Online businesses are a large part of the economy and they appeal to budding entrepreneurs with business ideas for several reasons. Many prospective business owners are taking advantage of platforms like eBay, Etsy, Amazon, and Shopify or creating their own websites—and even apps—to operate their businesses. But the launch of an e-commerce business is no small task. Here’s what you need to know to start a successful online business, step-by-step.
What is an e-commerce business?
The term “e-commerce” refers to the buying and selling of goods and services on the internet. It’s typically done through an online store that features product or service listings, a “shopping cart” tool, and a secure online payment system.
To say e-commerce businesses are expanding rapidly would be an understatement. The U.S. Census Bureau estimates that U.S. retail e-commerce sales for the fourth quarter of 2022 totaled an impressive $299.1 billion (or $262 billion after adjusting for seasonal variations). Total e-commerce sales for 2022 were estimated at $1,034.1 billion, representing a 7.7 percent increase from 2021. E-commerce sales accounted for 14.6 percent of total retail sales in 2022. The future looks bright, too. Morgan Stanley predicts the market could increase to a whopping $5.4 trillion in 2026.
E-commerce businesses attract entrepreneurs for many reasons. For starters, an online business is generally much cheaper to run than a traditional brick-and-mortar store. For example, you don’t incur expenses for rent or a mortgage, maintenance, property taxes, or property insurance.
In addition, an online business can reach a far wider potential customer base. Prospective customers aren’t limited to those in your locale, nor are they limited to certain opening hours—they could conceivably shop at any time of day and from anywhere in the world. Much like your customers, you (the owner) are not tied down to a specific address or opening hours. You could run your e-commerce shop from anywhere in the world, so long as you have a reliable and secure internet connection.
That said, you do need to think about the upfront startup costs. According to Shopify, a new e-commerce business can expect to incur costs of up to $40,000 in the first year. Those costs might include:
Product costs: raw materials, inventory, and supplies
Operating expenses: legal, accounting, insurance, and software
Online store expenses: hosting and domain fees, design, and coding
Shipping: packaging, labels, and carrier fees
Salaries and benefits for yourself and any employees
Marketing: advertising, print materials like business cards and brochures, brand development, and logo design
That $40,000 price tag shouldn’t necessarily dissuade you, though. Your costs can vary substantially based on factors such as your business model, whether you work on the e-commerce business part-time or full-time, and whether you have employees. Additionally, you don’t need to have your startup funds in cash. Shopify reports that, while 66 percent of entrepreneurs use their personal savings to fund their business, they also received financial support from friends and family (23 percent) and personal loans (23 percent).
Keep in mind, though, that new online business owners shouldn’t expect to see a profit in their first year. You might, but don’t plan on it. Be sure to line up other sources of income or support to bridge the gap until you reach profitability.
How to start a successful e-commerce business in 5 steps
The exact process for launching an online business will be different for every business. But just about every business will need to do the following:
1. Pick the right product(s) or service(s)
It takes a lot of research to determine the best types of products (and/or services) to sell through your online store. Bear in mind that your product ideas don’t have to be novel or revolutionary. The most important criterion is that there’s a demand for it.
You can turn to websites like Google Trends (including Shopping Trends), Statista, Trends.co, and other trend-tracking tools to search for ideas. Read product reviews for popular items to see if you can discern common complaints that could be business opportunities. Make sure you can identify the need you’re trying to fill and for whom with specificity.
Many online entrepreneurs have found success by focusing on a niche, or a smaller segment of a large market. With all of the entrants into e-commerce in the past decade, it can make a lot of sense to take a narrow, rather than broad, approach. The more specialized your niche, the easier it is to reach your target consumers. Look for a particular interest with passionate followers. You’ll probably fare even better if you’re part of your target market.
You obviously don’t want to select a niche market that’s already overcrowded with online sellers. On the other hand, if a niche is wide open as far as competitors, it may be a sign of low potential. Try to find an area that’s in between those extremes.
Whether you focus on a niche product or something of broader interest, it also helps if your product:
Is easy to package and ship
Has a long shelf life
Has solid profit margins
Once you select a product(s) or service(s), validate your choices by conducting market research, looking at both potential customers and competitors.
Develop target audience profiles, incorporating information like:
Demographics (age, gender, location, and income)
Interests
Where they are online (Facebook groups, for example)
If the demand is steady and/or growing
As for competitors, you need to know who you’re up against and your competitive advantages and disadvantages. Relevant questions include:
What do they offer, how do they provide it, and at what prices?
How are they positioned/perceived in the market?
How do they market their products (for example, through which sales and promotional channels)?
What are their most popular items?
When you have this information, you can conduct a SWOT analysis:
Strengths: What do you do well? Do you have any unique skills, resources, or other advantages that can help distinguish or elevate your business?
Weaknesses: Where can you improve? What would customers consider a weakness (for example, are your prices too high)?
Opportunities: Do your strengths or recent trends provide any openings you can seize? Are there untapped markets or ways to reach customers?
Threats: What are the risks that could undermine your success, such as barriers to entry or your competitors’ advantages that can’t be duplicated?
A SWOT analysis produces a “big picture” perspective that can be valuable when you’re mulling over product choices.
2. Select your sourcing and fulfillment
The route you choose when it comes to sourcing products will depend largely on your e-commerce business model. For example, will you produce your own products yourself? That requires you to maintain an inventory of finished products or materials, which may make it hard to scale up quickly.
Alternatively, you could work with a manufacturer. Manufacturers can make prototypes and might handle fulfillment, but it can take time to build relationships and it is often pricey. You’ll also need to obtain samples to ensure they match your specifications and have some way to enforce your quality control standards. It’s wise to have a backup supplier, too, so you’re less vulnerable to supply chain disruptions.
If you use a manufacturer, you could adopt a private labeling or a white labeling approach. With private labeling, you’re the exclusive seller of that product. With white labeling, you put your own branding on a generic product and are one of the potentially many sellers of the same product.
Another sourcing option is dropshipping, which means you purchase items from a supplier as you receive orders, and the supplier sends the product directly to the customer. This does not require you to keep inventory.
Next, you’ll need to make a lot of decisions about how to handle shipping.Determine early on how you will charge for shipping. Will it be an add-on, and, if so, will it be a flat fee or based on each purchase? Or will you offer “free shipping,” and, if so, how will you work that into your product pricing? What about returns? Will you cover those shipping fees? Will you charge a re-stock fee to help cover them? These can be consequential decisions for an e-commerce business.
Fulfillment refers to how you’re going to get customers their orders. Platforms like Shopify usually offer shipping label printing and can add shipping costs to orders at checkout. Or you could handle all aspects of shipping yourself.
Subscription models can ease the fulfillment burden somewhat. Customers purchase a subscription, rather than individual items, and receive regular deliveries. Some e-commerce business owners prefer the predictability of a subscription model.
3. Develop a business plan
A business plan is a critical component to launching a new business of any kind. Your business plan should include the following:
Executive summary: a brief overview of your e-commerce business
Company description: greater detail on your business’s purpose, any relevant history, and set-up
Market analysis: data and research on the viability and profitability of your business
Services and products: descriptions of your offerings and explanations of how they provide value
Marketing strategy: how you will build a customer base and sell your offerings
Financials: budgets, expense and cash flow projections, funding sources, etc.
Goals: quarterly, annual, and longer-term
The good news is that there’s no need to start from scratch when you sit down to do your business plan. You can find templates online to help you get started but understand that drafting a business plan requires a serious time commitment.
Developing a business plan can ultimately be disappointing. When you pull all of this information together in one place, you might come to see that your idea has little chance of success. But it’s better to realize that early on and change your course than to discover it after you’ve already invested a large chunk of money you can’t recover.
4. Craft a comprehensive marketing strategy
One of the most significant components of your business plan will be the marketing strategy. This section should cover several critical topics, including:
Your business name. An effective business name is memorable and immediately conveys to consumers what you’re selling. You want both existing and new customers to associate your business name with your offering without needing to think too hard.
When you have a few options, take the time to consult the relevant secretary of state’s website and the U.S. Patent and Trademark Office to make sure the name is not already in use. You should also check whether the related domain name, or a very close variation, is available for your online store.
If you decide to use a business name that’s different than the name of your entity (see below for more information on entities), you should file a DBA (“Doing Business As”).
Your e-commerce website. Your e-commerce website is basically the storefront for your online business. Like any website, its design and aesthetics are important. But an e-commerce website requires much more functionality. The website must be able to handle product listings, manage inventory, and process transactions—and it must be easy for your target audience to navigate.
You can hire a designer to develop an e-commerce website from scratch at your own domain name, or you could use the online store builder available on platforms like Shopify, Squarespace, and Amazon. Generally, the more you can automate the functions on your website, the better off you’ll be.
Conduct research to make sure you pick the platform with all of the functionality you require. If you’re not sure that, say, Shopify is right for you, you can dip your toes in the water with a low-cost or free store and then upgrade as you expand your e-commerce business.
Your sales and marketing channels. You want to be where your existing and potential new customers are online. The right channels will depend on your product and your target market, but it’s almost always best to employ a mix of channels. Your options are numerous, from affiliate marketing and email marketing to in-person channels like craft fairs, local stores, and trade shows.
Digital marketing is especially critical for e-commerce stores. It’s essential to drive traffic to your online store and convert visits to sales.
You can use multiple forms of social media marketing. Twitter, Instagram, TikTok, Facebook, and Pinterest are popular choices. Many online businesses regularly post about promotions and products on their social media accounts. Some also use paid advertising on social media.
Don’t overlook the powerful potential of content marketing. This involves creating value for your social media followers without making an explicit sales pitch (or making it a relatively small part of the content). The content could take the form of a blog post, a podcast, a live event, or an infographic. Regardless of the form, the goal is to inform and entertain your target audience. It’s a long-term marketing strategy that builds relationships and trust. It requires effort, though. You should consistently post high-quality content and actively engage with your followers (for example, by responding promptly to questions or comments).
Your social media marketing could also make use of so-called influencers. Influencers have thousands of followers who often are quick to take their recommendations for products (which they recommend for a fee). Influencers can prove particularly helpful if you’re focusing on a specific niche in which they’re regarded as an authority.
Whatever your approach to social media marketing, remember that you can start small. It can seem intimidating to establish a presence on every platform out there. Start with the one or two where your target audience is most likely to be and add more as you move forward.
Social media isn’t the only form of digital marketing; you also must pay attention to search engine optimization (SEO). SEO generally refers to developing your e-commerce website with an eye toward boosting your ranking in search engine results pages (SERP) without paying for sponsored links.
You accomplish this through the strategic use of keywords and link building—or acquiring links to your website from other sites, especially those considered authoritative. Strong and relevant content is one important tool for link building. You want to give others a good reason to associate their websites and products with yours.
It’s essential that you experiment and refine your marketing strategies regularly over time. Don’t get so invested in your assumptions about your target market that you can’t evolve as necessary. That’s how businesses get left behind. Try to keep up with emerging trends.
Finally, identify key performance indicators (KPIs) to evaluate how your strategies are working. KPIs for an e-commerce business might include the number of social media followers and degree of engagement, conversion rates, website traffic, traffic sources, number of subscriptions, the gross number of sales, and the number of clicks on a link.
5. Take care of the legal stuff
Now for the fun stuff—or not! While many would-be entrepreneurs understandably dread the legal matters involved in starting a business, they’re vital if you want to protect yourself and your assets.
As an initial matter, you need to decide on the right type of entity for your online business. For an e-commerce business just starting out, you’re most likely going to be a:
Take your time to research the implications of each (the articles linked are a great place to start!). Your choice can affect everything from your personal liability and tax obligations to your ability to recruit and retain employees. You may want to consult an accountant for guidance.
You might need to register your business with federal, state, and local governmental agencies. The exact requirements will depend on your entity type and location. You can find more information about registration requirements on the Small Business Administration (SBA) website.
The SBA website also has information on licensing and permitting requirements imposed by cities, counties, and states. If any of these apply, you want to be in compliance before you open for business.
What about business taxes? You may need to obtain an employer identification number (EIN) from the IRS for federal tax purposes, as well as an EIN for your state taxes, too. Not every business needs an EIN, though. For example, if you plan on running a one-person business such as a sole proprietorship or single-member LLC, you may be able to use your Social Security number. You might nonetheless want to get an EIN if you expect to hire employees.
It’s advisable, too, to have separate bank accounts and credit cards for your business. (Note that you may need a federal EIN to open a business bank account.) Business accounts can provide some protection from personal liability for business debts. They can make it easier to obtain financing later, as well, by establishing a relationship with a lender and building a credit history for the business.
Finally, you should think about the type(s) of business insurance that can help protect your business in the case of accidents, natural disasters, or liability. Your particular needs will depend on your product, entity type, governmental requirements, and risk appetite, among other factors. An insurance broker can help.
Starting an e-commerce business takes some research and investment, but there aren’t too many barriers to getting started. If you’re ready to be your own boss and launch your product or service ideas, you can do this!
