Making Profit from your Web Store

 

It’s never been easier to set up an Online store-front..  Platforms like Shopify make it so easy to get your Web store up and going quickly and cost-effectively. Before you know it, you’re checking your online visits, orders and picking, packing and sending stuff out the door from your garage.  Easy right?  Well yes it is, but before you go and purchase a bunch of stock from a wholesaler, or get it made for you by a manufacturer, take 3 deep breaths and fully understand your cost model.  It’s easy to run a web store but even easier to run a webstore at a loss.

We’ve all done those quick calculations in our heads right.  I purchase my widget for $5, I’m selling it for $15.  $10 margin – this is easy, I’m on a winner here.  So ok, let’s look at some of the real costs of being an online retailer.  

Stock

Given it’s unlikely you can purchase your stock in 1’s and 2’s, let’s assume you need to purchase 1,000 widgets to get them at $5 each.  You’re now down $5,000 to start with but that’s a modest outlay to get you going.

Just be a bit careful.  If your widget is tied to a ‘now’ fashion or fad and that ends sooner than you think, you might be stuck with a bunch of stock you cannot move unless you hold a fire sale and burn your expected margin.

Your Shop

You can establish a Shopify store for around $60/month.  This is great as it takes minimal investment to get this started and there’s plenty of nice functionality and features that comes with your Shopify store to make purchasing easy for your customers and managing your store and customers easy for you. You’ll also need to have a way to accept payment.  There’s plenty of options out there, with Stripe and Paypal easy ways to do it.  Let’s assume you choose Stripe who charge around about 2.5-3% of each transaction.

Getting Customers to Shop with You

If you build it, they will come.  If only that was true! Unless you already have a huge online following or extensive customer list, you’re starting from a place where nobody knows you exist.  You’ll  need to advertise as organic search (SEO) will only get you so far.  (Google) Adwords and Social Media advertising will give you that extra oomph in marketing your store – let’s start modest and allow for $200/month of marketing costs to get you started. (If you don’t have any knowledge in setting this up, you’ll need help getting that sorted. – which is again an extra expense)

Order Fulfillment

If you have plenty of space (a garage or spare room) and a big family you can keep costs to a minimum here, especially if your widgets are relative small.  But let’s assume you need to rent out a small secure storage shed at $150/month.  You can offset courier delivery costs by on-charging this to your customers but may choose to offer free delivery for orders over $50 or so as this the expected norm.

Returns, Discounting

Unfortunately, sometimes your widgets may come back either because it’s not what your customer expected or it’s not working as intended.  You need to acquaint yourself with the Consumer Guarantees act to understand your customer’s rights and options but let’s allow for a monthly return rate of 5%.  Sales may also be slow so you decide to discount your product 10% to get some traction – customers will generally expect some form of discounting unless your widget is very unique and sought after so we do need to allow for this.

So let’s do some rough calcs.  Retail can get a bit complex, particularly around cost of stock (read about weighted average cost) but let’s keep our scenario as basic as possible.

 

Sales for Month:

Quantity                        Sell Price                     Total

100                                 $15.00                         $1,500

Discounting  sell price                                   -$150

Returns                                                             -$75

Total sales:                                                                         $1,275

Cost of Goods Sold (COGs):

Quantity                       Buy Price                     Total

100                                $5.00                            $500

Returns to Supplier                                        -$25

Minus Total COGs:                                                             $475

Equals Gross Profit:                                                       $800

Gross Profit is $800, not bad.  So let’s take into account your other costs which include;

Shopify Store $ 60

Payments processing $ 45

Marketing $200

Storage $150

Free freight $ 15

 

Total operational costs = $470

 

Gross Profit	$800
Minus operational costs	$470
Equals Net Profit	$330

 

So we’ve made a net profit of $330 for selling 100 widgets.  Well almost, the government will also want a piece of this but let’s not go there for now.  So our real profit is really $3.30 per widget, not the $10 we first thought.

Is this all swirling around in your head a little too much for you? If you’d like to get some help establishing pricing, or find out how to make the most of the stock, online store and business you’ve already started, we’d love to talk.

You’ll obviously start to make some more money by selling more widgets but you’ll also need to allow for additional costs to go with that, particularly Marketing so let’s go with a bigger marketing push via Facebook and Adwords at $1,000/month which gets you a 5-fold increase in sales (a bit optimistic but I don’t want to completely deter you from your budding enterprise).

 

Sales for Month:

Quantity                               Sell Price                           Total

500                                        $15.00                               $7,500

Sell price discounting                                                  -$750

Returns                                                                          -$375

Total sales:                                                                                                 $6,375

Cost of Goods Sold(COGs):

Quantity                               Buy                                   Price Total

500                                       $5.00                                $2,500

Returns to Supplier                                                    -$125

Minus Total COGs:                                                                                 $2,375

Equals Gross Profit:                                                                              $4,000

 

Gross Profit is $4,000, now that’s more like it.  So let’s take into account your other costs which include;

Shopify Store $     60.00

Payments processing $   225.00

Marketing $1,000.00

Storage $   150.00

Free freight $     75.00

 

Total operational costs = $1,510.00

 

Gross Profit	$4000
Minus operational costs	$1510
Equals Net Profit	$2490

 

So we’ve now made a net profit of $2,490 for selling 500 widgets.  Yes, the government will grab some of that but at least you made some real money this month and made a dent in that initial investment.  The profit is now starting to look at bit better, $4.98 per widget but still some way away from that initial calculation you did in your head.

So there you go, some simple calculations for you to consider before you launch head first into your shiny new web store.  Do the numbers around realistic sales and costs and see where it lands.

What we’ve looked at above is based on a reasonably positive scenario and assumes you’re the labour force to keep this little enterprise going.  

Next time we’ll look at some of the gotchas around basic retail so you’re more prepared for potential pitfalls that can make things go a bit pear-shaped.  But in the meantime, trade well.