Costs of Starting an Online Retail Business
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Online retail businesses are a popular option for entrepreneurs with minimal capital to invest up front. What’s more, online retail is a great business to run as a home-based, solo, parent or part-time entrepreneur. It can also be a fantastic outlet for your creative talent or hobby.
So you’re asking yourself—what does it actually cost to start an online retail business? We’ve got a real-life example for you: Amy Weaver, corporate refugee and owner of a new online greeting card company. Amy took her creative ideas about a tried-and-true product—greeting cards—and launched her own online retail business. “Your words, not ours” is the humble tag line that sums up the unique niche of Amy’s Whoopzie Daizie Cardz. “I’m a card addict,” Amy explains. “But for me, greeting cards always seemed a little over the top—the glitter and the butterflies and everything else. I just want them to be simple. Maybe start a thought or give a good impression of what the card will be about on the front, and then let me fill in the words.”
Amy, a 32-year-old Dallas resident, began thinking about starting her own business more than a year and a half before she taxied down the runway. Her career as an airline property manager left her feeling confined. “Both my parents had their own companies, and I always felt claustrophobic working for someone else,” Amy admits. “So I’ve been attracted to the entrepreneurial lifestyle through experience.”
“I was drawn to the card industry because it’s a low-risk industry,” she continues. “Other than printing cards and the other basics, it’s pretty low cost—it’s not like I’m building superconductors.”
To finance her startup venture, Amy secured a $30,000 line of credit from a Texas bank and tapped into personal savings to keep up with her regular living expenses. While securing a line of credit is not typical for a startup that has been in business less than two years, many entrepreneurs are able to leverage personal savings, credit cards, friends and family or home equity loans to get started.
Amy then mapped out three critical areas on which to focus her financial resources in the initial startup phase:
- designing a dynamic website
- creating a top-quality product
- implementing a strategic marketing program.
Let’s take a look at these priorities one by one.
Designing a dynamic website
“First, I had to have a wonderful website because essentially that’s my storefront. I wanted it to look sharp and classy but still convey the personality of Whoopzie Daizie Cardz.” Amy invested $5,000 in her site, which went live in February. This figure includes a web designer’s hourly fees, web hosting costs, domain-name registration, and the purchase of a shopping-cart function that allows Whoopzie Daizie to accept online orders and payments. Amy admits that she chose to go with some of the pricier options when building her site, and that it certainly is possible to build a site for less than $5,000.
Because her company name is long and has an idiosyncratic spelling, Amy reserved two domain names, whoopziedaiziecardz.com and wdcardz.com. The site’s platform was constructed under the first address, and customers who use the shorter name are automatically funneled to the Whoopzie Daizie Cardz site. Amy recommends that business owners whose company names have an unusual spelling—say, Andersen or Hawthorn—consider doing the same. A supplemental domain name can be claimed for less than $100 for a 2-year period, with the opportunity for renewal when the term expires.
Creating a top-quality product
The second critical objective of Amy’s startup strategy for her online retail business was to design and manufacture top-flight greeting cards. She had counted on having to pay $60 to $80 per hour for graphic design services, but luck was on her side. Clay Davis, of Plan 9 Design, was so excited about the fledgling card company that he offered to come on board as Amy’s art director and business partner.
As Clay set about designing the cards, Amy began investigating materials and manufacturing. She quickly realized that there is much more to a piece of paper than meets the eye, and that using two commercial printers would be a practical and cost-effective approach. “The volume of the print run brings down the cost, but then you may have too many cards. That’s what directed me into two types of printing. The digital printing is less costly for the lower volumes, so I printed most of my cards through there and just printed a couple hundred each. The larger, traditional printer I used for the cards that needed to be more precise. I printed a thousand cards each, which is a lot.” All told, Amy spent $1,600 on paper and $5,400 on printing services to create enough inventory to take the site live.
Next, Amy turned her attention to packaging. She splurged on a supply of silk drawstring pouches the same azure blue as the Whoopzie Daizie logo. Each card is individually wrapped in a transparent plastic sleeve, which costs about $0.10, and an insert in the bag tells the company story and informs the buyer that her purchase will benefit a cancer-related charity. “My dad died from multiple myeloma, a cancer of the blood and bone marrow, and my mom had breast cancer,” Weaver says. “The donations—20% of my net income—are the focus of all this.”
Implementing a strategic marketing program
When it comes to building out a strategic marketing program —the third and final piece in Amy’s initial startup expenditures for her online retail business—understanding the consumer is of paramount importance. To gather data about customer preferences, Amy and Clay conducted extensive market research. Once they had about 45 design mock-ups, they printed two of each card and hosted a focus group. Their goal was to halve the number of final designs that would go to press. They invited about 50 friends and family members to critique the look and feel of the cards. “Through that focus group we got ideas like ‘The font should be different’ or ‘I don’t like the color’ or ‘I’d never buy this card,’” Weaver remembers. “Thank goodness we have really critical friends who are honest!”
The focus group expenses toted up to about $900, a figure that includes card printing, product displays, food and drinks, and gift bags for each participant. The bags contained Whoopzie Daizie t-shirts, cards, and cookies. Weaver plans to use focus groups again in the future, but she says she’ll be more shrewd in planning the next session. For example, she wants to target women, who make up more than 80% of card buyers, according to the National Greeting Cards Association.
Pricing the product: A carefully constructed marketing plan requires savvy product pricing. In talking with others in the industry, Amy discovered that retail prices of greeting cards generally reflect a 100% markup from wholesale. The psychological tipping point for consumers, she learned, is $4. “Anything above $4, people want something extra, such as a bookmark,” Amy says. She and her director of business development, Megan Wood, applied that rule of thumb to determine that a unit price of $3.75 would be readily accepted by customers and yield a modest profit.
Marketing the product via trade shows: Although her showroom is in cyberspace, Amy wants customers to be able to see and touch her cards. To accomplish this, she has begun exhibiting her product line at trade shows. The first was in Dallas, and Amy spent about $1,000 to create a “bare bones” display that includes several cards enlarged to 2’ x 3’.
Amy’s mother, Sandra Weaver, helped staff the Whoopzie Daizie booth. The entry fee to reserve exhibit space runs from $1,500 to $2,000 at most trade shows. Travel expenses for one or two people will be about $1,000 for out-of-town conventions.
Trade-show attendance is the linchpin of Amy’s clever wholesale-to-retail marketing strategy. “My goal is to try to develop the wholesale end of the business—to get the cards into stores—to develop brand awareness that will drive the retail business to the website.” This approach ties in with Amy’s idea of using Dallas as a test market. For example, Amy plans to deliver gift baskets to the owners of local gift shops and boutiques that might be interested in carrying Whoopzie Daizie cards.
When all was said and done, Amy managed to start Whoopzie Daizie for around $20,000 by allocating her money in the following categories:
- Website (design, domain name, web hosting, shopping cart): $5,000
- Product (card stock, printing, packaging): $7,500
- Market research (focus group party): $900
- Trade show marketing (one trade show): $2,500
- Wholesale marketing (gift baskets for local stores): $1,000
Amy is inspired by the challenge of competing with 3,000 other greeting card publishers in the United States. “I’m not someone who is drawn to Vegas or to gamble, so it’s not like starting this business was an impulse decision,” she says. “There’s great risk in what I’m doing, but—man, it’s exciting. Just bring it on.”
Our Bottom Line
Starting an online retail business can take a relatively small amount of capital if you manage your budget wisely. Some of the key ingredients of an online retail startup are: building a dynamic website; creating a top-quality, market-tested product; and developing an innovative marketing strategy. But above all, make sure you understand your market and your unique selling proposition very well, because the competition is pretty stiff out there in cyberspace!
Melissa Martin is a freelance writer for StartupNation.