eCommerce is lowering traditional barriers to entry for small businesses
Xero study finds that ecommerce is creating a new generation of profitable niche operations.
Xero surveyed 171 accountants and bookkeepers – with a collective clientele of about 6,000 small businesses – to learn how ecommerce was changing business ownership.
To participate in the study, advisors had to have clients who were online-only and clients who were in traditional brick-and-mortar businesses. Responses came from Australia, the UK and the US. Here’s what they had to say about the differences.
Four ways ecommerce de-risks business ownership
1. Starting an online business costs less
Hitting ‘go’ on an ecommerce business requires less of a financial investment:
- 7 in 10 experts say it costs less for service businesses to start online.
- 6 in 10 say it costs less for retailers to start online (although Australian respondents say there’s no difference for retailers).
Retail is probably a closer call. 35% of experts say that creating a truly effective online shop costs more than most people think, while digital marketing can also require a substantial upfront investment.
2. Running an online business costs less
7 in 10 experts agree that digital businesses (service and retail) cost less to run. Instead of paying thousands in rent, those businesses pay hundreds in software subscriptions. However, they do face increased costs elsewhere. For example, online transaction fees can soak up between 2% and 4% of revenue, while a third of experts say novices get surprised by the expense of digital marketing. Retailers also have to contend with the added cost of shipping. A McKinsey report suggests that these expenses are squeezing margins for larger retailers. But for small businesses, at least, it seems as though ecommerce is an overall cost saver.
3. Failure isn’t quite so daunting
7 in 10 experts say owners of online businesses stand to lose less in the event of failure. That jives with the generally lower startup and operating expenses, which suggests ecommerce businesses may not go quite so deep into the red. Experts also note that their online business clients tend to break even sooner, suggesting they’re in the red zone for less time.
4. Net profit margins are higher
6 in 10 experts say online small businesses have higher net profit margins. Lower costs give them a good head start and it seems as though most are able to press home the advantage by holding their prices. In fact, accountants and bookkeepers generally felt their online business clients experienced slightly less downward price pressure than their bricks-and-mortar clients. That extra fat results in a little extra financial wiggle room.
Lower risks embolden entrepreneurs
While no business is risk-free, ecommerce is relieving some pressure points for startups. The survey suggests it lowers upfront capital requirements, reduces running costs and helps cut back on the owner’s personal financial stake.
This seems to be encouraging entrepreneurs to try things they may never have felt comfortable with before. Two-thirds of accountants and bookkeepers say that online businesses are more likely to be based on a novel idea.
Planning remains key
This research, alongside countless other studies we’ve done here at Xero, demonstrates the importance of planning. Financial strategies that work offline might not work online, or visa versa.
By far the happiest, most thriving businesses we come across in studies like this have hired an accountant or bookkeeper to look after the financial plan so the owner can focus on product, marketing and operations.
Takeaways for small business
Experts note that online small businesses are making the most of some key financial advantages:
- Small online businesses cost less to run even when accounting for hidden costs like merchant service fees and digital marketing, which sometimes catch out novices
- Online business owners face fewer personal financial losses in the event of business failure
- Net profit margin is generally higher, providing owners with extra financial flexibility
- The lower risk profile coupled with hyper-connectivity to niche audiences is encouraging entrepreneurs to bring more novel business ideas to market
Check the findings for yourself — see more from the study in Xero's guide to starting an online business.
Got a question about making the most of accounting or bookkeeping in your business? Get in touch with our Xero specialists who will be able to assist you with all your cloud accounting queries on 09 520 9200.
Alliott NZ Chartered Accountants & Business Advisors are Platinum Xero Partners in Auckland.