Brick-and-mortar retailers are adopting online shopping solutions while entrepreneurs are starting their businesses online, often not venturing into traditional retail at all. It is little wonder why.
The demand for providing goods and services online is at an all-time high, and the resources necessary to start an ecommerce business have never been more accessible. However, starting an online business can lose its appeal when you are faced with the number of steps you need to take and the sea of available information on how to approach the undertaking.
This step-by-step guide provides all the information needed to start an ecommerce business from scratch, including how much the entire process costs.
How To Start an Ecommerce Business
Steps to start an ecommerce business:
- Find a suitable ecommerce business model.
- Choose a niche.
- Research the competition.
- Choose which products to sell.
- Secure suppliers and order fulfillment.
- Choose a legal structure.
- Give the ecommerce business a name.
- Register the ecommerce business.
- Obtain an EIN, business licenses and permits.
- Choose an ecommerce platform.
- Set up an ecommerce website.
- Hire an accountant.
- Apply for a merchant account.
- Partner with a reliable payment processor.
- Create a brand.
- Promote the ecommerce business.
1. Find a Suitable Ecommerce Business Model
The most popular types of ecommerce business models are:
- Dropshipping. Customers place orders on a business’s website but a third-party supplier/manufacturer is responsible for shipping the order. The website connects customers with the supplier while the business benefits from the sales margin.
- Wholesaling and warehousing. The business sells or stores large quantities of products for low prices. Typical customers are other businesses, but the general public can be the target audience as well.
- Private label manufacturing. This business model works for companies that want to market a product but lack the means to produce it. Private label manufacturing allows companies to outsource the manufacturing of products to a third party while selling them under their brand name. In the case of private labeling, the product is sold exclusively to one retailer.
- White labeling. This business model is similar to private label manufacturing. Companies outsources products from a manufacturing company which relabels the products. White labeling differs from private labeling in that the product is generic and sold to multiple retailers.
- Subscription. With the subscription business model, products or services are delivered periodically to customers. A subscription system is well suited for Software-as-a-Service billing.
The best business model for a business depends on its startup capital and readiness to take on business risks. For example, if a business has limited startup capital, it should opt for private labeling, white labeling, or dropshipping. These business models are considered low risk because the inventory and logistics are handled by a third party instead of the seller.
Note: Learn more about ecommerce and retail by visiting our in-depth comparison article Ecommerce vs Retail.
2. Choose a Niche
Considering there are hundreds of well-established online retailers in every niche imaginable, choosing one is a challenge.
The following tips will simplify the process of choosing a niche:
- Pick a niche you or your team specializes in. It is much easier to sell and advertise products you know inside out. Choosing a niche close to your specialization allows you to prove your expertise and build authority more easily.
- Start small. It is not a good idea to attempt to enter an already oversaturated market. A new brand will find it almost impossible to succeed right away in a niche with many established brands. Starting in a smaller niche allows businesses to gradually build up a reputation.
- Stick to one niche. Startups should focus on a single niche, establish authority, and then gradually branch out. Targeting several niches right from the start drains precious funds. Another drawback is that customers find it difficult to trust an emerging business that sells random, unrelated products (e.g., shoes and dishwashers).
3. Research the Competition
Competitor research provides valuable insights that can be used to grow an emergent business more quickly. This is especially helpful to first-time business owners.
Typical reasons why brands perform competitor research is to:
- Create or improve their buyer persona. Brands benefit from becoming acquainted with their competitors’ target audience. Knowing what competitors are doing right helps businesses fine tune their targeting.
- Get product, content, and marketing ideas. Competitor research does not only reveal whom to target, but also when and how. Knowing inside-out what competitors sell helps businesses highlight the unique features of their product offer and provide their customers with added value.
- Identify market gaps. Market gaps are the business opportunities a business’s competitors missed. They come in the form of products, product features, or services. Taking advantage of these opportunities gives brands the chance to stand out in their niche and win over their competitors’ audience.
4. Choose Which Products To Sell
The right choice of products for an ecommerce business idea depends on several factors:
- The business’s niche. It does not make sense for a cosmetics store to sell gardening products.
- Market demand. A store selling on-trend fashion items will not stock up on outdated clothes.
- Manufacturing capacities. Businesses manufacturing their products have their offer limited by their manufacturing capacities. For example, if the business is selling 100 pieces of three products daily, and its manufacturing plant is operating optimally, introducing a fourth product could compromise the business's ability to meet demand for the other three products. Even worse, it could disrupt the efficiency of its production plant.
- Storage capacities. All businesses, regardless of whether they manufacture or outsource products, need storage space. Any planning done within the business must consider available warehouse capacities to ensure that products are kept in perfect condition before shipping. Packing a warehouse bears the risk of product damage caused by improper storage, which leads to financial losses.
Evaluate your business’s needs before developing a product offer.
Note: Learn about product line extension to keep your product offer on trend.
5. Secure Suppliers and Order Fulfillment
The next thing to do is secure material or product suppliers and take care of ecommerce order fulfillment. The best supplier for an ecommerce business will be one that:
- Specializes in the manufacturing or procurement of products for a chosen niche.
- Fits the budget.
- Offers order flexibility.
The right fulfillment supplier for an emerging ecommerce business is one that:
- Provides customer support.
- Specializes in handling products related to a chosen niche.
- Provides scaling opportunities.
- Monitors stock levels and shares that information with their clients in real time.
- Provides services at an optimal speed.
6. Choose a Legal Structure
Every ecommerce business is registered as one of four legal entities:
- Sole proprietorship. One person owns the business and has complete control over it. That person’s assets are not separated from business assets, meaning that they are personally liable for all debts and obligations of the business.
- Limited partnership (LP) or limited liability partnership (LLP). Two or more people own a business together. In an LP, one person has unlimited liability and must pay self-employment taxes, while the others have limited liability and ownership. In an LLP, all owners have limited liability and ownership, with added protection against the debts of other partners.
- Limited liability company (LLC). One or more people own a business together. Their assets are separate from the business and protected from the business’s debts and losses. Every owner must pay self-employment taxes, Medicare, and Social Security. Owners have the option to pass profits and losses through their personal income and avoid facing corporate taxes that way.
- Corporation. One or more people own a business together but face different taxes depending on the type of corporation in question (C, S, or B). In all cases, owners are not held liable for business debts and losses.
Every legal structure has its advantages and disadvantages, which is why business owners should consult an attorney to find the option that is best for their business.
7. Give the Ecommerce Business a Name
Choose any business name as long as it complies with the following rules:
- The name must not be used by another business. The name of the business must not even sound like another business’s name. The USPTO offers a free tool that allows anyone to check the availability of a business name. Business owners should also check their state’s trademark database.
- The business’s name must not contain prohibited words. Prohibited words differ between states. Consult local authorities to learn more about business name restrictions.
Here are some extra tips for naming a brand:
- Avoid brand names that are hard to pronounce or spell.
- Make sure the name hints what the brand is selling.
- Choose a name that is appealing and easy to remember.
Once you have chosen a business name, register it as a trademark with the local intellectual property registry. Every United States-based business must have its name registered at the United States Patent and Trademark Office (USPTO).
8. Register the Ecommerce Business
The steps to register a business depend on the business’s legal structure and the state it is being registered in. Consult with the Internal Revenue Service (IRS) to determine whether registration is needed and how to do it.
Tip: Some states, such as Alaska, Oregon, Delaware, Montana, and New Hampshire, have no sales tax or registration procedure. Perform thorough research to determine which state is optimal for your business.
9. Obtain an EIN, Business Licenses, and Permits
The Employer Identification Number (EIN) is also known as the federal tax ID, and businesses need it to file business activity reports and tax return forms. To check eligibility and apply for an EIN, complete the form provided by the IRS.
Obtaining an EIN is not enough to run a business legally. Registering a business with the state grants a general operating permit, but depending on the business’s needs, the business owner may need to apply for additional permits to ensure the legality of the ecommerce business. Some of those permits are:
- Signage permits
- Sales tax permits
- Health, safety, and environmental permits
- Building and construction permits
To obtain special business licenses and permits, file an application with the appropriate state, county, or municipal agency. Find information about these agencies by contacting your state or local Small Business Administration SBA office.
10. Choose an Ecommerce Platform
An ecommerce platform is a type of software used both by ecommerce businesses and customers.
Businesses use ecommerce platforms to manage inventory, sales, and marketing efforts. Customers use ecommerce platforms to browse through brands' product catalogs, add products to their shopping carts, and complete their purchases.
There is a plethora of ecommerce platforms available, each catering to different business’s needs. The most popular ones are:
The best ecommerce platform for an emerging business is characterized by the following:
- The platform was developed by vendors with impressive experience in a chosen niche.
- The platform offers a plethora of native features, meaning no third-party tools are necessary for basic platform functionality.
- The platform offers integration and customization options, meaning the business owner can implement third-party tools to tailor the platform to the business’s needs.
- The platform is scalable, meaning it can handle increases in inventory and orders.
- The platform was developed with best security practices in mind and receives security updates regularly to ensure proper handling of sensitive information, such as personal and payment information.
- The platform is mobile-friendly, meaning it looks and performs well across all devices.
- The platform is SEO-friendly, meaning that it is optimized to ensure good ranking in search engines, such as Google and Bing.
Read our article Magento SEO: A Comprehensive Guide and Checklist to learn more about why SEO friendliness is important in ecommerce.
11. Set up an Ecommerce Website
The process of setting up an ecommerce website consists of several phases:
- Designing an ecommerce website. The design of an ecommerce website can make or break its success. The website must be visually appealing and easy to navigate.
- Developing an ecommerce website. Web development is responsible for making all designed elements work as intended.
- Choosing a hosting provider. A hosting provider offers online storage space to its users to upload their websites. Hosting providers often provide users with the option to register a domain name for free or a monthly/yearly fee.
- Registering a domain name. Registering a domain name is the act of registering the physical address of a website online, through a business that provides those services, such as domain registrars, website hosting providers, or website builders offering free domain names.
- Performing ecommerce integration. Ecommerce integration refers to the act of implementing an ecommerce platform in an ecommerce website as well as integrating the website with customer relationship management (CRM), enterprise resource planning (ERP), and payment processing systems.
12. Hire an Accountant
Accounting plays a crucial role in every business, as it quantifies and tracks the circulation of assets and business outcomes.
Employ an accountant or outsource ecommerce accounting services from experts who have extensive experience working with ecommerce startups.
13. Apply for a Merchant Account
A merchant account is necessary to process online payments. It allows businesses to receive payments made by debit or credit cards and requires an integration with a payment processor to work properly.
Note: Read our article to find out what merchant account solutions are.
- Choose credit card brands to process. Choosing between credit card brands depends on the audience the business is targeting. A business shipping worldwide will partner with the majority of credit card brands. On the other hand, a local, small business will offer its customers the option to pay with the most popular methods – domestic, Visa, and Mastercard debit and credit cards.
- Choose a payment model. The right payment model for a business depends on its business model. Standard ecommerce stores need a one-time payment model, while subscription businesses typically offer both one-time payments and recurring billing.
- Choose a merchant account provider. Choose whether you want to work with an acquiring bank or a merchant services provider. An acquiring bank requires a lot of upfront investment, gives business owners lots of paperwork to handle, and charges a monthly fee even when the business does not process any payments. A merchant services provider saves time and money of business owners by providing them with everything they need to process electronic payments, charging fees based on the business’ monthly transaction volume, and using an aggregated merchant account instead of individual ones for every business.
- Ensure compliance with Visa and Mastercard regulations. A business’s website must comply with Visa and Mastercard regulations to process payments made with cards from these companies. These regulations typically apply to the website’s content and checkout or delivery policies.
- Ensure PCI (Payment Card Industry) compliance. Every ecommerce business must follow standards set by the Payment Card Industry Security Standards Council to ensure sensitive payment information is properly handled and stored. Carry out an independent compliance review, or request one from your merchant account provider to ensure PCI compliance. After that, submit an application form to the PCI Security Standards Council.
- Prepare documentation. The following is the documentation required to open a merchant account:
- Financial statements and credit history.
- Attestation of compliance.
- Business bank account number.
- Employer Identification Number (EIN).
- Business license.
- Additional documentation (delivery and refund policies, inventory reports, business plans, etc.)
- Submit the application. Application procedures vary from one merchant account provider to another, but representatives typically walk business owners through them.
Tip: Carry out an independent compliance review using our PCI Compliance Checklist for Merchants.
14. Partner with a Reliable Payment Processor
A payment processor is one of the core components of any ecommerce business as it plays several crucial roles:
- Opens a merchant account and communicates with financial institutions on the merchant’s behalf.
- Is the connection between businesses, customers, and financial institutions.
- Ensures all payments are processed quickly and securely.
Note: Find out everything a business owner needs to know about what payment processors are in our comprehensive guide.
The best payment processor for an emerging ecommerce business is one that:
- Has experience with payment processing in the business’s industry.
- Supports billing for the currencies the business owner intends to support.
- Supports customers’ preferred payment methods.
- Provides consistent and high-quality customer service and support.
- Follows payment regulations.
- Implements security updates regularly.
- Offers user-friendly payment forms.
Tip: Find out how to choose a payment processor that meets these requirements and your business’s needs by reading our step-by-step guide.
Note: CCBill is an online payment processing service provider with proven experience in many industries. Learn more about the benefits ecommerce merchants gain from our online payment processing services.
15. Create a Brand
A brand is everything that makes a business stand out among competitors. The process of creating a brand involves creating a visual identity (logo, symbols, business, and marketing visuals).
The more creative and innovative a brand is, the greater impact it has on customers. Employ an in-house design team or outsource designers. Communicate the brand’s mission and vision and participate in idea brainstorming sessions to ensure the brand encapsulates the essence of your ecommerce business.
16. Promote the Ecommerce Business
Ecommerce marketing refers to the continuous practice of connecting a business to its target audience through various traditional and digital means.
An ecommerce marketing strategy determines the success of any ecommerce business because it:
- Raises brand awareness
- Builds brand loyalty
- Attracts customers
- Connects the right customers to the right deals at a perfect time
Allocate funds to marketing. Employ a marketing team with extensive experience working with ecommerce businesses to ensure yours grows from day one.
Note: Check out these 6 Essential Ecommerce Marketing Strategies in 2022.
How Much Does It Cost to Start an Ecommerce Business?
|Business licence||$25-? (Depending on state)|
|Ecommerce platform||Free (WooCommerce) or starting at $29/month (Shopify)|
|Inventory||$0-$1000 to start|
|Payment processing||2-3% of business revenue|
|Fulfillment||$20-$50/hour if charged hourly; $5-$15 per pallet or $0.25 per item if charged by unit|
As per the information in the table above, the minimal cost of starting an ecommerce business (before receiving and fulfilling any orders) is below $50 ($39.49) if the business owner does most of the heavy lifting (e.g., marketing and design).
Disclaimer: The prices provided above are rough estimates and may not reflect the total expenditure related to starting an ecommerce business.
You now know what it takes to start an ecommerce business and how much the process costs. With this guide as a checklist, diving into entrepreneurial waters with a new ecommerce business will be a breeze.