So you’ve decided that you want to quit your day job and start your very own e-commerce empire. That’s great!
But before you become the next Jeff Bezos (and definitely before you quit your job!), it’s worth spending some time to think about a business plan. In this article, we’ll dive into the key elements of an ecommerce business plan, which is very different than writing a traditional business plan.
Why You Should Take the Time to Write a Business Plan
We know that starting an e-commerce business is exciting and it can be tempting to jump right in, without constructing a business plan. READ: PLEASE DON’T DO THIS.
Taking the time to write a business plan might seem like a lot of work but it can save you a lot of time and money in the long-run by better preparing you for potential challenges and opportunities that you’ll face as a first time entrepreneur.
When writing a business plan, YOU are your target audience! The point of a business plan is to help you get your ideas down on paper – so don’t worry about making it fancy or excessively long. You can write it on a napkin for all I care. You only need a fancy one with an executive summary if you are trying to get funding.
So what should one hope to get out of a business plan?
Knowledge. A better sense of what you know and more importantly, what you don’t know.
Resources. The resources you’ll need to make your online business successful (e.g. money, partners, employees).
Road map. Helping you set clear goals for your business from the outset.
Viability. Probably the most important thing – once you write your business plan, you should have a better sense of the viability of the opportunity.
Creating a short, crisp value proposition is a good gauge for how clear your idea is. Write this section as if you had one minute to explain your business to a potential investor or customer. Then practice it over and over and over again until you feel really confident in explaining it to someone. Once you write this and are happy with it, use it on your ecommerce store as your company description.
Let’s say you’re looking to start a hiking company, called Atlas Hiking Co., which sells premium performance hiking shirts. A possible company description could be the following:
Atlas Hiking Co. is a lifestyle hiking company that produces high performance hiking shirts for outdoor lovers. Our proprietary SPF40 fabric is one of the lightest fabrics on the market, providing mountain lovers with maximum comfort, both from a breathability and sun-protection standpoint. Our product is made in the U.S.A. and a portion of our profits are donated to preserve national parks around the country.
Before you start diving into the weeds, it’s a good idea to first develop a framework for your business model. Once you go through the different sections of the business plan and conducted extensive research, you will definitely want to make some tweaks to your business model so no need to make this perfect.
There are a number of ways to sell a product on the internet and several different online business models one could employ. Depending on what you intend to sell, it’s important to think through which business model makes the most sense for your product.
Digital products: Software as a Service products, ecourses, ebooks
Services: Consulting services, home cleaning
Who are you selling to?
Business to Business (B2B): You are selling to organizations, corporations and non-profits rather than individual customers
Business to Consumer (B2C): This means you are selling to individual consumers rather than businesses
Marketplace: You are acting as a middleman by bringing businesses and (B2B or B2C) customers to one website.
How are you sourcing your product?
Manufacture In-house: You make your product or service in-house
Third party manufacturer: You outsource manufacturing of your product or service to a third party manufacturer
Dropship: You partner with a dropship manufacturer. Basically this means that they make your product, package it and ship it directly to your customer while your company handles the entire customer relationship
Wholesale:You buy goods or services from other companies in bulk and re-sell those products on your online store
Here’s a fact you can bank on: there has never been a successful e-commerce entrepreneur that didn’t understand his/her target market, cold. That’s why this section is one of the most important in the entire business plan. It will force you to understand the industry in which you operate, the overall industry outlook, the existing competition, and your target customer demographic.
Before you even get started in writing this section, you need to spend several hours researching your target market.
Here are some of the most efficient ways to research a particular market:
Google is your best friend. Look for any recent industry reports on your market of choice. This will give you a good sense of how much growth the industry is experiencing, why this growth is happening and what are the largest customer segments. In our example of Atlas Hiking Co., we should research the outdoor apparel market.
Let’s say that through our research of the outdoor apparel industry, we discovered that there was a huge boom in youth hiking apparel. Perhaps parents were increasingly concerned of their kids’ exposure to UV rays while hiking so began to spend more money on their kids. We could use this valuable information to guide our business strategy.
There’s only so much you can read online. Go to a nearby store that sells similar products to yours and interview the store representative. The store rep has interacted with hundreds of interested customers which can lead to thousands of valuable insights! It’s amazing how these insights can translate into a meaningful business opportunity.
Here’s an example:
If I was going into a Billy’s Outdoor Store to research the outdoor apparel market, I would probably ask Billy the following:
What are your best selling products?
What are your worst selling products?
Find products similar to yours and ask the representative his/her favorite features on products similar to yours.
How much are customers generally willing to spend for these types of products?
Do customers make repeat orders of any of these products?
Do you get a lot of customers that are looking to buy last minute hiking gear before they go on a hike?
Create an excel spreadsheet of all of your competitors. In your excel spreadsheet, you should have the following columns:
Key Features (e.g. fabric, waterproof, slimfit, etc.)
What is the competition missing? Is there a gap in the offering? Where you can add some additional value?
After conducting the competitor analysis, Atlas Hiking Co. might find that the competition’s hiking shirts offer very few features at a low price point, but no one offers a luxury hiking shirt with additional features at a higher price point.
This is just an example of the types of insights one can gain from market research which can drastically alter your business model
By using Google’s keyword planner and trends pages, you can get a good sense of how in demand your product is and whether it’s trending upward, or downward. Google is great for a general idea, just don’t bank on it.
The video below is a good guide on how to use Google Trends and Google Keywords
Are there nearby trade shows that you can go to? Again, creating connections with other people in your industry is a sure-fire short-cut to countless hours of reading on the internet. Trade shows are also a great opportunity to talk to competitors, meet manufacturers, and better understand where things are heading in your industry.
Once you finish researching the relevant industry, you should summarize your findings by answering the following questions:
How big is the overall industry?
How big is the specific sub-industry in which you intend to operate?
Where has most of the historic growth in the market come from?
Why is this the right time to enter this market?
What are the sub-segments that are poised for future growth (e.g. youth apparel)?
How crowded is the product category with competition?
How is your competition distributing their product (online, retail, wholesale etc.)?
What’s missing from the competition’s product offering?
Who is your target customer (population size, age, geography, education, ethnicity, income level)?
Are consumers comfortable with buying your product category online?
With so many channels to reach your customer, which one is best for you?
Once we know pretty much everything there is to know about our target customer, we can shift focus to our marketing strategy. What channels should you use to grab the attention of your customer demographic? Some of the key marketing channels include:
What is your content marketing strategy? Come up with a content roadmap that lists the next 10-15 articles you want created as well as your strategy for creating such content (in-house vs. outsource). How will you persuade people to buy your product once they get to your ecommerce site?
Blogger networks – could be organic or paid through affiliate sale programs.
Develop a list of the key bloggers in your product category. For Atlas Hiking Co., this might be an influencer that blogs about the best hiking trails in America.
Finding the optimal mix of these advertising tools depends 100% on your customer segment as well as your product type. For example, a SaaS product targeting millennials will require an entirely different marketing strategy than an e-commerce physical product targeting baby boomers. Perhaps that should be a post on its own for another day!
How much should you spend to acquire a customer?
In order to understand this, we need to first discuss a concept known as Lifetime Value of Customer or LTV. In essence, this is a formula that helps you better understand how much an average customer will spend over time.
It’s important to remember that for new businesses, you don’t have a lot of data on customer purchase habits so it’s a good idea to be more conservative with your assumptions in calculating LTV.
Let’s say, for Atlas Hiking Co., I determine that the average LTV per customer is $300. This means that over time, the average customer will spend $300. Let’s say on average, if I receive $300 in revenue, $100 of that will translate to gross profit before I factor in my marketing costs (basically I’m just subtracting out the cost making the shirts).
Knowing that my gross profit is $100 per shirt is a critical piece of information because it tells me that I can spend up to $100 in marketing to acquire a customer and still be profitable!
Come up with a detailed list of the different products and services you need to run your business as well as the monthly and per transaction cost of each of them. This will be important in understanding the impact of these services to your margins.
Products and Services
So we know we want to sell hiking shirts, that’s great!
But for some of us, we’re not quite sure as to what we should sell. To succeed in online retail, you need a product that is trending upwards in a growing niche.
Come up with detailed specifications for each product or service you intend to sell. If it’s a hiking shirt we’re selling, we would want to have:
Detailed sketches of the shirt
Fabric weight, materials, type
Key features (e.g. pre-shrunk, water-proof, SPF 40)
Future product pipeline
What are other products that you have in the pipeline? Perhaps once you’ve successfully sold hiking shirts, you’re able to leverage your manufacturing relationships to provide hiking socks and shorts. Include that information in this section.
The financial section is used to forecast sales, expenses and net income of the business. Ideally, you’ll want to create a monthly excel schedule showing the following:
Projected revenue: first come up with your projected number of units sold and then come up with your projected revenue (Projected Revenue = # of Units Sold * Average Sales Price).
Fixed expenses: these are expenses that are fixed no matter how much you sell. Typically, these relate to monthly SaaS subscriptions, employee salaries or rent.
Variable expenses – these expenses change in direct proportion to how much you sell. Common examples include cost of goods sold and payment processing fees.
This helps business owners better understand what they need to achieve to hit their profit goals. In reality, projections are usually always off the mark, but it’s good to give yourself some measurable goals to strive for.
This section should aim to answer the following questions about your product offering:
How much product do you need to sell per year to meet your income goals for the business?
What are the margins on your product? If you sell 1 hiking shirt for $50, how much do you make after paying your supplier, employees and marketing costs?
What is the lifetime value of a customer (see marketing section)?
How much can you spend to acquire customers? If you conservatively project that the average customer will spend $300 over time on your shirts, then you can afford to spend an amount less than $300 to acquire that customer using the paid marketing channels described previously
Do you have any big capital expenditures early on that would require you to need to bring in investors?
Can you improve gross margins by making bigger orders from your suppliers?
Careful planning is crucial to get your e-commerce business from the planning phase to the launch phase, and to ensure its successful future.
Going through the exercise of writing a business plan will cement your own understanding of your business and your market. It will also position you to take advantage of lucrative opportunities while mitigating harmful threats to your business down the line.
Your turn! Have you written a business plan for your online store? Do you have anything to add? Tell us about it in the comments below!