So you’ve decided to launch an online store. Congrats! Now, how much money should you make to make this worthwhile?
A common mistake for new entrepreneurs is to focus too much on the revenue side of things, and forget about the expenses that come along with starting a business.
What exactly do you need to know? Let’s find out.
The Costs of Startup
When we think about the costs of startup, the first thing that comes to mind is probably rent. However, that’s only half of the story.
In addition to the cost of a physical space, you’ll need to consider the following expenses:
- Server costs: You’ll need a decent server to make the site functional (which we’ll explain later). The cost of the actual server (hosting) will be somewhere around $500 per month
- Bandwidth costs: Similar to the server costs, you’ll need to budget for the bandwidth you’ll consume (data transfer) which, depending on your plan, can be anywhere from $50 to $100 per month
- Domain name costs: You’ll need a domain for your website, and you’ll probably want to pick a.com or.net domain extension to make it easy for people to find your site (which, again, we’ll explain later). The cost for a decent domain name is around $12 per month
- SSL certificate costs: Similar to the domain name costs, you’ll need an SSL certificate to make your site secure (so hackers can’t see any of your information). The cost of an SSL certificate is around $12 per month
- Content management system (CMS) costs: A content management system (CMS) is a type of software that allows site owners to easily update the site’s content (websites, blogs, and so on). The cost of a CMS is around $25 per month
- Website builder costs: Similar to a CMS, a website builder allows you to easily create and update content on your site. They’re quite a bit more expensive than a CMS (around $60 to $80 per month), but, in my opinion, worth it. A premium website builder that we recommend is Wix.com
- Email marketing costs: To get the word out about your site, you’ll need to budget for email marketing campaigns, which, depending on your skill level, can range from $25 to $50 per month
- Search engine optimization (SEO) costs: To get more traffic to your site, you’ll need to consider optimizing your site (mainly, your H1, H2, and H3 tags) for SEO. While there is no exact amount that you should budget for SEO, you’ll need to allocate at least several hundred per month to properly optimize your site for SEO
- Adwords costs: If you’ve never done any digital marketing or paid advertising before, the first thing you’ll want to do is consider investing in Google Adwords. Similar to SEO, the cost of paid advertising in the form of Google Adwords can range from $25 to $50 per month
- Facebook Ads costs: If you’ve never done any paid advertising on social media, you’ll want to consider investing in Facebook Ads. Similar to Google Adwords, the cost of paid advertising on Facebook can range from $25 to $50 per month
- Quora costs: Just like with the others, the cost of advertising on Quora can range from $25 to $50 per month
- Pinterest costs: To get more traffic to your site, you’ll need to consider budgeting for paid Pinterest campaigns. Similar to the others, the cost of paid advertising on Pinterest can range from $25 to $50 per month
- YouTube costs: To get more traffic to your site, you’ll need to consider budgeting for paid YouTube campaigns. Similar to the others, the cost of paid advertising on YouTube can range from $25 to $50 per month
- Twitter costs: To get more traffic to your site, you’ll need to consider budgeting for paid Twitter campaigns. Similar to the others, the cost of paid advertising on Twitter can range from $25 to $50 per month
- Instagram costs: To get more traffic to your site, you’ll need to consider budgeting for paid Instagram campaigns. Similar to the others, the cost of paid advertising on Instagram can range from $25 to $50 per month
All of these costs add up. So, if you’re looking to make an online store that earns $500 per month, you’ll need to come up with around $22,000 in order to cover the costs of startup. Keep in mind that this is a very rough estimate and that you might want to bump up the figure a little bit.
The Revenues of Startup
So you’ve decided to launch an online store, and you’re ready to pursue the online merchant dream. Great! Now, how much money should you make to make this worthwhile?
A common mistake for new entrepreneurs is to focus too much on the expenses that come along with starting a business, and forget about the revenues that come along with selling a product.
What exactly do you need to know? Let’s find out.
- The Cost of Goods Sold (COGS): In order to make a profit, you’ll need to consider the cost of goods sold (COGS). This is the amount of money you’ll need to spend on the products you sell. Essentially, if you want to sell something for $10 and you spend $7 on the raw materials to make the product, your COGS will be $7
- Gross Profit: Similar to the COGS, you’ll need to consider the gross profit, which is the amount of money you’ll actually make (after you pay your bills and everything else is taken care of). Gross profit ranges from 30% to 50% of the product’s total cost.
- Profit Margin: Similar to the gross profit, you’ll need to consider your profit margin, which is the amount of money you’ll earn (after you pay your bills and everything else is taken care of) as a percentage of the product’s total cost. This is also called “profitability” and it determines how much money you’ll make or lose based on the final sales of your product.
- Total Expenses: As mentioned in the previous section, you’ll need to consider the expenses that come along with starting a business. Similar to the above-mentioned expenses, you’ll need to consider the total expenses, which are the amounts of money you’ll spend on everything, including the cost of goods sold, advertising, and so on. Total expenses can be found at the very end of the profit and loss statement, and, similar to the others, it ranges from 30% to 50% of the product’s total cost.
- Equity: Similar to the Total Expenses, you’ll need to consider your equity, which is the amount of money you’ll need to invest in the company. This is also known as “working capital” and it ranges from 30% to 50% of the product’s total cost. Essentially, if you’re taking out a loan to pay for your business, this is what you’ll need to pay back plus a little bit more.
So you’ve launched your online store, and, as expected, people come pouring in. The store does very well, and after some negotiating, you decide to take on some employees, and you expand your services. Pretty soon, you’re doing so much business that you decide to hire some more people. And before you know it, you’ve grown so much that you’ve decided to take on even more employees and continue growing rapidly.
Now, it’s important to take a step back and consider what you’ve learned during this whole process. First, you need to make sure that all of this is really worth it. Are you truly able to make an online store that can generate $500 per month? If not, then maybe you shouldn’t be doing this yet. You also need to make sure that you’re not spending too much money; after all, you’re just starting out. Keep in mind that you’re going to have to adjust your spending as you go along. As you can see, there are a lot of expenses that come along with starting a business, and it’s essential to keep track of what you’re spending so you don’t lose track of your finances. This is why we recommend using a cash flow management tool. A cash flow management tool can help you keep track of your expenses, and it will help you see which parts of your business are bringing in the most revenue so you can focus on those areas.