What goes into starting an online business?
Starting an online business is different to starting a traditional brick-and-mortar business. Yes, you need an idea, a plan, and a budget. But even those fundamental elements are done differently online.
We surveyed 171 experts who work with online businesses to find out what makes them tick. They told us the idea can be weirder, the plan can be shorter (whoop!), and the budget can be smaller (hooray, again!).
This guide combines their insights with quotes from online business owners and ecommerce consultants so you can see how to start an online business.
How to start an online business
1. Pros and cons of online business
Xero surveyed small business advisors to see how ecommerce stacks up against traditional brick-and-mortar businesses.
The accountants and bookkeepers who completed this survey prepare financial statements for 1,500 US small businesses. We asked them to compare the performance of online businesses vs brick-and-mortar operations. Here’s what they had to say.
- Profitability – 70% say online businesses have a higher net profit margin.
- Resilience – 69% say they’re less likely to fail (and 68% say owners lose less if they do fail).
- Innovation – 69% 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 4% say online owners are more stressed (49% say brick-and-mortar owners are).
- Costs – Most say it costs less to start and run (see full report for retail/service breakdown).
That makes online look pretty good. So what’s the catch? Well, the experts say there are a few.
- Digital marketing – 41% say digital marketing is tricky to figure out.
- Time online – 37% say the quantity of hours spent on social and reviews can be tough.
- Transaction fees – 35% say online transaction fees catch out beginners.
- Website – 33% say businesses struggle to create a genuinely good website.
- Technology – 33% say owners can have a hard time understanding the tech.
The online and brick-and-mortar businesses in this study had comparable revenue so these differences were not likely due to scale. 51 US accountants and bookkeepers participated in the study, with an average of 30 clients each (equating to a collective clientele of 1,500 businesses).
2. Online business ideas
Online business ideas fall into four broad categories – retail (including those who make their own products), service providers, apps, and content producers. Catch our article on online business ideas for tips on what could work for you.
Making your idea the best it can be
While online businesses generally cost less to start up, our study found they chew through just as much energy and effort as a physical business. You don’t want to waste all that sweat on an idea that could’ve been better. A little research can help you tweak your product or service in just the right way.
Experts’ number one tip for better ideas
We asked business experts for their top tips for online startups. The most common reply was to “define your target market”. In other words – work out which people (or businesses) will end up buying from you. They might be local parents, fitness fanatics, thrill-seekers, restaurants, schools, hairdressers, or something else entirely. Figure this out before starting your online business.
Whoever your target customers are, make everything about them. Make the product or service perfect for that specific user. And pitch your marketing at them, too. One way to get inside their collective heads is to have a chat with a few of them. Ask if they like your idea, your packaging, your price point. While you’re at it, ask who they buy from now and use the opportunity to learn about your competitors’ strengths and weaknesses.
3. Writing an ecommerce business plan
Writing a business plan for an ecommerce startup can feel strange to anyone who’s run a brick-and-mortar operation before. You may not need to put in as much detail. In fact, you may not be able to.
Why you don’t need a 20-page plan
Those big, buttoned-down business plans are great if you’re naturally a planner. But most people do them so they have a strong pitch to take to investors and lenders. Online startups don’t cost so much to run, which means you’re less likely to need outside cash. Besides which, institutional investors and lenders don’t generally back ecommerce startups anyway.
That frees you to write a business plan that works for you. It might still be 20 pages long but it doesn’t have to be.
Why you may only need a 1-page plan
When planning how to start your online business, you’ll probably find you don’t have all the information you’d like. Almost 60% of new online business owners struggle to forecast revenue for their first few months (Global eCommerce report, Xero 2019) after starting an online business.
That’s because so much depends on the success of your digital marketing, which is a massive rolling experiment in the early days. You’ll probably try lots of tactics on several digital platforms before you crack it. Only then will you have enough information to forecast sales and revenue.
Because online startups have to launch in the dark and learn on the fly, they tend to go with shorter, more fluid plans. Something that is easier to update as more information comes in.
Shorter plans doesn’t mean no plans
While the planning is dialed back a bit for online startups, it doesn’t go away and nor should it. Working through the steps of a business plan will help you think about your startup from lots of different angles. That process will help you build on your idea and make it better.
Related articles and templates
4. Creating a budget for a digital business
While it’s hard to estimate income when starting an online business, it’s still a good idea to have a rough budget. You need to know what the venture is going to cost you, and when it might start to pay you back. Accountants and bookkeepers generally agree that online businesses cost less to run, but they also say beginners often overlook some big costs.
3 common ecommerce budgeting mistakes
- 37% of experts say people starting an online business underestimate the cost of a good website: Off-the-shelf templates have made websites so much more affordable but creating a great user experience may require the help of freelancers who know what they’re doing.
- 27% say startups get caught out by digital marketing: Most digital advertising is sold on a cost-per-click basis. You pay for each site visitor. Only about 1 in 50 will buy anything (based on 2% conversion), so things add up quickly.
- 35% say online businesses don’t budget correctly for online transaction fees: When you take an online payment, up to 5% goes to the merchant service provider who processes the transaction. You need to factor that into your pricing.
How to do a budget
List all of your business costs and plot them on a calendar so you know roughly when they’ll hit. Then place some modest sales projections on the same calendar. You will be in the red a lot at the beginning, but that’s how starting a business goes. Just make sure you have a plan for paying bills in the meantime.
Online business consultant, Shahemen Farid of Boobooks Accountants says it will take a while for your long-term budget to become clear. “We suggest clients who are starting an online business go in with three months of working capital and base their forecasts on that first quarter.”
Experts’ pricing tip for online businesses
While online businesses are cheaper to run, they’re not expected to pass those savings onto customers. They can maintain prices similar to brick-and-mortar competitors, which leaves them with more margin between buy and sell prices.
Some of that extra margin will end up paying for things like shipping, which most customers expect to be free. But some will go into the business owner’s pocket, with our study confirming that ecommerce businesses have higher net profit margins.
Related articles and templates
5. Finance options for an online business
Banks are unlikely to finance an online startup, unless you already have a strong business track record. Fortunately, plenty of people have figured out how to start an online business without that external support.
Lots of online service businesses grow out of small freelancing teams, who don’t have terribly high operating expenses. They can get started with a laptop and a few software subscriptions, which they’re able to pay for out of their own pocket.
Retailers have to fork out more, but they can manage the risks easier than a physical store. They can try a soft launch, with limited inventory, and ramp up only when they find that demand is solid. “You can start an online retail business for 20K now,” says Shaheman Farid of Boobooks Accountants. “So people are increasingly able to self-finance.”
Sources of extra cash
If you still find you need extra money to start your online business, there are still options like:
- credit cards – just be aware that interest rates will be high
- personal loans – you will have to offer something you own as security
- friends and family – they might lend cash or buy in as investors
- angel investors – maybe, just maybe, a friendly industry contact will buy in
- crowdfunding – your idea would need viral potential to excite the crowd
- grants – some cause-driven businesses are eligible for free money
6. Digital marketing 101
In the online world, people don’t walk by your business by chance. You need to earn each and every visit to your website, and only about 2% of those visitors will purchase anything.
If you’re buying all your traffic through pay-per-click ads, costs can spiral out of control. Online business expert, Shaheman Farid says he’s seen failed campaigns chew through thousands of dollars without getting a single sale.
It’s not a unique problem. 41% of accountants and bookkeepers in our study say digital marketing is a big challenge for anyone learning how to start an online business. So how do you avoid catastrophes and give yourself a shot at online success?
The unsatisfying secret to digital marketing
The truth is that there’s no digital marketing playbook that works for every business. You could be doing search marketing through Google, creating articles on LinkedIn, posting videos on YouTube, or telling stories on Insta. Most things won’t work the way you need them to.
There will be heaps of trial and error. You can take some smart guesses, for sure. But you need to try several options at the beginning because results can be wildly unpredictable.
“There’s no telling what will work and what won’t,” says Ben Charlton of Air8 Digital, an agency that helps small businesses navigate the complex world of digital marketing. “You have to experiment. But you can do that without spending a fortune.” Ben’s low-cost tips are in our guide to digital marketing.
How much to budget for digital marketing
Ecommerce consultant Marc McKeown of FortBrave, encourages clients who are starting an online business 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.”
That may sound like a big chunk of money, but remember that digital marketing may be your only source of sales or leads. And that investment is offset by the money you don’t have to spend fitting out a shop or office.
7. How to set up an online shop, office, or app
Geography becomes irrelevant when you start an online business. You can sell to customers in other parts of the country or the world. Even people with super niche ideas can scrounge up enough customers from across the internet to make a living from it.
That may explain why 68% of accountants and bookkeepers say digital businesses are more likely to be based on a novel idea. But how do you actually interact and transact over the internet?
Creating an online shop
Retailers can use existing marketplaces like Amazon, Alibaba, Facebook, or dozens of others. It’s a fast and easy way to start because you just drag and drop pictures of your products into the shop and the marketplace processes payments for you. On the downside, you don’t have much control over how your shop looks and you pay a cut from each sale to the marketplace involved.
You can also create your own online shop using off-the-shelf templates from providers like Shopify, Square and BigCommerce. These usually cost you a monthly subscription fee and you will pay a cut on each sale in transaction fees, but you have more flexibility. However, that extra flexibility comes with the potential to make mistakes. Build your shop with care.
Setting up an online office
If you work in professional services, you probably already know how to work remotely. There’s tons of great software for creating, sharing and collaborating on projects. Online businesses have higher net profit margins than their brick-and-mortar equivalents which goes to show those remote working tools are perfectly productive.
Even complex group tasks like brainstorming are thriving online. Michael Yared’s app development agency, Echobind, has been using remote collaboration tools for years and says they’re better than in-person whiteboard sessions. “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.”
Creating an online studio
Olivia Park Coaching delivers online physical and wellbeing training to clients across Asia. Olivia Park attracts customers by sharing free content on social platforms, then signs paying customers to self-serve courses. She also offers one-to-one calls and says the digital approach allows her to help twice as many clients. “It’s enabled me to create more products with different tiers of service.”
Building an app
Got an idea for an app? Of course you do. Now you just need to turn that inspiration into a piece of working software. There are some pitfalls to avoid along the way. We spoke to an app development company to get the lowdown on how apps are made and what they cost.
Go start your online business
Our expert survey found that online businesses are less expensive to run and reach break even faster. They’re also less likely to fail and, in cases where they do fail, their owners lose less of their own money. It’s not risk-free – no business ever is – but it may be lower risk.
So write down your plan. Test your idea and build on it. Then give it a go. You can get free tips and tools for your business journey from Xero’s small business resources.
Get help from an ecommerce pro
You know who knows how to start an online business? Accountants and bookkeepers do. They do this stuff for a living. Find someone to help in our advisor directory.
Why Xero knows about starting an online business
Millions of small businesses use Xero’s software to run their finances and accounting. About 100,000 accountants and bookkeepers use us too. We asked some of those owners and experts how to start a business, then put their insights into this guide.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
Download the guides to starting a business
Fill out the form to receive two guides – "How to start a business" & "How to start an online business". Both are PDFs.