Online vs brick-and-mortar business

Comparing financial performance, workload, and stress between business types.


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. 51 of those experts (accounting for more than 1,500 businesses) were based in the US.

Findings were used to build our guide on starting an online business.

Key findings

  • 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).
  • Startup – 8 in 10 say it costs less to start a retail business online (vs B&M). 7 in 10 say the same about service businesses.
  • Running costs – 8 in 10 say it costs less to run a retail business online (vs B&M). Three-quarters say the same about service businesses.
  • Break even – 8 in 10 say online retail businesses break even sooner (vs B&M). Two-thirds 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 brick-and-mortar businesses. They understand the commercial performance of both, but they also know the start-up 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 US experts only. Explore the differences between online and brick-and-mortar businesses when it comes to:

Start up journey of online vs brick 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

  • Retail: 8 in 10 experts say online costs less to start up than brick and mortar
  • Services: 7 in 10 say online costs less to start up than brick and mortar

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.

Break even sooner

  • Retail: More than 8 in 10 experts say online gets to break even faster
  • Services: Two-thirds say online gets to break even faster

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

  • 68% of experts say online businesses are more likely to be based on a novel idea
  • 16% say brick-and-mortar businesses are more likely to be novel.

Experts are four 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 license to try something different. Online businesses are also better able to connect with niche markets to sell their specialty goods or services. In fact, more than a quarter of experts say improved access to niche markets is a key benefit of being an online business.

Faster to set up

  • Retail: 8 in 10 experts say online retailers launch within a year of having their idea (roughly 6 in 10 say the same for brick-and-mortar retailers)
  • Services: 9 in 10 say online services businesses launch within a year of having their idea (compared to two-thirds for brick and mortar)

Online businesses don’t have to organize 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

  • A third of experts say new online businesses underestimate the cost of a good website
  • A third say they get caught out by merchant service fees
  • Another third say they struggle to budget for technology expenses

While there’s plenty of consensus about the lower costs of doing business online, traps remain. 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 as much 2% to 4% of sales revenue to the merchant service provider that processes card payments.

Things to absolutely get right

  • 43% of experts say online startups should have some relevant industry experience to call on
  • 39% say it’s critical for online startups to have a clearly defined market
  • A third say they should be passionate about the idea

These keys to success could apply to both online and brick-and-mortar businesses. However, there are reasons why points two and three may have emerged as such 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. Meanwhile, passion is a great source of energy and resilience for startups, and digital businesses may need those qualities more than most. They work just as hard as their brick-and-mortar peers, but are more likely to hold down a day job on the side. That takes a lot of grit.

Financial performance of online vs brick 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 revenue is comparable, their costs are lower, their margins higher, and their cash flow stronger.

More likely to be a side hustle

  • 49% of experts say online businesses are likely to be a side hustle. 20% say brick-and-mortar businesses are likely to be a side hustle

Ecommerce businesses are 2.5X more likely to be a supplementary form of income. That’s despite the fact that most ecommerce businesses in this study enjoyed higher revenues.

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 brick-and-mortar counterparts
  • Services: Three quarters say online services have lower operating expenses than their brick-and-mortar counterparts

There’s wide consensus that an online business costs less to run. The effect is stronger in retail, where brick-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

  • 70% of experts say online businesses have higher net profit margins
  • A quarter say those online margins are much higher
  • Less than 20% say brick-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 brick-and-mortar counterparts. In other words, remote staff can, and do, get just as much work done from home.

Improved cash flow

  • 51% of experts say online businesses have better cash flow
  • 27% say brick-and-mortar businesses have better cash flow
  • 22% say it’s roughly the same for both

Experts were almost twice as 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 brick 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, although they seem to feel less stressed. Interestingly, experts believe online retailers are under less price pressure from their customers.

Workload for the business owner

  • Only 4% 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 brick-and-mortar businesses, only 4% of experts flagged reduced workload as an attraction. Digital business owners may not spend as much time ringing up orders at the till or traveling to meetings, but time goes in other ways. For example, 37% 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 33% 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

  • 4 in 10 experts say brick and mortar retailers face more downward pressure
  • 2 in 10 say online retailers face more downward pressure
  • The rest say there’s no difference

* 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 called this in favor of online retailers – saying their brick-and-mortar peers actually had to deal with more downward price pressure. This is probably because physical stores still have to show their prices online, and so are subject to the same web-based price comparisons.

Who’s more stressed?

  • Only 4% of experts say online business owners are more stressed
  • 49% say brick-and-mortar business owners are more stressed
  • 47% say stress levels are the same

While around half of respondents say stress levels are comparable, most say brick-and-mortar businesses are tougher. In fact, they’re 12 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 brick 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.

Failure risk

  • 69% of experts say an online business is less likely to fail
  • 6% say a brick-and-mortar business is less likely to fail
  • 27% 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 brick-and-mortar businesses to be more resilient compared to only 16% 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

  • 68% of experts say the failure of an online business will cause fewer personal financial losses (41% say it will be far fewer)
  • None think brick-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 costs 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:

  • 63% say selling outside of the region is a key advantage
  • 55% say lower startup costs
  • 33% say lower overheads

Cons of online business:

  • 41% say figuring out digital marketing is a challenge
  • 37% say time spent dealing with social media and online reviews
  • 33% say understanding the technology

Physical store vs online store

Summarizing the retail-specific differences between online and brick-and-mortar businesses:

  • 8 in 10 experts say online is cheaper to start, cheaper to run, and hits break even sooner.
  • 4 in 10 say online stores encounter less downward price pressure than a physical store. 2 in 10 say they face more downward price pressure. The rest call it a tie.

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 generated similar revenues to their brick-and-mortar counterparts, while enjoying higher net profit margins. Meanwhile, 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 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 brick-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 brick-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 46% of respondents said they prefer working with online businesses, while only 18% said they preferred working with brick-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.

Findings were used to build our guide on starting an online business.

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.

Start using Xero for free

Access Xero features for 30 days, then decide which plan best suits your business.