- E-commerce has surged during the pandemic, enabling businesses to survive and thrive.
- You don't have to spend much money on overhead when you run an e-commerce business compared to a brick-and-mortar store, and it gives you access to a worldwide audience.
- There are some inherent challenges to running an online store, such as the increased risk of fraud and high rates of cart abandonment.
- This article is for people who are interested in launching an e-commerce business and want to learn the basics.
Selling products and services over the internet took on new importance during the COVID-19 pandemic, as business owners and consumers had no choice but to embrace e-commerce. That shift is here to stay, presenting opportunities for small business owners to thrive online. But before you set up your internet shop, you have to understand how it all works.
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What is e-commerce?
E-commerce is the process of selling goods and services over the internet. Customers come to the website or online marketplace and purchase products using electronic payments. Upon receiving the money, the merchant ships the goods or provides the service.
Electronic commerce has been around since the early 1990s when Amazon just sold books, but today, it's a multibillion-dollar industry – and it has gotten even bigger during the pandemic. According to Digital Commerce 360's analysis of U.S. Department of Commerce data, e-commerce spending hit $347.26 billion in the first half of 2020, up 30% year over year. For comparison, e-commerce sales only increased 12.7% during the first six months of 2019.
It's not surprising. With few other options, consumers got used to buying everything from food to furniture from online stores.
"We're certainly seeing several studies that show folks are going to keep their new habits," Tory Brunker, director of product marketing at Adobe, told Business News Daily. "I really think this is our new normal."
According to research from consulting firm McKinsey & Company, several online shopping categories are projected to grow more than 35%, including over-the-counter medicine, groceries, household supplies and personal-care products.
Did You Know: E-commerce exploded during the COVID-19 pandemic, and the new online shopping habits aren't going away, which means opportunities abound for small businesses to launch e-commerce websites.
How does e-commerce work?
E-commerce works on the same principles as a physical store. Customers come into your e-commerce store, browse products and make a purchase. The big difference is they don't have to get off their couch to do so, and your customer base isn't limited to a specific geographic area or region.
Whether you're selling running shoes or home supplies, you go through the same process when operating an e-commerce website:
- Accept the order. The customer places an order on your website or e-commerce platform. You'll be alerted that an order was placed.
- Process the order. Next, the payment is processed, the sale is logged, and the order is marked complete. Payment transactions are usually processed through what is known as a payment gateway; think of it as the online equivalent of your cash register. [Read related article: What Is a Merchant Account?]
- Ship the order. The last step in the e-commerce process is shipment. You have to ensure prompt delivery if you want repeat customers. Thanks to Amazon, consumers are used to getting items within two days.
To show how it works in action, here's a look at a product's journey when it is purchased online:
- A customer visits your online shop and browses your products. She settles on a shirt. She chooses the size and color and adds it to the shopping cart.
- An order manager or order management software confirms the product is in stock.
- If the product is available and the customer is ready to check out, she enters her payment card details and shipping information on your payment form or page.
- The payment processor, typically a bank, confirms the customer has enough cash in the bank or enough credit on her card to complete the transaction.
- The customer gets a message on the website that the transaction went through. This all happens in seconds.
- The order is dispatched from the warehouse and shipped. The customer will receive an email that the product is out for delivery.
- The order is delivered, and the transaction is complete.
Key takeaway: E-commerce transactions are similar to physical retail transactions in that customers come into your store, shop for products and check out. The difference is that it is done digitally, and you have to ship the items to your customers.
What features should an e-commerce site have?
To be successful at electronic commerce, you should have a comprehensive list of the products and services you sell on your website or marketplace page. The online shop should be easy to navigate, user friendly and aesthetically appealing. It should also be optimized for mobile devices. According to data from e-commerce platform Oberlo, mobile commerce sales are set to reach $2.91 trillion in 2020 and increase to $3.56 trillion in 2021. With so many consumers shopping on mobile devices, it's critical to optimize your online store for them.
The checkout experience is another important aspect of e-commerce functionality. It is the process the customer goes through to buy your product or service. If your checkout process is clunky and cumbersome or requires too many steps, you may lose the sale. Shopping cart abandonment is a real phenomenon, with the Baymard Institute finding the ;average abandonment rate stands at 69.57%.
TIP: Make sure your e-commerce site has a detailed list of your products and/or services, is easy to navigate, and makes checkout a breeze.
What are the pros and cons of operating an e-commerce business?
Pros of running an e-commerce business
There were lots of reasons to start an online retail business before the pandemic, and there are even more now. Here are seven of the big ones.
- It has fewer overhead costs than a physical store. A big expense of running a retail business is the physical storefront. That means money spent on rent, utilities and other such needs. All of that goes away when you operate an e-commerce store. There is no rent to pay. You don't have to worry about keeping the lights on, nor do you have to pay to have the lawn mowed or the walkways shoveled.
- You can operate 24/7 with no staff. The internet doesn't have store hours. It is up 24/7, and so is your e-commerce business. Unlike a physical store with set hours, your site can accept orders whenever your customers are ready to buy, which can drive more business. If you use software to automate most of the process, you won't need to hire an ordering manager to work the night shift.
- Your business can scale on the fly. There are physical limits to how many products you can stock when you operate a brick-and-mortar store – you only have so much shelf space. There are no such limits with e-commerce; you can add and remove products as you see fit.
- You can reach more customers. Your business may be in New York, but you can sell to customers in California if your store is online. "E-commerce changes the game for small business," said Ben Richmond, U.S. country manager at Xero. "It doesn't matter if you're in a city or in a small regional town – e-commerce gives you the opportunity to live where you want and sell into many markets."
- It's easy to track your sales and shipments. Logistics are make-or-break for e-commerce companies. Thanks to the digital nature of e-commerce, it's easy to track sales and shipments. The benefit of having this information in real time is that it allows you to quickly identify and rectify any snafus.
- It compiles customer data. When you sell products online, you capture a lot of customer data, from addresses to emails. You can also glean information about their purchasing preferences. You can use these insights to target loyal customers with promotions and discounts.
- It's pandemic-proof. While brick-and-mortar businesses were forced to close their doors amid the pandemic, online businesses were able to stay open. As a result, consumers have shifted their shopping habits, making it a necessity for every retailer to run an online store. "I strongly believe that with COVID-19, the pros of running an e-commerce business outweigh the cons," Richmond said. "As more consumers are shifting their spending from visiting brick-and-mortar stores to online shopping, businesses need to shift too."
Cons of running an e-commerce business
Though e-commerce has many benefits, it's not without its challenges. Here are six to consider before you decide if an e-commerce business is right for you.
- You can't reach everyone. Even amid the pandemic, there are still consumers who simply don't like shopping online; they want to see and touch products before they buy, and they are afraid of online fraud. According to Oberlo, 2.05 billion people are projected to shop online in 2020 – but that's out of the 7.8 billion people worldwide, making it approximately 26%.
- Data and credit card fraud are rampant. One of the biggest problems with e-commerce is the risk of fraud. Credit card and identity theft are commonplace, affecting thousands of consumers annually. If hackers breach your network and steal sensitive customer information, it could cause irreparable damage. On average, a cyberattack costs a business $200,000, and 60% of businesses shutter within six months of the incident.
- Customers abandon their shopping carts. E-commerce makes it easier for customers to window-shop with little intention of buying. Shopping cart abandonment impacts a high percentage of online sales.
- There are costs for doing business online. You may not have the overhead physical retailers have, but there still costs to consider, such as website hosting and/or e-commerce platform fees, internet service costs, social media marketing, inventory management, and storage and shipping. Like any other business owner, you must also consider applicable taxes, business licenses and regulations.
- E-commerce is a cutthroat business. You aren't the first person to sell a product or service online; depending on your industry, you may have many competitors with identical or very similar products. Since many consumers shop based on price and expect to find good deals on the internet, you may find yourself in a race to the bottom.
- Customers want fast, free shipping. Physical retailers don't have to worry about packaging and shipping their products. An online retailer does. Amazon has taught customers to expect not only two-day shipping, but also free shipping – which you may not be able to afford to offer.
Key takeaway: An e-commerce business can help you save money on overhead, expand your customer base and track sales, but it also has risks. Payment and data fraud, fierce competition, and discount-seeking consumers are ongoing challenges.
Types of e-commerce business models
There are several different e-commerce business models, based on what is being sold and to whom. These are the three most common types.
- Business to consumer: This type of business sells products or services directly to the individual consumer. B2C e-commerce is the most common online business type and covers a broad array of products, from clothing to entertainment. Examples of B2C e-commerce stores include Amazon, Netflix and Overstock. Most established retailers, from Nike to Tommy Bahama, operate this type of e-commerce site.
- Business to business: When a business sells products or services to another business online, it is considered B2B e-commerce. These businesses might sell items such as office supplies, furniture and equipment. They also provide online business solutions, such as document-signing software and other cloud-based services.
- Marketplaces: Pioneered by eBay but overtaken by Amazon, e-commerce marketplaces are websites where third-party merchants can sell their products or services to consumers. Walmart.com and Etsy are other examples of online marketplaces. For a cut of your sale, you can list your products on their platforms and access their customer bases. Many online marketplaces will handle your payment processing, logistics and even social media marketing for a fee.
Examples of e-commerce businesses
- Online retail: Amazon is the crowned champion of retail in the e-commerce world, but you don't have to be the next Amazon to succeed in this space. You can use resources like Amazon and eBay partnerships to get an online store off the ground.
- Wholesale: One of the best-known wholesale e-commerce sites is Alibaba. While Alibaba does get into B2C sales as well, they have established themselves as a global giant in the B2B space. Businesses all over the world get their goods from Alibaba.
- Dropshipping: Dropshipping is where another company handles your product for you. You create the online space where customers can browse and place orders, but the dropshipping company takes care of the logistics of delivering the goods to the customer. While Amazon does cross into this space, the No. 1 dropshipping company right now is Shopify. You can have a working storefront on Shopify in a matter of hours.
- Subscription: Subscription companies come in many shapes and sizes. The subscription can be for automated replenishment of goods, like the Dollar Shave Club. They can be for curation, like with a wine of the month club. The subscription can also grant access to a service. Netflix is easily the best example of this type of subscription model.
- Digital products: Digital product stores do not offer physical, tangible goods. They offer digital products, which should not be confused with services. The most common digital product is software. Microsoft is one of the most prolific digital product companies. Digital products can be art, online courses and other "objects" that can be purchased, even though they only exist on a computer.
- Physical products: On Etsy, people make physical objects that they then sell and personally ship. You can see how this is different from retail or dropshipping. A physical products e-commerce business will make the things they sell.
- Services: Services are some of the easiest things to sell online. E-commerce services include tax and accounting, healthcare, legal services, and just about anything else imaginable.
Should I use a marketplace or a website for my e-commerce store?
You have two choices for how you set up your e-commerce store: You can start your own website, or you can join an online marketplace like Amazon or Etsy. The best choice depends on which makes the most sense for your specific business – a large factor being whether your business is established or just starting up.
"If you have a brick-and-mortar store, the best time to value is creating your own store," Brunker said. "For those who aren't ready to own an online store, selling goods on Amazon and other marketplaces is a great first step. It just depends on your goals and what you are trying to achieve."