How to Start an E-commerce Business
If you are looking for a business idea, starting an e-commerce business might be the right choice for you. You can buy just about anything online now, from t-shirts to cars. You just need a product idea and a way to get that product so that you can sell it and ship it.
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 all over the world.
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.
According to Insider Intelligence, the e-commerce sales industry is expected to increase 13.7% in 2021 to reach $908.73 billion. According to Statista, in 2020, over 2 billion people made online purchases globally, and retail e-commerce sales grew by over 25%.
The e-commerce market boomed during the pandemic in 2020, but even as the pandemic winds down, online shopping is expected to continue to increase for years to come. Globally, e-commerce is increasing due to more widespread internet access.
Your target market will depend on the product that you’re selling.
Skills, Experience, and Education Useful in Running an Ecommerce Business
There are several specific skills that you will need to open an e-commerce business.
- Experience. You don’t necessarily have to be tech-savvy, but it’s a plus. Knowledge of SEO is also extremely helpful.
- Business knowledge and experience. You will need to have at least some basic knowledge of marketing, finance/accounting, and human resources.
Checklist for Starting an E-commerce Business
Starting an e-commerce business can be an incredibly rewarding experience, but it’s important to make sure you’re prepared for the challenges ahead. Use this checklist to help get your business started correctly.
Step 1: Write your Business Plan
After coming up with the idea, the next step in starting your e-commerce business should be to write a business plan. The business plan will make you focus on some important aspects of the business, such as who your customers are, how you plan to reach them, projecting sales and expenses, your value proposition to use for marketing, and more. You’ll also need to do some research to calculate exactly what your start-up expenses will be and what your ongoing expenses will be.
Not only will a bank require you to have a business plan if you need financing, but multiple studies have shown that having a good business plan increases the odds of starting a successful business. Writing the plan helps you think through all the aspects of the business and then serves as a guide as you begin.
Related: How to write a business plan
Step 2: Name the Business
Finding the perfect e-commerce business name can be challenging. Not only does the name have to reflect what you do and be appealing to customers, but it also has to be available to use. You can check your state’s website to see if the name is available and register your name. Your name should make you stand out, reflect your brand, and tell potential customers exactly what you do.
Step 3: Form a Business Entity
A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for an e-commerce business, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay. The corporation can be a good choice because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: 3 steps to forming your LLC
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!
Step 4: Select your Location
Many e-commerce businesses start as home-based businesses, however, once the business grows or employees are hired, commercial space will be needed.
While an online store may not have a physical location for customers to visit, the store will have to be hosted online. First of all, a domain name will be needed. This is the URL that people use to find the website. Next, an e-commerce website host will be needed. Popular shopping carts include Shopify, BigCommerce, and others.
In addition to their website, some online sellers also sell on Amazon or eBay.
Related: Choosing a business location
Step 5: Apply for Business Licenses and Permits
You may need to obtain certain business licenses and permits. These permits and licenses can vary based on the state and town where the business is located. Check with your state for specific license and permit requirements for your e-commerce business. Some other common local, state, and federal registrations an e-commerce business may need include a sales tax permit and an Employer Identification Number.
Step 6: Find Financing
Coming up with a good business idea and having the skills to run it are one thing but getting the funding to start an e-commerce business is another. In order to get a loan, the borrower(s) will need to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
Step 7: Open a Business Bank Account
Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the income and expenses of the business.
Step 8: Get your Marketing Plan in Place
An online business will need to set aside a budget to cover marketing costs on a continuous basis. Common marketing techniques for an e-commerce business include social media platforms such as Facebook, Instagram, Pinterest, and Twitter, in addition to online advertising and Search Engine Optimization.
To make your marketing more competitive, try to choose a product or niche with less competition. The other benefit to less competition, is that your marketing costs will be lower as well.
Step 9: Get Business Insurance
An e-commerce business needs several types of insurance for full coverage:
– General liability insurance can help protect you from third-party claims of bodily injury and property damage.
– Professional liability insurance protects you from claims of professional errors or negligence that result in a financial loss.
– Worker’s compensation insurance covers expenses like medical bills and legal fees that a business might face if an employee were ever hurt while working.
Insurance policies will vary. To get the most accurate idea of what to budget for insurance, request quotes from multiple providers. When comparing the quotes, consider not only the premiums but also how the plan exclusions, coverage limitations, and deductibles compare.
Step 10: Hire Employees
You may need employees to help you run your e-commerce business. Make sure that you select people with appropriate experience and training.
In addition to salary costs, your budget will also need to include other employee-related expenses. Workman’s comp insurance, unemployment insurance, and paid time off are common expenses that a business will need to cover when hiring staff.
Related: Hiring your first employee
Step 11: Set up an Accounting System
Setting up an accounting system for your e-commerce business is critical to the long-term success of your business.
Staying on top of taxes not only keeps the business out of trouble with the government but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.
How much does it cost to start an e-commerce business?
Here are the typical costs you will face when you open an e-commerce business.
– E-commerce website – $100-$50,000 (See: E-commerce platform reviews)
– Initial inventory $1,000 +
– Shipping supplies $500 – $1,000
– Initial marketing such as Facebook ads or search engine optimization for your website $500 -$1,000
How profitable is an e-commerce business?
The profit potential is virtually unlimited, and revenue will depend on your product and how many people you can get to visit your website.
Many websites generate a significant amount of sales during the holidays, so having ample cash to constantly invest in inventory is critical. Adding to cash flow challenges, many products are purchased from overseas manufacturers and can take 3-6 months to land in your warehouse. Not paying attention to sales trends can lead to having out-of-stock products.
Are there grants to start an e-commerce business?
It’s extremely rare to find a grant to start an e-commerce business. If you search for small business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.
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.