This article reflects information as of 2021. For the latest details, please contact us.
Written by: Tomohiro Koizumi, Representative Director, tentus inc.
Advice for Those Considering Starting Their Own EC Store
There's one thing I'd most like you to do first when you consider running your own EC store. What do you think it is?
Marketing — how to sell?
The EC site's system?
Your internal organization?
No — all of these are certainly important, but the very first thing I want you to do is create a profit-and-loss projection.
Why a P&L Projection?
"Creating a profit-and-loss projection" may sound a bit daunting, but in short it means calculating sales/gross profit and costs.
Of course it's difficult to calculate all the wide-ranging costs at this point, but conversely, by starting with a P&L projection, you'll gradually start to see the costs you can spend on and the costs you must not spend on.
I'll cover the costs you can spend on and the costs you must not spend on later, but by understanding what kinds of costs an EC business incurs, you'll be able to build a more concrete strategy.
So let me briefly introduce the points you should include in this P&L projection.
On Sales and Profit
This part is easy: tentatively plug in your monthly order count and average order value, multiply them to get sales, and calculate gross profit from the product's gross-margin rate — that should do.
What matters in this P&L projection isn't forecasting sales, but rather: how much profit can you expect relative to sales? That's the key point, so feel free to roughly and loosely fill in tentative figures like sales.
Also add the shipping fees you collect from users to the average order value. When you do, apply the gross-margin rate to the product first, then add the shipping fee.
On Costs
There are quite a lot of costs, but here I'll pull out and introduce a few of the variable costs that matter most when doing a P&L projection.
I'll call costs that scale with sales, order count, and the like "variable costs" here; fixed costs incurred monthly regardless — such as server fees — are excluded from this entry for now.
1) Payment processing fees
These really aren't trivial. Depending on the credit-card company you contract with, you'll be charged roughly 1.5–5% in fees — and always having up to 5% shaved off your sales is very significant, so be sure to build this into your cost calculations.
2) Shipping fees
This is the cost you actually pay to the carrier. Costs get very high for places like remote islands, so be careful if you plan to offer free shipping. Of course it's difficult to compute an average before launch, so for now calculate the shipping you pay and the shipping you receive from users as equal.
3) Packaging material costs
Everyone who starts a mail-order business inevitably thinks, at first, "Cardboard is this expensive?!" Look up the unit price of the cardboard from the size of the products you'll sell — a rough figure is fine. Depending on your product's unit price and gross-margin rate, it can affect your gross profit to a surprising degree. One of our members has compiled a separate entry on packaging material costs, so please see that as well.
It's also a good idea to look up prices in advance if you'll need buffer material (bubble wrap), just in case.
Beyond these, you'll also need to calculate things like your return rate, warehouse storage fees, and operational costs — but for now, start by plugging in the three above.
Costs You Can Spend On and Costs You Must Not Spend On
Fundamentally, the leading example of a cost you must not spend on is the variable costs mentioned above. No matter how large your business grows, if your variable costs are large relative to sales, then no matter how hard you work, profit won't rise.
By considering, from the planning stage, "how can we reduce these variable costs?", you'll be able to run a healthy operation once the EC business is up and running.
Conversely, the costs you can spend on are marketing costs — promotions and the like that can drive up sales — but I'll explain marketing in a separate entry.
In Closing
What did you think?
By creating a profit-and-loss projection — the one thing you should do first when considering your own EC store — you'll get some sense of the ceiling on costs you can spend on systems and the like, such as initial costs, so please give it a try.
I'm sure there are plenty of unclear points, so if you're in the middle of considering a business, we also offer free consultations — please don't hesitate to reach out.