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How To Start An E-commerce Business

How To Start An E-commerce Business

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How To Start An E-commerce Business

How To Start An Ecommerce Business

With an increasing number of consumers turning to online shopping, launching your own e-commerce business gives you access to a massive global marketplace right from your laptop. But with so many moving parts involved in getting a store up and running, many aspiring entrepreneurs don’t know where to start.

If that’s you, don’t worry. This guide will walk you through the process of starting your e-commerce business, providing an overview of the business, steps to get started, and answers to common questions.

Business Overview

An e-commerce business sells products of various types from its online website or a third-party site like Amazon.  Products may be produced by the company or sourced from a manufacturer or wholesale supplier.  The products are then sold for a profit and then shipped to the customers.

The e-commerce business model offers entrepreneurs much more flexibility than a brick-and-mortar business. A few of the major benefits include not having to be tied down to specific working hours and selling to customers outside of their local area.

If you aren’t sure what products to sell or the inventory cost is too high, dropshipping is another way to break into the world of e-commerce. Dropshipping allows you to sell products online without ever having to buy inventory until the customer purchases it from your website. Once the product is sold, the manufacturer or distributor ships the product directly to the customer.

Industry Summary

Online shopping is now a typical part of many individuals’ lives. The convenience of browsing through products and buying what you need from the comfort of your home, all at any time of day, makes it a preferred option for many. Additionally, online businesses often offer a wider variety of products and more competitive prices than physical stores.

The e-commerce industry is rapidly growing and shows no signs of slowing down. According to the Census Bureau, e-retail sales in the U.S. amounted to over $1 trillion in 20221, and the number of online shoppers is expected to reach 298 million in the U.S. by 2028.2 This means there is a huge potential for success in the e-commerce industry, but competition in this space is fierce. To stand out, you need to offer unique products, exceptional customer service, and a seamless shopping experience.

Steps To Start An E-commerce Business

Step 1: Choose a Niche

In the early stages of starting an e-commerce business, your focus should be finding and defining your niche. With countless e-commerce sites out there, the key to standing out is focusing on something more specific than a generalist site.

The concept of a niche in starting an e-commerce business involves focusing on a specific, targeted segment of the market. It means choosing a particular area or category of products or services that cater to a distinct group of customers with specific preferences, needs, or interests. This approach allows an e-commerce business to specialize and differentiate itself in a crowded online marketplace.

For example, imagine starting an e-commerce store that specializes in custom-designed phone cases. Instead of selling a wide range of mobile accessories like big retailers, this store focuses solely on phone cases, offering unique designs, personalized options, or cases for specific, less common phone models. By aiming for something specific that big retail websites may not have covered fully yet will help your online store to stand out better. There are thousands of online stores out there. So, having your focus area helps customers find you and stick around.

Start researching niches that you know and are passionate about. Your own expertise and interests can guide you towards a niche that you will enjoy working in. This personal connection can also bring authenticity to your business, which customers value.

Step 2: Write your Business Plan

Even though a business plan is often a prerequisite for lenders, many e-commerce businesses aren’t required to write one since they can often be funded with the owner’s savings. But the role of a business plan extends far beyond securing funding, and jumping in without one can lead to wasted time, resources, and, possibly, failure.

One of the fundamental purposes that a business plan addresses is market research. It removes assumptions and has you take a closer look at the market opportunities, your target demographics, growth trends within your niche, and the preferences and behaviors of your ideal customers. This detailed analysis helps determine whether your e-commerce business idea holds future potential and if it meets a real demand in the market.

Your business plan should also outline the operational side of your business. This includes choosing a business model, which could range from dropshipping to warehousing your products, outlining your technical requirements, staffing needs, order fulfillment processes, and more. Working through these details early on sets up a business that runs smoothly once you are operational.

Another important section of the business is the financial projections. It helps you understand the costs related to setting up your website, maintaining an inventory, marketing your products, and running day-to-day operations. By creating a budget and estimating potential revenue, you can determine how much funding you need (if any) and evaluate potential profitability.

Related: How to write a business plan

Step 3: Source Funding

Starting an e-commerce business requires capital, but the good news is that there are several avenues to secure funding.

Personal savings: E-commerce businesses can be started without a load of upfront cash, and you may have enough in your savings account to fund the initial costs. Not only does this mean avoiding unwanted debt, but it also means you keep full control over your business.

Friends and family: Borrowing money from friends and family is another option. This route can offer easier access to funds than the bank, at potentially better terms. Just be clear upfront about how you plan to pay them back to avoid hurting relationships.

Business credit cards: There are many credit cards out there designed specifically for business use. Some come with reward programs and special offers like 0% interest rates for an introductory period. These credit cards can be a handy tool for covering expenses like early inventory, marketing, web hosting, and software costs. Be mindful to keep on top of repayments to avoid high-interest charges.

Business loans: Approaching a bank or credit union for a business loan is a more traditional route. Financial institutions may lend money to e-commerce startups, particularly those with owners who have good credit histories. These loans often provide larger sums than other sources, but they also require thorough preparation and may involve more stringent repayment terms and interest rates.

Related: Finding the money to start a business

Step 4: Register the Business

Before you start selling products and earning profits, you need to make sure you’re fully prepared on the legal front. Here are some steps you can take to properly register your business:

Business structure: When setting up your business, the first decision you’ll make is choosing the right business structure. Each type has its own advantages and implications:

  • Sole proprietorship: This is the easiest and least expensive to set up and maintain, which in turn makes it popular for new e-commerce businesses. However, as the sole owner, you are personally responsible for all debts and financial obligations.
  • General partnership: It’s a bit like a sole proprietorship but with more than one person. The business obligations are shared, but so are the profits and liabilities.
  • Corporation: This type offers the owners protection from personal liability, but it’s more complex and costly to set up.
  • Limited Liability Company (LLC): By merging the simplicity of a sole proprietorship and the protection of a corporation, an LLC tends to be a popular option for e-commerce businesses.

Related: Comparison of business structures

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!

Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Obtain business licenses and permits: Depending on your location, there will likely be a variety of general licenses or permits needed before opening. Registrations that e-commerce businesses commonly need include a local business license and seller’s permit.

Related: What licenses does an e-commerce business need?

Step 5: Set Up Operations

After the initial planning and registration, setting up the operations of your e-commerce business is the next step.

At the core of any e-commerce business is the platform it operates on. Shopify and WooCommerce (a WordPress plugin) are frontrunners and are popular for their ease of use, payment processing options, and app ecosystems that allow for extensive customization. The ideal platform will manage the technical backend details, freeing you to concentrate on marketing and customer acquisition.

Next, decide on the products you want to sell. If you plan to create your own products, consider the production process, including the costs and time involved. For those sourcing products, it’s vital to research and choose reliable suppliers or wholesalers. This decision impacts not only your inventory quality but also your ability to deliver products promptly and manage costs effectively.

With the website and products out of the way, it’s time to figure out shipping and fulfillment. You have several options:

  • Self-managed shipping: If you choose to handle shipping yourself, consider the logistics of warehousing, packaging, mailing, and managing returns.
  • Third-party logistics (3PL): Using a 3PL provider can streamline your shipping process, as they handle storage, packaging, and shipping of orders on your behalf.
  • Dropshipping: This model involves the supplier shipping products directly to the customer. It’s a popular choice for those who prefer not to hold inventory, but this option is often the least profitable.

Each option has its pros and cons, and your choice will depend on factors like the scale of your business, your budget, and the level of control you want over shipping and fulfillment.

Step 6: Prepare to Launch!

Starting an e-commerce business involves a range of steps, from ideation to operational setup. The journey doesn’t stop there, as there are several other tasks that need attention. The needs will be different for each person, here are a few of the most common ones:

Business insurance: Having business insurance can cover various risks, such as product liability, cyber threats, and even property damage if you have a physical location for inventory. Different types of businesses require different types of insurance, so it’s important to research and find a policy that fits your specific needs.

Setting up bookkeeping: Setting up a reliable bookkeeping system is essential to track daily transactions, manage taxes, and prepare financial statements. You can choose to hire a professional bookkeeper or use software solutions that make accounting more manageable and efficient.

Opening a business bank account: A dedicated business bank account is important for keeping your business and personal finances separate and simplifies tax reporting.

Creating a marketing strategy: Last, you’ll need to create a marketing strategy to market your products and drive traffic to your online store. This could involve a variety of tactics, including search engine optimization (SEO), pay-per-click (PPC) advertising, email marketing, social media marketing, and influencer partnerships.

Common Questions When Starting An E-commerce Business

How much does it cost to start an e-commerce business?

Starting an e-commerce business can cost anywhere from $500 to $2,500 in the beginning stages. The exact amount depends largely on the type of business you’re launching and the e-commerce platform you choose, but let’s break down these initial costs to give you a clearer idea of what you can expect to spend.

Inventory: The cost of inventory will be your biggest expense unless you are dropshipping. If you’re purchasing inventory, costs could range from a few hundred to several thousand dollars.

E-commerce platform: Setting up your e-commerce website can cost anywhere from $50 to $5,000, depending on whether you do it yourself or hire a professional.

Business registration: Costs for registering your business can vary based on where you live and your business structure. On average, you might pay between $50 and $500 for this.

Insurance: Depending on the coverage level and insurance provider, you can expect to spend around $500 on an annual General Liability Insurance policy.

Marketing: You want people to know about your business as soon as it launches. Starting budgets for marketing can vary broadly. Let’s assume you start with a small campaign, spending around $500 on paid or social media ads.

Office equipment & supplies: A computer, printer, labeling supplies, and other suppliers could cost between $50 to $200 to start.

How profitable is an e-commerce business?

With e-commerce, the profit potential is virtually unlimited, and revenue will depend on your product and how many people you can get to visit your website.

To illustrate this, let’s consider a new e-commerce store selling handmade jewelry. This store sells 50 pieces per month at an average price of $50, creating a monthly revenue of $2,500.

Outlining the expenses, we find the cost of material and production for each piece is around $20, totaling $1,000 per month. Assume additional monthly expenses for the website hosting, payment processing, marketing, and shipping at around $300.

With this information, let’s calculate the profit, which is revenue minus the cost of goods sold (COGS), minus overhead expenses. In our case, the monthly gross profit is $2,500 (revenue) – $1,000 (COGS) – $300 (overhead) = $1,200.

This hypothetical e-commerce business would then make a net profit of $1,200 per month, or $14,400 annually based on our assumptions.

It’s important to highlight that every business is unique, and your results will vary.

What is the NAICS code for an e-commerce business?

The NAICS code for an e-commerce business is 454110, which is categorized as Electronic Shopping and Mail-Order Houses. Other industries with this code include; electronic auctions, book clubs, home shopping, direct mailers, and others.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code and how to find yours

Sources:

  1. Census Bureau ↩︎
  2. Statista ↩︎

Author

  • Greg Bouhl

    With over two decades as an entrepreneur, educator, and business advisor, Greg Bouhl has worked with over 2,000 entrepreneurs to help them start and grow their businesses. Fed up with clients finding and acting on inaccurate and outdated information online, Greg launched StartUp101.com to be a trusted resource for people starting a business.

How To Start An E-commerce Business

How To Start An E-commerce Business

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