Article provided by Xero
Find out what it takes to start and run an online business. And learn how it differs from a regular brick-and-mortar operation. This guide includes tips and insights from experts and owners who’ve done it all before.
Same, same… but different
Starting an online business is a lot like starting any sort of business, but there are important distinctions. Here’s what experts and owners have to say:
Pros of online business
- Lower startup costs: “You cut the costs of bricks and mortar, so it’s much less expensive to get going,” says online business consultant, Marc McKeow of FortBrave
- Flexibility: “It’s allowed me to create more products with different tiers of service,” says online business owner, Olivia Park of Olivia Park Coaching
- Resilience: “Online accelerated during the pandemic, even as other types of businesses struggled,” says online business consultant, Shaheman Farid of Boobooks Accountants
Cons of online business
- Demands on marketing: “You’re doing well if 2% of website visitors buy, so you will need a lot of traffic,” says online business consultant, Marc McKeown of FortBrave
- Hidden costs: “People forget that merchant service providers and marketplaces take a cut of each sale,” says online business consultant, Shaheman Farid of Boobooks Accountants
- Forecasting cash flow: “We could only do a 2-month forecast, our first few years. We had no idea what would happen on day 61,” says online business owner, Michael Yared of Echobind
Steps to starting an online business
STEP 1: Evaluating your idea
Lower startup costs and overheads make it easier to launch an online business, but you’ll still invest a ton of effort. “There’s no such thing as a side hustle,” says e-commerce consultant, Marc McKeown of FortBrave. You don’t want to waste energy on something that won’t work.
A little research can help avoid mistakes. You don’t need a maths major or a stack of cash to test your idea. Just figure out who your target market is and get in touch with them.
STEP 2: Planning and budgeting
Online startups often have lower costs and unpredictable income compared to traditional startups. That combo can affect how you plan.
You may not have all the information you’d like to have at the start. Be prepared to jump in and learn as you go. Modify your plan as you learn more.
Taking real estate out of the equation really changes the economics of launching a shop or service business.
- For retailers: “You can start an online retail business for 20K now,” says Shaheman Farid of Boobooks Accountants. “So people are increasingly able to self-finance.”
- For services: “Rent goes away and tech costs are the same because you need online work tools anyway,” says Michael Yared of app development company, Echobind.
While the cost side of business typically goes down, the income side is almost impossible to forecast according to online business consultant, Shaheman Farid. “We suggest clients go in with three months of working capital and base their forecasts on that first quarter.”
What does this mean for planning?
Lower costs may mean less debt for the business owner, but a cloudy income picture makes financial planning hard. As such, online business plans need to be fluid and open to lots of possibilities.
A shorter business plan can be useful. It gives you a roadmap, but is easier to update. There’s no rule saying a business plan needs to be 20 pages long. Those big ones are for banks and investors. If you’re self-financing, then your plan can be as short as you need it to be.
STEP 3: Building your business
A business is more than an idea. You need to actually build something. It might be a shop, an app, or a remote working model. If you want to know the technological side of how to start an online business, these resources can help.
Two ways to sell online (infographic)
Learn how to start an e-commerce business with the least amount of fuss.
Shipping for small businesses
Experts explain how to deliver goods to online customers, and how to pay for it.
How to make money from an app
An app company gives us the lowdown on how apps are developed (and what they cost).
How to set up a remote office
What you need to serve clients online.
Delivering complex services online
You can provide consulting or training from anywhere nowadays. Michael Yared’s virtual agency has been collaborating online for years and he prefers it that way. “Digital brainstorming boards allow you to capture ideas from everyone – not just the loudest or highest-paid people in the room. Plus remote working encourages better documentation of your methods because so much information is exchanged in writing.”
STEP 4: Learning digital marketing
In the online world, people don’t walk by your shop by chance. You need to earn each and every visit to your website – and only about 2% of those visitors will buy anything. Starting an online business requires some clever marketing.
E-commerce consultant, Marc McKeown of FortBrave, says you’ll need to put in quite a bit of effort and some cash. “We encourage clients to keep 40% of their startup budget for marketing. We’d spend that in the first three months to see what things work and make a plan from there.”
But take care in how you spend that money. Shaheman Farid of Boobooks Accountants says things can go badly if you don’t. “I’ve seen failed campaigns chew through thousands without getting a single sale.”
Ben Charlton’s Air8 Digital helps small businesses figure out digital marketing and he says there’s just one rule that fits everyone – try stuff. “There’s no telling what will work and what won’t. You have to experiment. But you can do that without spending a fortune.” Read some of Ben’s tips.
Pick your target
You can reach a lot of people online. It’s important not to go for all of them. Olivia Park of Olivia Park Coaching says that when you market to everyone, you’re really marketing to no-one. “You have to niche down. Create content with a very specific customer in mind, or else it won’t resonate with anyone.”
STEP 5: Setting up online payments
No matter what you sell, you’ll be doing it remotely. So how do you get the money? These articles explain how online transactions work.
Retailer’s intro to e-commerce (infographic)
How to start with e-commerce: the two fastest ways to get going.
Service provider’s intro to online invoicing
Learn how online invoicing and payments works.
Learn how direct debit allows you to take recurring payments from customers.
Controlling transaction fees
Online transactions attract fees, which the seller usually pays. Some types of transactions cost more. Shaheman Farid of Boobooks Accountants recommends thinking about that when you ask customers for payment.
“Make debit card the default payment method. The transaction fees are generally lower and the money often appears in your bank faster.”
STEP 6: Dealing with fees and taxes
There are lots of niggly numbers floating around an online business. Each and every sale can be subject to transaction fees, taxes, and shipping charges – so be prepared.
Transaction fees can chew through almost 5% of your sales revenue, which is a lot. Each fee must be recorded against the corresponding sale. If that sounds like too much work, software like A2X can help.
Don’t forget to add sales tax to your prices. You’ll have to pay that money to the government, so try not to spend it. Some people put sales tax straight into a separate bank account.
Many retailers give free shipping to customers. You can do this by building the cost into your prices or paying it out of the business expense account. Either way, you’ll want to put a plan in place. Learn about shipping for small businesses.
STEP 7: Funding an online business
Most experts agree that banks are unlikely to finance an online startup – unless you already have a strong business track record. So if you need extra money, that leaves friends and family, angel investors, or crowdfunding (if your idea is super interesting). Learn more about those options in these articles.
Friends and family loans
Lots of businesses start this way so why not yours?
What are angel investors?
Learn what makes them tick and how to pitch them.
How crowdfunding works
How to start an online business with a bang.
What ‘future you’ will be thinking
Today you’re wondering how to start an online business. What will be on your mind in a few months’ time?
We asked people who’ve had an online business for less than six months what they worry about. Here’s what they said.
- 59% have trouble calculating fees and taxes on each sale
- 58% struggle with forecasting and managing cash flow
- 48% find it tricky to manage multiple online sales channels
(Global e-commerce report, Xero 2021)