E-Commerce Business Best Practices
So You Want to Start an E-Commerce Business
After reading all the success stories about entrepreneurs making a living in e-commerce, you’ve decided that you want to start your own online business. You have a great idea, and now you want to start selling a product/service to become a smashing success. But where do you start? What are the first steps in making your mark in the e-commerce world? What does e-commerce even mean?
First, let’s go over some basics.
Reviewing the Basics of E-Commerce
E-commerce is defined as the buying and selling of products/services electronically. The “e” in “e-commerce” actually stands for electronic. When referring to e-commerce, it is generally assumed that the transaction is occurring online, over the internet.
The market for e-commerce is HUGE. In 2021, there were 2.14 billion digital buyers. This is likely in part due to the pandemic closing many physical shopping locations, consumers got a good taste for buying online rather than in a physical store. Despite the global economy beginning to slow, trends show that e-commerce is here to stay. Current projections show that by 2026, e-commerce will account for 27% of all retail sales.
Now that you have some basic understanding of e-commerce and the current climate of the market, let’s look into the first steps you should take if you’re ready to start your business.
1. Identify Your Target Audience
A good first step is determining exactly who your customers will be. But, what does that mean? Isn’t everybody on Earth a potential customer? Surprisingly, no.
Like traditional brick-and-mortar businesses, e-commerce stores require customers. Customers who spend money on products/services are the lifeline of your business. Without gross income, there can be no profit. Without income, there can be no profit, and without profit, the business fails.
Spending time to identify a good customer base can save thousands of dollars later in one’s e-commerce journey. It’s a good idea to narrow down who you think your ideal customer is, so you don’t waste your time trying to convince somebody to buy something they have no interest in.
A common misconception is that a great product or idea will attract a customer base on its own. This idea is largely false, but sometimes the excitement and passion for business can cloud one’s judgment.
The first three questions you should ask yourself when identifying your target audience should be:
A. Will my customers be similar to or different from myself?
B. Will I need a lot of low-profit customers or fewer, higher-profit buyers?
C. Will I target individuals, businesses, or both?
A. Will My Customers Be Similar to or Different From Myself?
If your customer base is a lot like you, then you already know a lot about them. You know what they like, how they think, and what motivates them to purchase. Write out these motivations as a tangible source to refer back to.
If they are different from you, perhaps more research or consultation is warranted to identify their shopping habits. Try putting yourself in the shoes of your ideal customer. Ask yourself, “what do they like to do in their free-time? What do they do for a living? How does my product/service affect and improve their day to day lifestyle?” Write down everything. It’s important to track your thoughts – you never know where they may lead.
B. Low Profit Customers vs. High Profit Buyers
If you plan to sell high-volume, low-profit products to a multitude of buyers, you may spend more of your daily time on client acquisition than long-term relationship building.
On the other hand, if you are planning on selling to higher profit clients who yield larger margins, you may find yourself more focused on relationship building and repeat sales methods after things get going. Think about which you would enjoy more.
C. Individuals, Businesses, or Both?
Will your store sell business items or consumer goods? This matters because there are far more individuals shopping online than businesses. A smaller pool of business customers compared to masses of individual shoppers can present a challenge. While there are more individual shoppers online, it may be easier to solicit larger purchases from businesses since many of them are well funded with deeper pockets.
There may be no bad choice here, but deciding on the entities you will be selling to early on can save you a lot of headaches and may make running your e-commerce business more enjoyable.
Determining Products and Needs
After deciding on your niche and target audience, it’s time to decide the specific products you’re going to sell. This goes hand-in-hand with defining your consumer base, because often, the same types of products may be sold to various types of customers. However, the quality and quantity at which you sell may vary greatly depending on your buyers’ needs.
For example, let’s say you launch a coffee business online. If you focus on business clients, your inventory may turn over faster, making the expiration date of the coffee less of a concern to you. Your volumes may increase, but your profit margins may go down in order to attract those larger corporate buyers. Shipping and storage of large quantities will also play a factor in your costs.
However, if you sell more expensive coffee brews to individual coffee connoisseurs, you may hold higher profit margins while moving less product. This can decrease overhead costs for storage and shipping. But, ensuring high-quality coffee delivery within expiration date ranges will be a major factor in your daily picking and packing process.
Your client base will affect the focus of your operations, product lines, and the overall processes you use to run your business.
Next, you’ll want to determine if your target customer base has a need for your product. Doing your research to determine the demand will be one of your most important tasks while setting up your business.
Here are two questions to address that pertain only to your target customers:
1. What is the current supply vs. demand for my product type?
2. Are there significant obstacles entering the supplier channel?
Supply and Demand
Often, sellers will assume that a high demand for a particular product will increase the total market demand for that category of product. Most of the time, this is not the case.
Let’s stick with the coffee example. If your e-commerce business is focused on selling coffee, you’re probably not going to create more coffee drinkers just because there’s another option out there. There’s already plenty!
Your goal is to grab the current coffee drinkers that are dissatisfied with their current brew and convert them to be your customers.
The percentage of customers you have out of the total coffee drinkers defined in your target audience is your market share.
If you feel there is sufficient demand (and not enough supply) for your product(s), you should consider how to make your product more desirable to conquer the necessary market share to ensure your success. This can be achieved through the means of: higher quality, lower price or effective marketing, to name a few.
This brings us to market entry and barriers that could inhibit your efforts. What is a barrier to entering the market with your product? This could be anything from securing a steady supply of inventory from a reliable wholesaler, to market domination by a mammoth competitor (like Starbucks, Dunkin’ Donuts, or Krispy Kreme).
Regardless of the obstacles you face, you can empower yourself with the knowledge to make calculated decisions at this entry stage. Take into account local, regional, and global market conditions. Find out if your competition is lacking in a certain niche that your product could fill. You can even try seeking out honest feedback from veterans in your product sector. Many will gladly share their knowledge and can provide valuable feedback or insight. The worst they can say is no!
2. Develop a Business Plan/Strategy
Once you determine who your customers will be and that your product can fill a market demand, the next step is to develop a strategy, AKA a business plan.
There are three areas to address up-front:
1. How will you let everyone know about your e-commerce store?
2. How will you fulfill orders on a daily basis?
3. When, and how fast, should you be prepared to grow/scale your business?
No doubt you have heard the old adage about building something and, “they will come.” The problem with that saying is that they won’t come if they don’t know you built it! Letting your potential customers know about the new business and keeping it on their mind as they make purchasing decisions is called marketing.
Marketing can involve advertising and promotions to get buyers’ attention to make them aware of your products. Marketing engages your customer base over longer periods of time through brand awareness campaigns. Effective marketing will keep your products in the customer’s mind at the time of purchase decisions. The result should be a sale, which turns into income and ultimately profit. Again, profit is crucial to your success! This may seem obvious, but it’s something you should always be aiming for. Don’t get ahead of yourself and bite off more than you can chew and end up in the red!
3. Create a Fulfillment Plan
Before the orders start arriving, you need a plan in place to fulfill them. Fulfillment involves having inventory on hand (or available immediately for procurement) and shipping it to the buyer.
Orders may arrive via an online marketplace like Amazon or Etsy, through your e-commerce business website, or both. Orders can be collected through an order management system, commonly referred to as an OMS. For larger-scale businesses, while orders are managed using an OMS, the process of picking and packing these orders is typically managed through a warehouse management software (WMS).
Oftentimes, e-commerce businesses will choose to fulfill orders through a 3PL (Third-Party Logistics) company. A 3PL will handle everything that goes into warehousing and shipping on your behalf. As you begin to scale your e-commerce business, it may be beneficial to implement a 3PL into your operations. However, at a certain point, some businesses decide to purchase their own warehouse(s) to fulfill orders themselves.
Warehouse management involves planning your inventory levels, receiving stock into designated locations in your warehouse, and routing/tracking items until they are shipped. The WMS will alert warehouse staff of pending orders and direct them to the proper location in the warehouse to retrieve the ordered item. The picker will place the items into boxes for shipping. Once packaged and verified, the order will be shipped to the customer. A WMS makes the process of fulfillment much more simple and less time-consuming.
As your e-commerce business grows and you venture into warehousing, consider the amount of time and money you will save by doing things right from the beginning.
How many employees will you need to effectively operate your warehouse? When should you plan on hiring and training more staff? How much inventory will you need to stock? What happens if you run out of product? These questions are addressed in the contingency and forecasting sections of your business plan. We will discuss these items and more in part two of this series
For more information and resources on e-commerce, check out our e-commerce blogs!