Online store cost

Once you have your overall online store strategy, there’s still much to do to set up the business model. Here we run through the different types of online store cost to help work out the future profitability of your online store. 

Online store cost planning

How this guide raises your game.

  1. How selling direct changes the sales revenue line in your Profit and Loss compared to when you sell to a retailer. 
  2. Learn the different selling costs you need to manage when you run an online store.  
  3. Read our thoughts on how to scale, get creative or outsource key parts of your online store business model. 

Building your online store strategy will have given you an idea of the size of the potential target audience for your online store. It will also have given you an idea of what competitors are doing. You should have an idea of where your online store sales will come from.

But before you invest in your D2C store, you should work out what your online store costs will be. You need this so you can set sales targets and be sure your investment will be profitable. And that your you can manage you online store day to day in a cost-effective way. 

Credit card payment

Online store sales or revenue

From a financial point of view, the D2C Profit and Loss (P&L) works differently to the P&L generated from sales through a traditional retailer.

When you sell products or services through a retailer, they pay you the ‘trade price’. The difference between the consumer selling price and trade price (often called trade margin) covers their costs to sell the product and make a profit. This trade margin is usually expressed as a percentage and varies wildly by category and retailer.

 

Wallet with credit cards

It depends on the relative size of the selling business and the retailer, but typically would be in a range between 15% and 30%. (we’ve know businesses where this was as low as 5% and others as high as 70%).

When you start talking commercial terms and P&Ls, it’s usually easier to explain if you use some example numbers. So let’s go back to the small ice cream manufacturer based in Sydney example we’ve used in other articles

Let’s say we currently produce our ice cream at a cost to produce of $10 per litre. We sell that to a local supermarket at $20 per litre. They sell it on to their customers at $25 per litre. So far so good. We make $10 on every litre sold, the difference between our selling cost to the retailer and our cost to produce. This is sometimes called gross margin. 

The retailer takes care of all the logistics, sales tax and managing customer orders as part of their $5 they make between the consumer price and the price they buy from us. Good for them. They will have the scale and efficiencies to do this and still make a profit. 

So, now let’s say we start up our online D2C shop. We decide we don’t want to threaten the business we have with the local retailer, so we decide to sell at the same consumer price of $25 per litre. The local retailer might moan about you being in competition but if they are still making similar sales and profits probably won’t complain too much. Especially if you don’t directly compete against them on price.

Now, instead of making $10 per litre sold, we are making $15 per litre sold. That’s a 50% increase in sales value per unit just there. Brilliant. Job done? Well, no. Not by a long way.

Online store costs

Many business owners feel unhappy about the trade margin they have to give to retailers.

But if you consider what the retailer actually does in the process, this trade margin covers a lot.

For ‘bricks and mortar’ stores, this margin covers the cost of operating a physical store. The staff wages to pack the shelves and operate the tills. The electricity and gas bills to keep the store going.

Burning money

And for both physical and online stores, this margin covers the costs of the delivery trucks and warehouse systems. These are needed to get the products from Distribution Centres (DC) on to the retail or virtual shelves where shoppers can buy them.

The retailer margin also covers all the computer and payments systems that process transactions and manage refunds and returns.

When you are selling direct online, the extra sales value you make per order needs to cover ALL these costs that the retailer normally covers.

When you calculate all your D2C costs as we will do below, if those exceed the margin you give away to a retailer, then consider very hard whether D2C is the right option for you.

Online store cost 1 – Credit Card Surcharge

So let’s go back to our $15 D2C profit on ice cream. First off, it’s unlikely we’ll receive $25 for the ice cream as the consumer will almost certainly have paid by credit card. And paying by credit card incurs a surcharge that you as the seller in this case would normally pick up. It is normally between 1% and 3% so let’s say 2% for this example. 2% of $25 is $0.50 so our $15 is now $14.50. All still good.

Online store cost 2 – Delivery from warehouse to doorstep

Here’s where it gets complicated. How much will it cost to get your product from your warehouse to the shopper’s doorstep?

If you were to use Australia Post’s current ‘standard’ offer, a small satchel delivery under 5Kg would cost $8.95 plus the cost of the satchel. And it takes 2 to 5 days to deliver within the same state.

So, there’s two problems right away. The $8.95 delivery charge would take our profit down to $5.95. Less than the $10 we were making selling to the retailer. 

And it takes 2 days to deliver without factoring in temperature control, Which for a product like ice cream in a country like Australia is important.

So, what about a courier or delivery company?

We’ve worked with several of these types of businesses in the past. DHL for example.

These companies can manage the temperature issue. They will have refrigerated trucks and warehouses in their systems. And they can generally do same or next day delivery within the same city. Great. However, to provide this level of service, they will charge a delivery fee per order which will be anywhere between $12 and $20 (or more) depending on the delivery circumstances.

So our delivery charge could in theory wipe out ALL our D2C profit.

This last mile cost as it’s often called, can be one of the most challenging aspects of online store cost planning. You can read more on that subject specifically in this article in our blog section. 

Think creatively about delivery

So how do you get around the problem of all these extra online store costs involved in selling direct? This is where you need to start getting more creative.

The specialist delivery companies normally charge the delivery cost per order rather than per item. So if you can get a customer to order two or three items, then the cost of delivering those will be the same as if they had ordered one item. But that means the cost of delivery per item is lower as it is spread across multiple items.

The last mile cost - food delivery guy on a bike with food in backpack

 

If in the ice cream example, let say we got a delivery company who would deliver an order for $16. One litre of $25 ice cream that costs $10 to make and $16 to deliver makes a $1 loss.

But if we could influence a consumer to buy four litres at $100, the $16 delivery charge would be the same. But the delivery cost per litre would drop to $4 per litre ($16 / 4). So per litre, $25 consumer price – $0.50 credit card – $10 cost to produce – $4 delivery means $10.50 gross profit. Better than our retail sale. Brilliant. 

Except the number of people willing to buy 4 litres of ice cream ($100 in this case) is likely to be much lower than the number of people buying 1 litre of ice cream. So, there’s a knock-on impact on the higher level sales number. 

This is why you will find a lot of online shopping is actually done by small businesses and organisations buying in bulk. People who are buying on behalf of a group. Like children’s centres. Or old people’s homes. Or prisons or police stations. All genuine examples we’ve come across in the past.

This is why most online stores offer free delivery when you spend over a certain amount (usually anywhere from $50 to $100) because they can absorb the delivery charge in to the order. And why you won’t see free delivery on low value items. 

Of course, if you are selling big ticket items it’s much more common to get free delivery. $16 is way more easily absorbed into a $1,000 purchase of a TV for example than it is into our $25 litre of ice cream.

Delivery charges to the shopper

What’s much more common on these lower value purchases is to charge the customer for delivery. Maybe not the full amount you are paying. But enough to bring your profit per order ahead of what you would have got selling to a retailer.

In the case above, if we were selling the $25 ice cream as a single order, we’ve already lost $0.50 to Visa, Mastercard or Amex. The product costs us $10 to make and $16 to deliver. So if we offered free delivery, we’d actually be losing $1.50 per order. $25 – $0.50 – $10 – $16). So in order to even match the $10 we were making with the retailer, we would need to charge the consumer $11.50  just to get back to matching profitability.

Online store costs – not quite done yet

And here’s the kicker.

So far, all we’ve talked about is managing the profitability of one order. And really all we’ve talked about are the variable costs per order.

Think about all the other costs. The marketing spend to get people to visit the site. The investment in building the shopping website. The cost of returns and refunds. The cost of the team who will run the operation for you.

We’ll cover these in more detail in the section on managing an online store, but when you are doing your online store cost planning, we do recommend you make sure you are clear on how your P&L will work. 

D2C coins

D2C – Scale, get creative or outsource

Well done for making it through the D2C sales and cost planning article. It’s one of the toughest articles to read because it brings home a lot of the challenges of running a D2C store. 

D2C can sound exciting because it’s new. It means breaking the hold that the retailer has on accessing your consumers. But there are a lot of costs that need to be managed before you push the D2C button. In our experience, we’ve seen it work best when companies go one of two ways.

If your idea is strong enough and you can generate enough scale, a lot of those high costs per order will come down. Having scale means you can negotiate better delivery rates from your delivery partners. When your D2C sales go up, you operating resources like staff and warehousing won’t increase at the same rate. You’ll be able to spread those costs across more units bringing better profitability. As you scale, you might want to look at partnerships particularly in the back-end. Do you have complimentary (or even competitor) products that could be sold through those same channels to help you spread around all those fixed costs?

Your other alternative is to be creative or to outsource. There are companies already doing delivery where you could piggyback on their existing model. We cover this opportunity in our last mile article in our blog section. 

In our ice cream example, we would be looking at a Deliveroo or an Uber Eats type company who could collect the product from us and get it to customers quickly. We’d expect to give up some of the margin from selling direct. But we’d be handling a lot of the delivery and customer service complexities over to someone else. 

Three-brains and e-Commerce

We have worked on many e-Commerce projects and have good experience across strategy, working with retailers and building D2C stores. We know how to connect these expertise areas back into driving your brand marketing and growing your sales. 

If you want to know more about how we can support your e-Commerce to grow your business  through our coaching and consulting services, click the button below to send us a message.

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D2C Online Store Status dashboard
Click to download the pdf

Downloadable D2C status dashboard

Setting up an online store needs you to define your strategy and plan, work out the sales and marketing and also set up the whole operational side of the business including the finances and the delivery / supply chain model. It can be complex to manage.

That’s why we’ve used this project dashboard to great success in the past to have a simple one-page summary of the key actions require to set-up and manage a D2C online store. Download it here or from our resources section. 

Powerpoint and Keynote versions of this document available on request. 

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