Updated: Nov 12, 2019
Selling online seems to be cheaper than selling offline
However, that is not necessarily a fact
Selling your brand online requires you to fight for consumer mind space and shelf space amongst millions and millions of products.
While you save on real estate, you end up spending a lot of money on getting customers. However, selling online surely requires less start-up capital and can be started much faster than a brick and mortar shop. For example, in a brick and mortar shop you have to identify the real estate, do a 3 to 5 year lease, refurbish your shop, stock it with products, hire staff and pay for overheads. All this is a huge commitment in any country no matter how lower the cost of living may be
Its relatively cheap to set up an online business
On the other hand, selling online can be done pretty fast. You can setup an online shop on Shopify for a few dollars a month and you can list your products on online marketplaces with the help of a trained resource in a very short span of time. And you need not hold huge inventories either. You can have back to back supply chain arrangements which allow you to make purchases from wholesalers with a very short notice period. Sometimes, even after the order has been placed by the consumer.
So while the cost of infrastructure and setup is relatively extremely low to set up and online shop compared to brick and mortar, the major factor that needs to be considered is the cost of customer acquisition
Cost of getting traffic is high
Many entrepreneurs who have the right product and the passion to sell often do not anticipate how difficult it is to get a customer online. If you have a store in the mall , you will get natural mall traffic and some of it filtering into your store. The same is not true online. If you simply place your products online on an online marketplace like Amazon or on your brand store, you are unlikely to get significant traffic without making significant marketing investments
Existing brands have an advantage
Some brands may not need to spend as much online because they are already spending a lot of money offline to build their brand, so to that extent the natural searches for the brand on online marketplaces may be high because of the investments made by the brand outside the marketplace. However, if you are a new brand seeking to establish yourself in a new geography you have to factor-in a significant cost of customer acquisition . This is for at least for the first 3 years of your business till such time as your brand gets established and you have a good track record on the marketplace itself
What is the cost of acquiring customers in different countries?
One way to test out the cost of customer acquisition is to run a Google ads campaign which drives traffic to your own web store. If you don’t have your own web store then drives traffic to your brand page on the marketplace that you are selling on, for example, Amazon.
Invest $5000 a month for a period of 6 months and you will get some idea about the conversion rates for different products and SKUs and the associated cost of customer acquisition.
Take an example of a beauty products brand trying to sell its products in India. Beauty is a highly competitive category and a click on Google should cost between 50 cents to 1 dollar per click for some the popular keywords and for the long tail of keywords it could be between 15 cents to 30 cents per click. Conversion rates in ecommerce at best can be 1% especially for a new brand. In the rare case where the conversion rates are higher at 2% or 3% it is probably because the brand is very well established and has made significant investments in areas like content marketing and customer education.
Assuming the conversion rate of 1%, let’s work the math. In the case of long tail keywords at an average of 20 cents a click and a conversion rate of 1%, the cost of acquisition is 20 dollars. In the case of high value keywords at a cost of per click of 50 cents the cost of acquiring 1 customer at a 1% conversion rate is 50 dollars. Even if the conversion rate is 2%, the cost of acquisition will come to approximately 25 dollars.
So what is the cost of acquiring a customer in different countries?
Following are estimates purely based on desk research and experience. The cost of acquiring customers in the following countries is:
India : Between Rs 500 to Rs 1500
Singapore: Between S$ 25 to S$ 75
USA. : Between US$ 25 to US$ 75
China : Between RMB 50 to RMB 200
Indonesia. : Between US$ 25 to US$ 50
Malaysia. : Between US$ 25 to US$ 50
The above rates are indicative only and are potentially rates that would apply to the brand online store operated by or on behalf of the brand.
Customer acquisition on online marketplaces may be up to 50% cheaper. However, it requires significant investment upfront in building the brand and seller track record. It also requires a large number of positive buyer reviews. Typically a brand may invest $20000 a month in marketing to get potentially $30000 in sales for the first 6 months. Thereafter invest $30000 a month to get sales of $60000 a month for the next 6 months. After year one, a brand may invest $50000 a month to get $150000 a month in sales and potentially after 2 years a brand may invest $100000 a month to get half a million dollars a month in sales.
The cost of customer acquisition as a percentage of sales value certainly depends upon the transaction value.
Brands are encouraged to look at a transactional value of at least $75 and above if they want to make their ecommerce business profitable. Typically brands that are stuck in the trap of ecommerce are those that have a low transaction value and high shipping cost. Many FMCG companies are also stuck in this trap. Brands and products that hope to make money online are those that have higher transaction value and have a cost of product that is less than 20% of selling price AND have some differentiation in the product compared to competition.
In addition they should follow trends. For example, internet of things, health, fitness, knowledge, learning and so on, so that they can stay ahead of competition and still continue to get a steady stream of buyers on a regular basis.
In summary, ecommerce is not as easy as it seems. The easiest part is to setup a store and start spending money on marketing but the most difficult part is to make money and to run the business profitably over a sustained period of time.
Ecommerce should also be viewed as marketing tool that puts the product and brand in front of millions of consumers whether or not they buy the product. They may actually go to a physical store at a later date or come back to the brand at an appropriate time maybe a year or two or three later
So a Brand Manager should look at least at 50% of the investment made on marketing on online portals as well as for the brand online stores as a marketing investment and not judge it purely based on sales.
And for those who really want to make money online, they need to source their products really cheap and sell them at least 5 times the sourcing price.
To know more about how you can make your ecommerce business profitable, feel free to reach out to the author on Whatsapp +6583886673 or email firstname.lastname@example.org