Xero surveyed 171 accountants and bookkeepers with a collective clientele of more than 6,000 small businesses to explore the differences between online and physical businesses. 61 of those experts (accounting for more than 2,200 businesses) were based in the UK.
- Profitability – 56% say online businesses have a higher net profit margin.
- Resilience – 66% say they’re less likely to fail (and 73% say owners lose less if they do fail).
- Innovation – 65% say they’re more likely to be based on a novel idea.
- Lifestyle – Online business owners are 2.5X more likely to hold down a day job as well.
- Stress – Just 13% say online owners are more stressed (44% say brick-and-mortar owners are).
- Startup – 6 in 10 say it costs less to start a business online.
- Running costs – 8 in 10 say it costs less to run a retail business online (vs B&M). 6 in 10 say the same about service businesses.
- Break even – Three-quarters say online retailers break even sooner (vs B&M). 4 in 10 say the same about online service businesses.
About the experts in this study
The accountants and bookkeepers in this study prepare financial statements for both online and bricks-and-mortar businesses. They understand the commercial performance of both, but they also know the startup journey, workload, risks, and lifestyle implications for owners. This report reflects their observations in the case of very small businesses (0 to 4 employees).
These results are based on the responses of UK experts only. Explore the differences between online and bricks-and-mortar businesses when it comes to:
- Financial performance: including level of income, running costs, profit margins, and cash flow.
- Lifestyle: including workload, downward price pressure, and stress levels.
- Failure rates and repercussions: including failure rates and personal financial risks.
- Pros and cons of online business: in which we look at three good things about owning an online business, and three not-so-good things.
Start up journey of online vs bricks and mortar
Online businesses are generally seen as faster and cheaper to set up, with owners achieving break-even on their investment sooner. These lower barriers to entry allow people to set up niche businesses based on novel ideas.
Cheaper to start
- 6 in 10 experts say online businesses cost less to start up
Online businesses don’t have to enter expensive lease agreements or fit out premises. They can also try a soft launch – where they carry less stock in the early days and only increase their spend as demand grows. Physical businesses are under more pressure to hit the ground running in order to meet higher operating costs.
It’s noteworthy that 4 in 10 experts think online businesses cost more to start. Good websites are not cheap to build, and most experts recommend making a considerable investment in digital marketing in the first quarter of the business’s existence.
Break even sooner
- Retail: three quarters say online breaks even faster
- Services: 4 in 10 say online breaks even faster. A quarter say they're slower. The rest call it a tie
Break even is a big milestone for any business. Experts agree it happens faster for those in the online world. Lower startup costs will play a role, but lower weekly operating expenses (see the finance section) will also help. This leaves more of their revenue available to claw back startup costs.
Room for creativity
- 65% of experts say online businesses are more likely to be based on a novel idea
- 10% say bricks-and-mortar businesses are more likely to be novel
Experts are six times more likely to say online businesses are based on novel ideas. Lower startup and operating costs mean owners face fewer personal financial losses in the event of a business failure. This de-risks the ‘worst case scenario’ and gives entrepreneurs more licence to try something different. Online businesses are also better able to connect with niche markets to sell their specialty goods or services. In fact, 43% of experts say improved access to niche markets is a key benefit of being an online business.
Faster to set up
- Retail: about three quarters of experts say online retailers launch within a year of having their idea (only half say the same for bricks-and-mortar retailers)
- Services: 9 in 10 say online service businesses launch within a year of having their idea (compared to three-quarters for bricks-and-mortar services)
Online businesses don’t have to organise physical premises, so they sidestep an array of time-consuming decisions and activities. It is also much faster and easier to ‘hang a shingle’ online and begin prospecting for sales – even before all aspects of the business are nailed down.
Money traps to avoid
- 45% of experts say new online businesses get surprised by digital marketing expenses
- Another 38% say they underestimate the costs of a good website
- A third say they get caught out by merchant service fees
While there’s plenty of consensus about the lower costs of doing business online, traps remain. Digital marketing is complex and may require lots of early investment in trial and error. Although off-the-shelf website providers have made it easier than ever to create an online presence, it still costs money to make that website really good. Owners may also have to pay 2% to 4% of sales revenue to the merchant service provider that processes card payments.
Things to absolutely get right
- 50% of experts say it’s critical for online startups to have a clearly defined market
- 39% say they should take extra care nailing down their supply chain
- 32% recommend having an interesting brand story
These keys to success could apply to both online and bricks-and-mortar businesses. However, there are reasons why they may have emerged as big considerations in the ecommerce space. Digital marketing can become prohibitively expensive when not focused on a small audience, so it’s important to define the market. Supply chains are a struggle for all types of businesses in the era of Covid-19, but arguably more so for digital businesses, whose customers typically expect convenient ordering and seamless fulfilment. Meanwhile, brand story is becoming an important differentiator for small businesses who need to stand out from ubiquitous corporations that often dominate online search and advertising.
Financial performance of online vs bricks and mortar
Owners of online businesses are more likely to hold onto their day job. This would seem to suggest that they don’t generate as much income. However a further inspection of financial performance shows that generally their costs are lower, their margins higher, and their cash flow stronger.
More likely to be a side hustle
- 51% of experts say online businesses are likely to be a side hustle. 20% say bricks-and-mortar businesses are likely to be a side hustle
Ecommerce businesses are 2.5X more likely to be a supplementary form of income. There could be several reasons for this. Perhaps they’re younger businesses that haven’t matured into cash cows just yet. After all, almost half of UK experts say they generate less revenue than their bricks-and-mortar equivalents (only a quarter say they generate more). But even in markets like the US, where online businesses earned more than their bricks-and-mortar equivalents, they were still more likely to be a side hustle.
It could be that online businesses are easier to manage, meaning owners have the time and energy to hold down a day job. However, that’s probably not the case; the lifestyle section of our survey suggests workloads are comparable. It may instead be that digital tasks can often be completed at any time of the day. This allows owners to work for someone else during traditional business hours and for themselves at night.
Less costly to run
- Retail: 8 in 10 experts say online retailers have lower operating expenses than their bricks-and-mortar counterparts
- Services: 6 in 10 say online service businesses have lower operating expenses than their bricks-and-mortar counterparts
There’s wide consensus that an online business costs less to run. The effect is stronger in retail, where bricks-and-mortar businesses would traditionally pay more rent to get into high-traffic locations. While the absence of rent probably drives many of the savings across the board, factors such as automation may play a role. For example, 1 in 5 say lower staffing costs are a major advantage for online businesses. Fewer costs mean there’s a lower threshold to cross for a business to become financially sustainable. This may explain why there are a greater number of niche-focused and side-hustle businesses online.
Higher profit margins
- 56% of experts say online businesses have higher net profit margins
- 23% say online margins are much higher
- 20% say bricks-and-mortar margins are higher
Online businesses get to keep more money from every sale. This reflects the fact that there are less operating expenses to eat into revenue. But it also suggests that online service providers are equally as productive as their bricks-and-mortar counterparts. In other words, remote staff can, and do, get just as much work done from home.
Improved cash flow
- 48% of experts say online businesses have better cash flow
- 31% say bricks-and-mortar businesses have better cash flow
- 21% say it’s roughly the same for both
Experts were about 50% more likely to say online businesses have better cash flow. Cash flow is the amount of money a business has to spend. It affects their ability to buy supplies and keep trading. Consequently, it also determines the level of financial stress felt by owners. Online businesses typically bill clients electronically, which will mean they’re more likely to receive instant payments via credit card or direct debit. These forms of payment are known to reduce debtor days (wait times) by up to half. As noted, online businesses also have lower operating expenses, which puts less pressure on their cash.
Of course, fewer cash flow problems doesn’t mean no cash flow problems. A third of experts say new online businesses run into difficulty managing expenses like merchant service fees. Another Xero study (Xero, 2021) notes that 58% of online businesses have difficulty forecasting cash flow.
Lifestyle of online vs bricks and mortar
Small businesses typically demand a lot of their owners, which can affect wellbeing and quality of life. Online businesses are no different. Their owners work just as hard and face similar price pressure from customers, although they seem to feel less stressed overall.
Workload for the business owner
- Only 3% of experts say reduced workload is an advantage for online businesses
While there’s some mythology about earning passive income online, the reality is quite different. When asked to identify advantages that online businesses have over bricks-and-mortar businesses, only 3% of experts flagged reduced workload as an attraction. Digital business owners may not spend as much time ringing up orders at the till or travelling to meetings, but time goes in other ways. For example, 30% of experts say the amount of time spent maintaining a digital reputation (via social media and by managing reviews) makes online business a challenge for owners. Another 30% say a lack of face-to-face contact is a problem. That could suggest time is lost correcting misunderstandings that can sometimes arise in digital forms of communication like email.
Downward price pressure
- Experts say online and bricks-and-mortar retailers* face similar downward price pressure
* We limited this question to retailers because they tend to sell like for like and are more subject to price comparison.
While online businesses face fewer costs and higher profit margins for now, those benefits could always be eroded by customer expectations. Downward price pressure can make business feel like a race to the bottom. We checked to see if online shoppers apply more of that downward pressure on retailers. After all, it’s easier for them to run price comparisons by simply clicking on another search result.
Most experts said there was no difference in downward price pressure felt by owners. Those who felt there was a difference were equally divided – half saying online faced more downward pressure and the other half saying bricks-and-mortar faced more. So this one is a tie. Based on accountant and bookkeeper feedback, there’s no expectation for online businesses to provide cheaper goods or services.
Who’s more stressed?
- Only 13% of experts say online business owners are more stressed
- 44% say bricks-and-mortar business owners are more stressed
- 36% say stress levels are the same
- * 7% declined to answer because it was too hard to say
While around a third of respondents say stress levels are comparable, most say bricks-and-mortar businesses are tougher. In fact, they’re three times more likely to pick bricks-and-mortar businesses as more stressful. This can probably be traced to core financial factors. The lower costs of being an online business mean break-even is always nearer at hand for a given sales period. Better cash flow means they have fewer unpaid bills hanging over their head. And higher margins give them more financial wiggle room. Plus, as you’ll see in the next section, online business owners stand to lose less if the business gets into trouble.
Failure rates (and repercussions) of online vs bricks and mortar
Online businesses are generally thought to be more resilient. At least that’s the feeling right now. It was a very different picture pre-pandemic, and only time will tell where consensus ultimately lands. One thing is for sure: online business owners are less likely to endure large personal losses if their business closes.
- 66% of experts say an online business is less likely to fail
- 5% says a bricks-and-mortar business is less likely to fail
- 30% say there’s no difference
Online businesses clearly find it easier to keep trading during massive social disruptions like the pandemic. That has greatly influenced the experts’ answers to this question. Before Covid-19, 41% of them backed bricks-and-mortar businesses to be more resilient compared to only 7% for online (with the rest calling it a tie). It remains to be seen where expert opinion lands as the world emerges from the pandemic.
Personal financial losses from failure
- 73% of experts say the failure of an online business will cause fewer personal financial losses (39% say it will be far fewer)
- 7% say bricks-and-mortar business owners will lose less
Sole proprietors are personally liable for the debts of their business. In the case of failure, they may be expected to pay creditors out of their own pocket. However, online businesses seem to face less of a risk on this front. They tend to spend less during startup and they reach break-even faster, which suggests they carry fewer debts. Because their operating expenses are also lower, they may be less likely to trade their way into debt. The end result is that they face fewer personal financial hardships in the case of business closure.
This consensus may also reflect the lack of lending available for online businesses. It’s widely felt that banks offer fewer loans to ecommerce startups, which means those businesses simply can’t load up on debt.
Pros and cons of running a business online
This report explores some of the metrics by which business performance and personal comfort are measured. However, we also wanted to understand the strategic advantages and disadvantages of being an online business.
Experts were asked to nominate the three biggest pros and three biggest cons faced by digital businesses.
Pros of online business:
- 49% say selling outside of the region is a key advantage
- 48% say lower overheads
- 44% say lower startup costs
Cons of online business:
- 39% say understanding the technology is a challenge
- 38% say figuring out digital marketing
- 30% say time spent dealing with social media and online reviews
Physical store vs online store
Summarising the retail-specific differences between online and brick-and-mortar businesses:
- 6 in 10 experts say an online store is cheaper to start
- 8 in 10 say it’s cheaper to run
- Three-quarters say an online store breaks even sooner than a physical store
Findings related to profitability, cash flow, stress, and workload are for all business types – not just retail.
Ecommerce is creating new, lower risk pathways to business ownership. Startup costs are generally lower, as are operating expenses. This allows owners to claw back their upfront investment faster. Owners also face fewer personal financial risks in the case of business failure.
These lower barriers to entry don’t seem to be offset by obvious financial penalties. The online businesses covered by this study enjoy higher net profit margins, while the instant nature of digital payments (combined with lower operating expenses) supports improved cash flow.
On the other hand, online business owners are getting caught out by some of the unique aspects of operating in a digital environment. The costs of digital marketing, the challenge of creating a good website, and the costs of taking online payments are the main traps. Mentally, they may be challenged by the long hours spent online and the absence of face-to-face contact. This may be exacerbated by the fact that they’re more likely to hold down a day job, which puts them at extra risk of overcommitting themselves. Overall, however, they appear less stressed than those in bricks-and-mortar businesses.
Limitations of the study
This study was undertaken with accountants and bookkeepers who are familiar with the financial performance of both online and bricks-and-mortar businesses. However, they did not refer to ledgers to provide answers. As such, this report reflects their overall impressions rather than a strict head-to-head analysis of financials.
It should also be noted that 44% of respondents said they prefer working with online businesses, while only 30% said they preferred working with bricks-and-mortar businesses (the remainder had no preference). This may reflect a bias toward online businesses, although it may also come down to inherent advantages of working with such businesses.
Participants were asked to limit answers to their experiences of very small businesses (0 to 4 employees).
Why Xero did this study
There is lots of conjecture about the pros and cons of running an online business. Most of it is based on hunches and assumptions. We wanted to begin replacing that say-so with substance, by surveying the people who work with the financial facts – accountants and bookkeepers.
Xero produces accounting software, which is used by millions of small businesses and 200,000 accountants and bookkeepers. Participants in this study were sourced by a third-party researcher. They do not necessarily use our products.