The Six Costs of Modern e-Commerce
Everything has a cost. Find out which ones you're managing effectively, and which ones you may be overlooking.
Thinking About Costs Properly
Unsurprisingly, people who are successful in eCommerce often spend a lot of time and effort thinking about the idea of costs. After all, underneath all of the operating complexities of running a store, the realities are pretty stark — you figure out a way to make revenue exceed the costs of doing business, or you fail.
This basic math will always be true. But the specifics of what costs matter most are always changing, whether it’s due to changes in the scale and complexity of your business, or new developments in technology, sales channels, or business logistics. In other words, costs will always define your business. But which ones, and when, is something many store owners take for granted.
At Gooten, our partners include a wide range of businesses at every stage of scale, maturity, and profitability. One side effect of that is that we’re uniquely aware of the different costs that affect stores at different points in their growth, as our technology and services are often a part of controlling those costs. In this guide, we’ll walk you through the six major types of costs that affect typical, growing eCommerce businesses, and show you when the most successful stores are thinking a lot (or not so much) about them. While every business is different, you may be surprised how common many of the challenges you face are to entrepreneurs of all shapes and sizes.
1) Product Costs
Product costs, or “unit cost” is without a doubt the most obvious cost a new store takes into account. This is partially because it’s impossible to miss (because you pay it on every order), and unlike some of the other costs we’ll discuss later on, it’s extremely easy to quantify. However, there are a couple of mistakes many businesses (especially new businesses) make when it comes to thinking about unit cost.
- Unit cost is often based on economies of scale, because when you produce a lot of something, you can often get it cheaper. But to really move unit cost, you need an enormous amount of scale — not something new businesses are going to get out of the gate.
- Because of this, businesses ordering relatively small quantities of something are usually only able to lower unit cost by either (a) buying lower quality goods, or (b) working with manufacturers willing to take unrealistically low margins.
- The second thing sounds okay — why wouldn’t I want to get an awesome price? — but actually becomes your problem when manufacturers go out of business, can’t afford to actually produce your orders, or start cutting corners without telling you. In other words, getting your products produced at an unsustainably low price for a manufacturer is going to hurt you and your customers eventually.
At Gooten, our solution to the unit cost problem for small or mid-sized retailers is twofold. First, instead of manufacturing everything ourselves, we route orders through large suppliers who already produce lots and lots of orders. Their own operating costs are lower per unit because they produce huge quantities of product — not just for Gooten, but for huge brands like the NFL, etc. etc.
Second, Gooten itself acts kind of like a manufacturing co-op, because it gives individual partners unit costs that are much closer to those of a very large business than they could ever get themselves, even after taking into account the margin that pays for Gooten’s technology and service. You might be able to “go direct” to some manufacturer and get a better unit price on a given product, but in most cases you won’t — and you’ll be stuck managing your orders (and your supply chain) yourself. We’ll talk about the cost of that a bit later.
The long and short of product or unit cost is that it’s a highly visible cost that, while important, is something many store owners spend too much time thinking about in relation to other less obvious, but more relevant costs.
2) Time Costs
Time costs are in many ways the direct opposite of product or unit costs — they’re sneaky, often hidden, and difficult to calculate correctly.
The simplest way to think about time costs (and the way most people do think about it) is simply to assign an hourly rate to something you have to do, and then see how long you spend doing it. This is a very common cost justification for things like technology, automation, or outsourcing you’ll see in a lot of advertising. For instance, if you’re paying someone twenty dollars an hour to generate invoices, and they spend ten hours a week doing it, this thinking would imply a time cost of about two hundred dollars a week. If a product became available that automatically generated and sent out invoices for something like a hundred dollars a month, it’s easy to justify based on those time costs.
The problem with this thinking when you’re running a business and doing a lot of things yourself is that it often understates your time costs. That’s because when you (or someone who works for you) spends ten hours a week doing a low value task, you aren’t just paying to have it done — you’re paying to have it done INSTEAD of paying to have something more valuable done.
To continue the previous example, what if you took the ten hours your employee spent on generating invoices, and put it towards generating new business, and they start generating — very, very conservatively — $100 a week in new sales with that time. The time costs of that invoicing just went up by 50%, to $300 a week, even with extremely low expectations.
This is why it’s so important for businesses to invest in the right technology and automation. Smart, hard working people building a business are often extremely cost-conscious when it comes to cash out the door, but relatively blind to the costs of not putting their time where it can bring money in the door. So while it feels like “saving money” when you perform administration and logistics work yourself, that is time you’re not putting into things that are much harder to automate, like:
- identifying and developing new products
- building your brand and promoting your business
- talking to customers
- finding other routine tasks to automate (freeing up even more time!)
Gooten tends to partner with fast-growing stores — the kinds that have to constantly think about the best ways to spend their time, money, and resources, and frequently reassess what they should be doing and how they should do it. Most of these partners think about time costs exactly like this, not necessarily because they’re savvy business geniuses, but because they scrapped and battled through a lot of repetitive, manual work before realizing how much it was holding back the true potential of their business.
3) People & Technology Costs
No business actually runs itself, and eCommerce is no exception. Everything that gets accomplished — from marketing, to order processing, to returns — has to be done by either a person, or some kind of system. Unsurprisingly, both of those things have costs.
People costs include the obvious… and not so obvious. Obvious costs include paying wages or salaries, as well as for anything people need to be productive, whether that’s a pen, a laptop, or a helmet. It can also include less obvious costs like insurance (for the people or your business). People also take time that usually comes from other, potentially revenue-positive work. Employees and contractors need to be managed, motivated, and held accountable for their performance — all things that take time and energy either from you, or managers (who also need all of these things).
Of course, the purpose of hiring people and taking on the time and resource costs that come with them is to grow your businesses’ capacity to do things like fulfill orders, manage your operations, and grow revenue. The promise of technology is to give you some or all of this capacity without the complexities of hiring actual humans. From finance and business operations systems, to customer management and marketing applications, to creative and design tools, there’s an endless amount of technology that can potentially enhance the humans you have (including yourself), and even eliminate the need for some tasks to be done by a person at all. That allows you to either reduce your personnel costs, or redirect those resources to more productive tasks.
However, software systems come with their own set of costs, financial and otherwise. Unless you’re truly massive, you probably won’t have to consider seriously expensive technology — the kind that costs thousands of dollars a month and is designed to support dozens of employees. Still, what many eCommerce businesses aren’t prepared for is the time, effort, and potential consulting costs that come with the day-to-day operations of even relatively inexpensive technology systems. Maintaining a website, managing advertising, sending email promotions, and fulfilling orders can all be done with systems that cost few (or zero) actual dollars to operate, but require hundreds of hours and hard-earned expertise to operate correctly. Even non-technical tasks like maintaining multiple, discrete sales channels (WooCommerce, Etsy, Shopify) take hours of setup, testing, and updating as you add and retire products.
At Gooten, our approach to reducing these kinds of costs is to combine the benefits of a consultant/outsourcing firm (consistent cost, no learning curve, no management time, no liability) with the benefits of one software platform. Gooten is essentially a supply chain and logistics team you get to bolt on to your business without having to deal with the cost or overhead that comes with building your own, and a technology solution that automates and consolidates as many of the unremarkable, repetitive tasks that come with running an online store as possible. That way, you can focus on putting you and the people you do hire into roles that are more about actual growth than they are about simply keeping the proverbial trains running.
Evan JacoverJackbox Games
"Gooten’s tools are super helpful and make our lives a lot easier."
"The quality is great, the prices are reasonable, and I love how Gooten offers a ton of great products to choose from. The products ship quickly, and our customer support team has been very happy with how much less work they have to do since we switched to Gooten."
Dylan WestPixel Empire
“With the t-shirt provider I used prior to Gooten, I was spending 3-4 hours a day handling customer support myself just to maintain the current business."
"Now, I spend most of my time working on things that actually drive growth — new customer acquisition, and building relationships with artists.”
4) Sales Opportunity Costs
When an eCommerce business first gets off the ground, the most basic profitability questions understandably get the most attention — basically extensions of “does anyone want what I’m selling”, and “are they willing to pay enough for me to cover my costs”. At that point, the last thing anyone is thinking about is getting too many orders.
Still, businesses that build a real, sustainable audience and find their place in the market do eventually hit this challenge, and all of a sudden high demand isn’t a pipe dream for some far off future state. It’s a reality with real implications. Holidays, promotions, and seasonal spikes for certain brands or specific brands can generate big months that mature businesses rely on, either because the spike is fundamentally limited (in the case of holidays), or because it’s a spike created by a big investment in finite marketing & promotion resources that needs to generate a return on investment.
At that stage, generating demand you can’t fulfill is even worse than no demand at all. Think about it; you’ve burned through promotional money or a seasonal opportunity, you’ve hurt your brand (and future sales) by dropping the ball during a high visibility moment for your store, and you’ve probably been overwhelmed with communications from customers who didn’t get (and probably eventually canceled) their order.
That combination of opportunity costs + operational costs — basically all the work and investment of a big, successful business without the actual revenue — is the nightmare scenario for successful storer owners, and the number one reason people come to, and in some cases come back to, Gooten. These aren’t people looking to get rich quick, or see if some crazy idea takes off. They’re heavily invested business owners who have something to lose (potential sales and their brand), and they aren’t willing to risk it on an inflexible, self-managed supply chain.
Gooten connects our partners orders to a network of suppliers for exactly this reason. We can move quantities, re-route orders, and take a variety of actions in response to everything from a regional power outage to an equipment failure. Your local printer, or even large vendors that produce in-house, don’t necessarily have that option. If they can’t produce your orders, you’re out of luck, and potentially out of business.
Does all this matter when you’re first getting off the ground? Almost certainly not — at that stage, manufacturers who work with you closely during the product development phase to get you exactly what you need are more important than redundant supply chains and the ability to re-route orders. That’s why sophisticated store operations platforms like Gooten aren’t necessarily the best fit for everyone; we put a lot of our focus into being truly exceptional at things you simply won’t notice until you’re moving hundreds or thousands of orders a month.
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5) Reputation & Brand Cost
It’s hard to really understand the value of your brand in eCommerce until you have it — but once you do, it’s pretty obvious that it’s your most important asset. Your brand consists of a lot of different pieces (product, operations, tone, style) and different aspects may be more important to your business than others. But the one thing that’s consistent across every flavor of retail brand is that it’s an essential difference maker.
There are a lot of places people can buy things like apparel, home decor, art, and things like that, and new ones pop up every day. When people shop at these stores, they aren’t looking to get the best possible price (even though price matters), or even the highest quality product (although quality matters). They’re ultimately choosing to go through a shopping experience that they enjoy, which is part actual purchase-experience, part product ownership, and part sharing with the rest of the world. That shopping experience — all of it — is your brand, and it’s ultimately going to be why people buy from you, talk about you with their friends, and hopefully come back for more in the future.
Do not underestimate this cost. Too often, people think of a retail brand as simply a matter of being cool, or buzzy, or of the moment. Those things often matter, but they’re not everything, or even the most important thing for many businesses. Equating brand solely with style also leads some entrepreneurs to think of it as something they can figure out at any time, and something largely divorced from things like operations or fulfillment. This is a huge mistake, and similar to Time Costs, one that people tend to make simply because calculating the impact of a damaged brand isn’t as cut and dry as the costs of things like raw material or shipping.
Underneath all of our advanced technology and operational expertise, Gooten works for our partners because it allows them to build the brands they want to build, and because those partners have built amazing brands and purchasing experiences that people want to be a part of. As you read this, Gooten’s API is enabling everything from build-your-own-shirt video games to massive libraries of purchasable, user-generated merchandise, to personalized pet products for businesses that know exactly what they want to be for their customers. Logistics, production capacity, product management, shipping — none of that gets in the way because these stores value their brands too much to let it.
There are some scenarios where operations and fulfillment can make your brand, but in general, most of the stores we work with simply need things to work (along with visibility into the rare occasions when they don’t) and that’s just fine. The trick is simply to ensure a consistent, reliable, net-positive experience for your customers without blowing up your business model.
6) Focus & Switching Costs
“Switching costs” are kind of like the opposite of “economies of scale”, but for work. The idea is that there’s a startup cost for any given task, and an even bigger cost if you’re switching to some completely different kind of work.
If you’re running a relatively simple, small business, these costs are manageable — you might not even notice them. But as you grow towards something with enough revenue to be a full-time business (or extremely serious side-hustle), those costs start to explode.
Why? Because in eCommerce, success breeds complexity. More revenue comes from more orders (and potentially more products), and more orders and products lead to more challenges than one person can handle with pure grit and hustle. Unless you’re selling incredibly high margin goods (rare art?), a successful store by definition is moving hundreds or thousands of orders each month, and doing all of the promotional, management, operations and support work that comes with that many sales. And that work doesn’t necessarily come at you in large, focused chunks. Instead, it’s often a thousand tiny asks and individual deadlines spread throughout your day.
This is why the happiest Gooten partners think of us as a growth and operations partner, versus a printer or vendor. What we excel at isn’t handling a couple of orders here or there — you could probably do that yourself with a laptop, a local printer, and a UPS store. The switching costs are totally manageable — fun, even! — at that point. We actually recommend that early stage stores go through a process like that, or get started with a pure print-on-demand vendor as they initially look to find their niche.
If things go well, though, there comes a point where the most important thing you can do as a store owner for your sanity and your effectiveness becomes consolidation, and automation of as many things as possible. Gooten, for example, allows you manage multiple sales channels (Shopify, Etsy, WooCommerce) from one place, as well as develop a variety of specialty products from different vendors without having to manage any of them. If something isn’t right with your business operations, you don’t have four vendors to contact — just Gooten.
Understand your costs, don’t fear them.
The most important thing to realize about all the different costs mentioned in this guide is that (a) they’re all real and paid by stores every day, and (b) they’re all important at certain points, and arguably irrelevant at others, in a store’s growth and maturity. There’s no one magic number to get down that, if you figure it out, means you’re going to succeed. You could have an amazingly efficient productivity environment but no profit margin, for instance, or a massive demand for orders that you can’t fulfill, or fulfill well.
By understanding when costs are relevant (and when they aren’t) you can get in front of them and take operational steps to mitigate them properly, whether that means changing your prices and workflow, or looking into a solution like Gooten’s order management system. Just as importantly, you can not waste time and energy worrying about costs that aren’t going to materially impact your success, and focus on doing things that build your brand, delight your customers, and grow your business.