Blog / Beginner's handbook / The Real Cost of Running an Ecommerce Business
A few months ago, I was given the opportunity to run the Startup Vitamins store. And guess what, I wasn’t prepared for it. But was I up for the challenge? Obviously.
I’ve gone through the growing pains and learned a lot. One of the main things I’ve had to master—the financial side of running a store.
In this article, I’ll give you an insight into Startup Vitamins’ finances and provide some of the most necessary tools to run a print-on-demand (POD) business with effective money management.
From categorizing print-on-demand costs and calculating net income to finding your business’s break-even point and setting realistic profit expectations, you’ll learn about it all.
I’ll also show you all of our revenues, expenses, and the profit for a whole month. You’ll get to see everything.
Hopefully, I can help you up the learning curve, so that you’re not as confused as I was when I first started off. Together, we’ll learn to make educated business decisions and set realistic expectations.
Before I dive into the nitty-gritty, let’s go over our business model and Startup Vitamins history so you get an overview of what we do.
We started out in 2011 when our original team needed some motivational wall art to decorate one of our startup’s offices. However, after looking far and wide for posters that would fit in a startup business environment, we came up empty-handed.
That’s when the idea of motivational posters for startups was born. We were sure that we weren’t the only ones who wanted such posters and got to work.
We started printing posters in our founder’s living room and soon the business picked up. The customers resonated with our message and were stoked about our designs and products.
Since the start, our side-hustle has grown considerably and allowed us to make decent salaries and even save up over $265,000.
We’re long past printing posters in a living room but our idea and mission haven’t changed. We still do our best to motivate entrepreneurs and their teams around the world.
Nowadays, we offer many more products than posters, for example, stickers, canvas, clothing, notebooks, and others.
Most of our products are made on demand with Printful. Other products, like our colorful mugs, are mailed from other suppliers and stocked using Printful’s warehousing service. This means that all of our orders are fulfilled by Printful without us having to lift a finger.
For this article, I’ve chosen July 2021 as a benchmark. It was an average month for Startup Vitamins in terms of both income and expenses.
Our goal is to be profitable in the long run, not just for a month. However, for the purpose of this article and for the sake of keeping things simple, I’ll analyze just one month.
Remember that it’s OK to earn less in some months, as long as you keep your focus on long-term growth and make sure you make up for any losses.
Startup Vitamins’ income statement, July 2021
|Payment provider fees||-$166.59|
In total, our revenue for the month was $5,676.50. After deducting all the expenses, we’re left with a profit of $2,124.91.
There are 2 kinds of costs in every business—variable and frequent.
Variable costs include shipping expenses, fulfillment fees, costs associated with making each product, and so on. These depend on the sales volume—the more you sell, the more of these costs you’ll have.
Frequent costs are the ones that don’t change no matter how many sales you make. Most of these stay the same month to month. These include rent, storage costs, salaries, marketing expenses and more.
Knowing this distinction is important because it’ll help you understand down the line to find how much you need to sell to break even or make a profit. Understanding your costs is essential to maximize profits.
Production and product costs: $3,038
Production costs are what we pay Printful for fulfilling our orders on demand. We find that this cost is a good bang-for-your-buck as it takes away the headaches of making, storing, packaging, and shipping the goods ourselves. If you operate a POD store, you will surely have this expense, too.
We’ll need to know how much variable cost each of our products has to calculate the expected profits. To find this, I looked in our store’s Printful Dashboard.
Here you can see our “Get Shit Done” t-shirt. The Printful price is our variable cost for this t-shirt and the retail price is what we sell it for.
Payment provider fees: $166.59
For each purchase that a customer makes in your store, a payment has to be processed. There are many different payment processing options available, depending on the platform which you build your store on.
Our store is built with Shopify, so we use Shopify payments and PayPal express checkout.
Shopify payments enable our customers to checkout without leaving our website. This is great because we don’t want customers to leave the store midway through the purchasing process and possibly abandon their cart.
Shopify payments’ fees depend on the plan that you use. We use the $79/month plan, so our fees are 2.6% of each order value + $0.30 for each order. If you used a different plan, you’d have different fees.
We also use PayPal express checkout. It costs us 2.9% of the transaction amount plus a $0.30 flat fee. For us, this is worth it because our customers use it often.
Providing checkout options that your customers want to use and trust is one of the first steps to generate more sales.
Payment processing fees won’t be included in the profit prediction calculations because it’s difficult to predict how many customers will use each option.
Bank monthly payment: $10 per month
Bank payments are unavoidable because you’ve got to store your cash somewhere. You can use whatever bank suits your needs best. Keep in mind that your payments will depend on your choice, so research them carefully before making a decision.
Tax and accounting software: $100 per month
We pay for accounting software to easier manage our revenue, expenses, and everything tax-related. We suggest you find an accounting and tax solution that works for you since it’s a necessity to run a legit business.
I should note that we hire tax specialists from time to time and you too may have to. If taxes are a mystery to you, start by checking out this article on taxes in the US. I’d like to stress that we aren’t tax experts and suggest hiring one to avoid legal hiccups!
Shopify subscription: $79 per month
There are many well-rounded platforms for you to build your store. Each platform offers different functionality and has different costs. Some examples to consider for your store are Etsy, Amazon, or a custom WordPress store.
The Startup Vitamins store is built on the Shopify platform. We value the customizability, stats, and easy user interface that it offers. We use the $79 plan mainly because it includes additional reports for shopping cart analysis, financial charts, and information on customer behavior that we can’t find anywhere else.
If the payment of $79 per month is too steep for your business or you don’t need the additional functionality, you can go for the basic plan and pay less ($29 per month).
Store customization apps: $79 per month
We use several apps to add features to our Shopify store. Most of them are free, but we pay for Sufio ($49 per month) and Privy ($30 per month). We use Sufio to automatically send invoices to our customers and Privy to set up pop-ups and send cart abandonment emails. For most features, you can find free apps, so you could avoid this expense.
Most of the customizations we test are pop-ups or other kinds of banners. Check out the article about pop-up ideas to learn more about customizing your store with a purpose.
Mailchimp subscription: $79 per month
In addition to Privy, we also use Mailchimp for emailing our audience. For us, Privy works better for on-site integrations, such as email signup banners, custom pop-ups, and cart abandonment emails. We use Mailchimp for newsletters, promotional emails, and automated emails like the signup and post-purchase emails.
If you do business online, an email platform is essential, so you can’t really cut this expense out completely. But you could decrease it by choosing to use only one email service provider instead of two.
Most of the traffic to our website is organic (from Google searches) because our website has strong SEO. We also have social media profiles on multiple platforms and a sizable email list, which generates some free traffic to our website.
Ads are a good way to boost your numbers and we started experimenting with them recently.
If your website doesn’t have enough SEO power or a strong enough social media presence to generate reliable traffic, you might need to plan to spend money on advertising. Set aside some cash for that, too.
If you’re not sure where to start with ads, read this article about effective ads on a budget.
With your revenues and costs in line, you can do a host of business calculations, but I’m going to show you the two most important ones to start with: break-even and how to make X profit.
These calculations will give you a clearer picture of your financial situation, help you gain a better understanding of your cash flows, and set realistic expectations for your profits.
We keep them in mind whenever we’re thinking about changing any product costs, adding new products, and setting discounts, etc. We don’t want to be in a situation where a product is losing us money.
The name sums it up—it’s the point at which you break even, having no loss and no profit. You can calculate break-even point terms of the units you need to sell or the revenue you need to bring in.
To find your break-even point, you must know your products’ selling price, your variable and frequent costs, and, if you sell more than one product, how much of each you sell. If you’ve been running your business for a decent amount of time, you probably have a good idea of what portion of your revenue each product generates.
Break-even point = frequent costs / contribution margin
As you can see from the formula, we’ve got to find the contribution margin to calculate the break-even point. The contribution margin shows how much revenue of each sale goes towards covering the frequent costs.
Contribution margin = selling price – variable cost per item
For example, you sell a t-shirt for $25 dollars + about $10 for shipping and tax, which comes out to $35. The t-shirt itself costs you $15. The variable costs for each t-shirt are $15 + $10.
The contribution margin would be
If you have more than one product, you should calculate the contribution margin for each product. You’ll find that different products have different contribution margins. You can compare them and find which products are the most profitable.
Focus your efforts on the products that actually bring the most value to your business. Spend more money on advertising the most profitable products and place them in high-visibility places in your store.
Once you’ve found the contribution margin, you can use it to calculate the break-even point. For the sake of this example, let’s say that your fixed costs are $300 per month. How many t-shirts would you have to sell to break even?
Remember the formula from before (Break-even point = frequent costs / contribution margin)
This means you would have to sell 30 t-shirts to break even.
You can find the revenue you need to bring in to break even by multiplying the selling price by the number of units to break even.
You would have to sell $1,050 worth of t-shirts to break even.
To make your life a bit easier and help you avoid doing math in your head, check out the break-even point calculator I made. Just enter your products, how much each of them costs, and how much of each product you expect to sell in relation to everything else.
However, know that break-even point calculations aren’t always 100% accurate because they involve some assumptions. If you have more than one product, you have to assume the proportions that each product makes from your sales.
If you sell t-shirts, hoodies, and hats, you have to assume how much of the total revenue comes from each product. For example, that t-shirts will make up 50% of your revenue, hoodies 30%, and hats 20%.
Here’s how the break-even point calculation looks for Startup Vitamins.
On the left, I’ve entered our products, their selling price, the variable cost for each product, and what proportion of revenue will come from each product (% of sales mix). On the right I enter our total fixed costs and the desired revenue (enter 0 for break-even point).
And now we see that we have to make $698.09 in sales revenue to break even. However, we must keep in mind that the proportion of revenue that each product brings in is an estimation, which means that the actual break-even point may vary.
Let’s say that you wanted to make $500 of profit selling the t-shirt from the example before. To calculate how many t-shirts you’d need to sell, add the desired profit to the frequent costs and perform the rest of the calculations the same as before.
You’d need to sell 80 t-shirts to make a profit of $500, which is $2,800 in revenue to profit $500 (80 t-shirts × $35 selling price).
If you use the calculator from before, just enter your desired profit in the desired profit field and it’ll show you how much of each product you need to sell and the revenue you need to generate to get the profit you desire.
There are three main things that you can do with your profits: reinvest them into your business, save them, or take them out of the business for yourself.
We choose to save and reinvest most of our profits back into the business. This has created a nice safety net in case some unexpected expenses come up. Not only that, having spare cash allows us to take advantage of any new opportunities that we see.
Some examples of how you could reinvest back into our business are:
Over the years, we’ve saved up more than $265,000 by taking out profits only when necessary.
However, there’s nothing wrong with taking the profits for yourself, too. After all, you’re the one who earns them. You can splurge on yourself as much as you want, just keep in mind that the business needs some cash, too.
Even though you may have started with an awesome idea for a design or a product, it’s not quite enough to make a sustainable business. You’ll have to figure out your finances if you want your business to grow.
You don’t need to be an expert in accounting or finances to grow a successful business. However, an understanding of the financial basics of your business is a necessity.
Knowing your break-even point, understanding your costs, and predicting your profits are just some of the things you’ll have to learn along the way. Even though these are just the basics, they’re enough to get you on a good path.
All that’s left is to stop reading and start implementing this knowledge. Chop chop, get to it!
Haralds is a Content Marketing Specialist currently working on his Bachelor’s degree in Business Administration with a focus on marketing. He’s become increasingly interested in copywriting, SEO, UX, advertising, and everything ecommerce-related while running the Startup Vitamins store.
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