have skyrocketed. Economists say the situation will only get worse before it gets better. These bottlenecks will take some time to resolve and cause angst amongst companies and shoppers alike.
There have also been impacts on the cost of goods, meaning eCommerce merchants are now paying more for goods that are often already at a tight margin. With constraints on products and components and new tariffs in place, vendors and manufacturers have increased the wholesale cost of their products. That impact is passed on to retail partners who then need to raise their prices, sell at a loss or risk losing business to competitors who may have stock on hand.
So what do you do? Most say you have to plan ahead - way ahead. Front-loading inventory - purchasing stock to hold on hand ahead of orders coming in - allows you the opportunity to weather the storms of uncertainty. You’ll know exactly how much you’ve paid for what you have on hand, and you’ll be able to ship it when the orders come in. Yes, you may have to pay for a larger facility to store your inventory, but it’s better than experiencing a stockout, which almost always leads to a loss of customers.
Diversify Product Offering
With a bit of extra cash on hand, you can expand your product catalog. If you’ve taken out a loan, we don’t recommend doubling your product offering or taking a risk on something completely off the wall. We do recommend building out your product list to appeal to your customers.
Accessories are a great option for upselling. If your product can be accessorized, do some market research to find what types of accessories are in demand. By offering additional and complementary products, you’ll provide more value to your customers and their desire for one-stop shopping.
If you’ve been around for a while, you’ve probably received questions or feedback from customers. If there are frequent questions about products, accessories, or variation options, look into whether those would be a viable option to add to your online storefront.
Digital Marketing and Branding
Marketing is essential to standing out amongst the crowd. Having a great - and available - product at a competitive price is a good start. You just need to attract the right customers to see your offering and complete their purchases through you.
Branding is critical. If you want people to search for your products, they need to consider your brand as the go-to. Branding often takes help from an agency, including defining your brand personality, logo, slogan, creative messaging and brand marketing.
Social media is a vital component of your digital marketing and branding strategy and should not be overlooked. Staggering statistics from the Digital Marketing Institute show the influence of social media on the retail market, and a glance through platforms like Instagram and TikTok will reveal a current trend in the market: Influencers.
Influencers have emerged as people with clout in the world of social media. With high follower counts and often enviable lifestyles, these people have the power to boost a brand’s appeal with a few taps of their finger. The same report from DMI shows 40% of consumers purchased something after seeing it on Twitter, YouTube or Instagram, and 49% depend on influencer recommendations for their purchases.
Investing in targeted digital marketing is invaluable to your business. SEO strategy, email campaigns, paid search and things like social sharing and retargeting are all worthwhile avenues to help grow your business. Having a knowledgeable person on staff or an agency with the expertise will ensure that you’re maximizing your investment in your campaigns.
You’ll need to spend some of your money on legal advice. Your attorney will ensure you set your business up correctly to reduce your vulnerability from company and contingency documents to privacy practices, tax considerations, and regulatory issues.
Product and Market Research
We mentioned some of these earlier, but you have to invest in tools that help you understand your audience, market and competition. Did you know that 35% of businesses fail because they try to sell a product too few people want? And 20% simply get beat by the competition. Another 15% fail because of pricing and cost issues.
Good data, however, can minimize these risks. Investing in market research on the front end can save your business in the long run.
Having the right people on your team costs money, but it is well worth the investment. You have to hire the right talent for key positions, such as finance and accounting. Hire the best you can afford and take care of them so they’ll stay. For everyone else, such as tax professionals and even marketing, you can outsource until (or if) you decide you can afford to bring them in-house.
Inc.com says there are four qualities to look for when hiring:
- They buy into your vision.
- They’re easy to get along with.
- Where you’re inferior, they’re superior.
- They know how to multitask.
While you may not foresee any threats to your business, things happen. Spend some of your money purchasing insurance to protect you from disasters and losses. The most common small business insurance types are:
- General liability insurance - for injuries or property damage
- Professional liability insurance - for work mistakes that lead to injuries or financial losses
- Workers compensation insurance - for on-the-job injuries or illnesses
- Cyber liability insurance - for customer privacy issues
You may not need all of these, but it’s a good idea to talk with an insurance provider to determine the types and amounts of coverage you may need now and as your business grows.
Being an entrepreneur in the eCommerce space can be exhilarating and is full of opportunities. Armed with the right approach and clear priorities, you can not only survive but thrive as an online business.
To make the right decisions that set you up for success, make sure to take the time to get informed. Do your homework, talk to those with experience and learn from others’ mistakes as well as their successes. Make sure you track your cash conversion cycle and have the cash flow to keep inventory levels where they should be without adding risk.
When it comes to developing a strategic financial approach, building your capital stack to work in your favor is key. Make sure you’re aligning your chosen funding options with their best purposes, and use your money strategically. Being well-informed and deliberate in your approach will take you far in this competitive but growing market.