Investment in an online store
Investing in the development of a trading site is just the “tip of the iceberg” of the upcoming costs of launching an independent online store. Major investments will go offline.
According to a recent study by the Public Opinion Foundation (www.fom.ru), covering the period beginning in 2004, a little less than 4 million people use the Internet every day in our country (according to the same data, the number of all network users in Russia is approaching 15 million, however, this “total” figure has little practical meaning). It can be assumed that at least half of the “residents of the Network” who use the Internet daily, i.e. almost 2 million Russians are potential and very likely customers of online stores. This is already a lot, although significantly less than in countries with a developed information infrastructure. Nevertheless, this level of technology penetration and the potential of 2 million customers make entrepreneurs, who are generally suspicious of virtual technologies, think about creating online stores.
Some, inspired by successful western experience, regard it as a venture capital business, i.e. they want to “test the market” and “try” in this way. Others “build” an online store as an addition to traditional business (for example, to a real retail or wholesale network). Still others are considering the possibility of creating an online store from scratch in order to turn it into a main independent trading platform. In the latter case, the business can be called “pure” or a classic online store.
There is an opinion that the opening of a “clean” online store is the most low-cost and weakly dependent on external adverse factors way of doing business. He is not afraid of the risks of raising the rent, terminating the lease, reducing the prices of goods stored in the warehouse. The advantages of a “clean” online store certainly exist, but this article is likely to spoil the head-shocking mood like “minimum costs and the whole business: made a website and let’s trade”. In fact, an online store is a rather costly business that requires constant attention. Naturally, here and later in the article, the assumption is taken as a basis that an online store created from scratch is intended for legitimate trade in legal goods. Trading in marginal goods (pirated audio-video products, fake documents, illicit drugs, etc.) is subject to completely different laws – here one-day online stores remain out of competition and do not need survival recipes.
Not a very virtual store
Contrary to popular belief, the online store is not at all virtual. On closer examination, its own legal marketplace on the Internet is not much different from the usual one, i.e. physically existing store (for example, household or bookstore). Judge for yourself: for the full functioning of the electronic store, you also need accounting, cash register (for working with cash payments), competent sales assistants, employees responsible for marketing, delivery service (external contractual or own). Of course, we also need an office to accommodate employees. However, such an office does not perform representative functions, clients usually do not come there, therefore the premises may not be of category A or B. The main thing is that it has the necessary communications (several telephone lines and a dedicated Internet access channel).
The disadvantages of online stores compared to traditional ones (let’s call them offline) are obvious. One lack of visitors the ability to hold the goods in the hands of what it costs! But the benefits are also quite significant. The most important of them is that electronic stores offer the most flexibility in responding to market demands and offering attractive prices, minimizing their costs. For example, the owner of a “clean” online store does not need to rent expensive retail space, maintain a large staff of service personnel (security, cleaning, excess sales staff, etc.), rent warehouses and store significant inventory. Its sales area is the site pages, and the warehouse is a package of contracts with reliable suppliers.
What are the costs of an investor opening a legal online store selling abstract standardized goods?
Suppose we are talking about opening a relatively small store with an assortment of 300 commodity items without our own courier service. Then, in the cost structure, there are several main blocks, most of which are characteristic of any trading business and are not at all specific to an online store.
The one-time start-up unit includes the following:
1. Organizational expenses – $ 700-900. These include payment for the services of a legal company for registering a company in the form of an LLC, expenses for opening a current account in a bank, making a minimum share capital, installing an electronic bank-client system.
2. Buying a minimum set of office furniture – $ 700
3. Purchase of computers and office equipment for the organization of 4 workplaces (workstations, internal server, multifunctional device, fax, shredder, cash register) – $ 4,500.
4. Installation of a local network and setting up equipment – $ 300.
5. Purchase of a specialized server for an online store and its placement on the provider’s site – from $ 1,300.
6. Development of an e-store site (storefront and administrative interface) – from $ 3,000. This amount will cost the development of an online storefront (catalog) with the means of placing an order. In fact, we are talking about the simplest version of an entry-level online store, which is quite enough at the first stage of business development.
7. Short-term advertising campaign on the Internet – from $ 1,000.
TOTAL: $ 11,600. In the “estimates”, there is a potential cost reduction of approximately 10%, which may compensate for “unforeseen expenses”.
1. The cost of accounting services – $ 400
2. Renting an office that does not require repair is $ 500–600 (a room of about 20 square meters).
3. The subscription fee for telephone lines and Internet access – $ 400-600.
4. The subscription fee for placing the store server on the provider’s site – $ 150.
5. Salary to staff (2 sales managers, development manager, system administrator, courier for internal orders) – $ 2,400. The most “critical” position of development manager, whose function is to find the best prices and conditions. Sales managers, as well as sellers in a regular store, do not need to conduct an independent search for customers, it is enough just to promptly process incoming orders. This reduces professional requirements and, accordingly, the level of salary. It is assumed that one sales manager is able to handle about 50–70 orders per day.
6. Office expenses (consumables for office equipment, stationery, etc.) – $ 200.
Total: $ 4200 fixed costs monthly. That is, the cost of developing an e-store site is likely to be lower, or at least comparable to the cost of its monthly operation.
Of course, in all the “total” listed, an experienced entrepreneur will easily find the cost items to be partially reduced. You can try to find cheaper rentals, purchase less expensive equipment or, for example, instead of two sales managers, hire one. Nevertheless, a significant reduction in costs (even by 25–30%), following this scheme, is difficult to achieve. She already professes a “minimalist” approach. In short, if the calculations are correct, then the circle turns out that (very conditional) to achieve profitability and profit at the level of $ 2000 / month. A “clean” online store is required to receive a monthly profit of almost twice the net monthly cost – about $ 8,000 “dirty”, including taxes. It turns out that if the profit from the sale of a certain conditional product is $ 10, then the store needs to sell 800 units of such goods per month or about 36 units of conditional goods every working day. Of course, one sales manager will cope with this volume, but the income of $ 10 from the unit sold was a big convention. And the lower the profit from the unit sold, the higher the turnover required and the calculated burden on managers.
CUSTOMERS AND SHIPPING
As in any retail trade business, the main asset of an online store is its customer base. But here there are some peculiarities. Buyers who turn to Russian online stores not for the first time – people are not at all spoiled and usually do not harbor any illusions that their order will be delivered at the speed of a pizza. Everyone understands that the seller of the online store does not sit on the boxes with the desired product, and the courier does not “beat the hoof” under the door, ready to take off. Most realize that the seller will need to order the goods from one or several suppliers, send the courier to their warehouse, and then he will go to the buyer. Therefore, whatever one may say, they will not ring your door in an hour.
But buyers of online stores have the right to count on three things.
1. Timely delivery within a reasonable time (on the second or third day), in the promised period of time.
2. The real possibility of the delivery of goods presented on the online storefront. The store is electronic, so that the catalog quickly displays the current state of the range. Worse, when a visitor spends time on an application, loses waiting time, and it turns out that the selected item is “temporarily out of stock”. Such a visitor is unlikely to go to the mountain-shop again.
3. The price (at least, excluding delivery) is slightly lower than in traditional retail. The difference may not be very significant, but visitors to online stores believe that by their expectation they are paying for a more profitable purchase from a financial point of view.
Buyers of online stores have become accustomed to the fact that delivery costs money, so phrases about “free delivery” are treated with an element of irony (it is clear that its cost is “blurred” in the price of goods in this case). Therefore, now most of the stores prescribe the cost of delivery as a separate line (from 50 rubles for small cargo). It does not confuse buyers, but it gives shops the opportunity to declare lower prices in catalogs. The cost of delivery of large-sized goods (for example, copiers or televisions) can be 200 or more rubles or “eroded” in the price of the device.
The organization of delivery, as well as the issue of guarantee guarantees, requires careful calculation at the stage of drawing up a business plan. Perhaps the organization of its own courier service (at least at the first stage) would be inappropriate. Especially while the number of buyers is small. In Moscow, services are offered by many specialized courier services, independently providing logistics and door-to-door delivery. Prices are decreasing as volumes increase and are at an acceptable level. Even in the area of non-urgent business correspondence, they amount to $ 2.5-3.5 for delivery. The possibility of attracting an external service was taken into account when calculating our case of basic investment in an online store.
Is the game worth the candle?
The attentive reader may already be surprised: if the creation of an online store is not a cheap idea, and it’s not difficult to burn out, then why do online marketplaces grow on the Web like mushrooms after a rain? Moreover, everyone has examples of successful e-business (www.dostavka.ru, www.bolero.ru, etc.). Do not forget that the now recognized and popular online stores had to go through a rather long and costly way of becoming, developing special relations with suppliers, inevitable “stuffing cones” and advertising “promotion”. They started in the period of the birth of the e-commerce market in our country, and they were led by highly skilled managers – specialists in the traditional trading business. So their success is not indicative of start-up stores with a development budget of 10–20 thousand dollars (that is, not going beyond the status of small business).
Now about the “mushrooms”. A significant part of online stores is created as a network supplement to the business of companies engaged in traditional trading business, and already successful (for example, www.mvideo.ru or www.tehnosila.ru). They are created, in large measure, for image purposes and as an element of a development strategy. They can not particularly care about self-sufficiency of their Internet direction. The task is to attract visitors to the site who will familiarize themselves with the product catalog, compare prices and features, find what they need, and then arrive at the store for a purchase. Or, on the contrary, they will see the item they like in the store, return home and order from the site (with delivery and special discount). However, the benefits are usually there. Thus, according to information from one of the major networks of mobile phone salons, the online store provides about 5% of all cell phone sales.
The fashion to create online stores to serve the main business stems from simple logic. A large trading company focused on the sale of consumer goods, the site is in any case needed. Visitors will come to him is clearly not in order to read the history of the creation of the company. This means that an updated product catalog must be present on such a site — dynamic, generated from a database, with illustrations and descriptions.
And technically, from a site with a dynamic catalog of products to an online store is one step. Just add the checkout tools and some specific functions for online stores. If you don’t complicate the task, but only implement functions that are really necessary for customers, then a website with the status of an online store will cost a little more than a website with a catalog. Here is another reason for the growth of mushrooms – the costs are almost the same, but an additional trading tool appears. In addition, for the operation of a secondary online store does not require a significant expansion of infrastructure, you can rely on the existing one. The same applies to marketing activities: an additional online store will not require an independent special advertising campaign and additional costs. It is enough to indicate its address in the advertisement of traditional business. In all other cases, you will have to take specific steps to promote the store.
Of course, the golden rule “a good site (ie, a store) will promote itself” works here. But only the store, unlike “just the site,” is not a pleasure. It causes fixed costs from the first day of its existence, and it is important for him to quickly attract interest. Every day, “idle” store threatens with new costs.
In conclusion, it is necessary to emphasize once again that it would be a mistake to assume that when creating an online store, the most important thing is to create an effective and convenient site for visitors. As in any business, in this case, the main thing is an effective business plan:
* what to sell;
* how to ensure profitability;
* what are the required costs for the creation and maintenance of the necessary infrastructure;
* ways of development;
* development of advertising strategies, ways to ensure competitive advantage and other issues.
In this context, the store site, the online storefront itself, is just one of the important elements of the infrastructure. In addition, according to the above calculations, the element is not the most expensive compared to the others. Today, an online store in Russia is a very promising way of doing business. The audience of the “network residents” is growing rapidly (over the past year, the growth of the user base was, by some estimates, more than 50%), and the successful work of the pioneers of online commerce increases the overall trust in all online stores, including beginners.
But in any case, the success is waiting only for those investors who seriously approach the customers’ requests and will pay increased attention to the infrastructure, rather than complete the “start” procedure of the store immediately after the launch of a spectacular website. Indeed, in contrast to educational and entertainment online projects in the case of an online store, the main factor is not so much the presence of a professional website and an increase in attendance, as the growth of the flow of satisfied customer service.
The secret to the success of this enterprise lies in the answer to the main question: what to trade? If the product is in demand in the market and does not yet meet with strong competition, then the online store is one of the least costly forms to start a trading business. If this condition is not met, then even the most advanced form of organization of trade will not lead the company to success.