With the rise of online platforms, it’s no secret that companies have changed their marketing approach. Gone are the days when small and midsized businesses (SMBs) would spend thousands of dollars on print or television commercials. Nowadays, most companies focus on online advertising to reach customers with a high success rate.
However, e-commerce entrepreneurs must be careful about fruitless attempts at getting traffic to their e-commerce stores. If they don’t, they will lose money in the long run because these attempts will not convert into sales.
As an e-commerce business owner, you must learn how to create and handle an e-commerce budget. Budgeting allows businesses to appropriate their finances properly to several crucial areas, like online branding, protecting their digital assets, and building an effective ecomm strategy. Proper budgeting will let you have a clearer view of the necessary resources and how much to allocate for them to avoid losses and, ultimately, for your business to thrive in the digital marketplace.
Here’s a four-step guideline for creating a budget:
1. Determine All E-Commerce Costs
Before you can start calculating your e-commerce budget, you must determine all the costs of running a store. You must list all the setup, operational, promotional, and other expenses before coming up with conservative estimates. To be more precise, here’s a list of the staple costs to factor into your monthly budget:
- Platform: This refers to the costs of setting up an online store, including hosting your site and using a site or software where you can list products. You can learn about these fees by checking the platform’s website for more information.
- Order Fulfillment: This fee covers the cost of processing orders and fulfilling them. It also covers any additional software or services required to manage customer orders, such as order or fulfillment software.
- Taxes And Duties: Imports and exports have associated taxes and duties collected at the country’s entry point. The rates can vary, usually depending on the nature and prices of your materials or goods.
- Website Creation And Maintenance: Even if you already have an online shop on third-party platforms, your website will be the motherlode of information about your products and services. Website creation and maintenance can be costly because building, maintaining, and optimizing a site takes time. You’ll have to pay for a team of designers and developers who can focus on user experience, smooth web navigation, and mobile responsiveness.
- Digital Marketing: Aside from a website, you must also invest in digital marketing, which generally involves social media marketing, e-mail marketing, and search engine optimization (SEO). Although these tactics are technically free, if you know how to exploit them properly, you may still have to use targeted paid advertisements to ensure your campaigns reach your consumers.
- Product Sourcing: This refers to the costs you incur from procuring your raw materials, such as the costs of raw materials, labor, shipping, and packaging. You may even have to invest in vendor management software to manage your suppliers and track their delivery performance.
- Customer Support: This refers to all costs associated with customer service and technical issues that arise during and after online sales transactions. This can include the costs of e-mail and chat support, social media interactions, site maintenance, and downtime.
- Item Shipping And Returns: Shipping costs can be steep, especially for large and international orders. Plus, there might be additional fees involved. You must also allocate expenses for item returns, replacements, refunds, and restocking.
Vendors, a website development agency, a digital marketing team, and a shipping service provider are some of the major players in any e-commerce business. Depending on the nature of your business, other expenses might arise, so be sure to deliberate thoroughly and have ample foresight.
In addition, in budget allocation, you need to include a timeframe. For instance, if you plan to launch an ad campaign on Facebook, you must include how long you’ll fund the advertisement. With these insights, you’ll know how much money will be required to keep the entire campaign running.
2. Identify Your Goals
Once you know all the possible costs of running an e-commerce store, you must identify your financial and other business goals. For startups, this usually means you need to know how much money you need to make to break even. Listing your goals will help you determine how much money you need to achieve them.
For any business, generating leads and growing a customer base are nuclear goals. Today, there are several more convenient tactics to achieve that goal, especially for an e-commerce business. For instance, to acquire new clients, you can exploit paid advertising and other online marketing channels. To increase the number of repeat buyers or drive more sales from existing customers, you must streamline your message to clarify your value proposition and offer consistent service and support to gain trust.
When you list your goals, you can determine which channels will be valuable to you. Investing in the right resources maximizes your return on investment (ROI).
3. Make A Revenue Forecast
You must conduct revenue forecasting after a preliminary rundown of expenses. A revenue forecast tabulates the expected revenue over a specific time frame. For startups, a rough rundown of costs is sufficient to quantify the expected revenues. Otherwise, businesses use insights from previous sales, expenses, and profit margins. A revenue forecast will let you know whether your budget allocation can hit your goals and then make necessary adjustments if it can’t.
In forecasting, you must also determine possible scenarios affecting your financial health. Consider the seasonal variations, competitive factors, market saturation, or regulatory changes. If you know these factors, you are allocating your finances knowing you’ll stay profitable no matter what happens. Aside from that, you’ll also be able to determine which costs you can minimize or eliminate.
4. Calculate Your Profit Margin
Once you know how much you need to sustain your e-commerce business, you may calculate your budget by defining your profit margin. The profit margin helps you understand the profitability of your online store to identify how you can achieve your sales goals each year.
You can calculate your gross profit margin (GPM) by subtracting the expenses of goods sold from your net sales and then dividing the difference by net sales. Multiplying it by a hundred, you will arrive at a percentage value, which represents the GPM. For example, if your net sale is US$10,000 and the cost of goods sold is US$3,000, your GPM would be 70%. This means that for every US$1.00 of revenue, the company earned US$0.70 in net profit.
Once you have your GPM data, you can use these insights to make better decisions when investing in new technologies or marketing tactics.
5. Set Spending Limits
After calculating your profit margin, it’s time to set spending limits. You’ll use this as a baseline before spending on any online expense. This ensures you can remain in control of your expenses and prevent you from overspending or misspending.
You can set spending limits by setting a maximum amount for each category. For instance, if you intend to spend US$500 on Facebook ads per month, set this as your maximum budget for the category.
You may also use a credit card that will enable you to set spending limits. Some credit card brands will even send you alerts in case your balance is reaching its limit. Having a spending limit can make you manage your finances better and avoid overspending.
6. Make Adjustments Along The Way
The next step is to monitor the performance of your business and make adjustments to the budget when necessary. For instance, if your ads generate a lot of sales, consider increasing your paid advertising budget. If it slows down, consider limiting these expenses and checking your marketing campaign.
More importantly, you also need to factor in many other variables that can come into play, such as inflation rates and market saturation. You must regularly monitor your budget to ensure it’s up to date. By adjusting your budget and spending wisely, you can increase sales without paying more than necessary.
Whether you’re a startup or still growing, creating a proper budget lets you know how much money you’ll need to set up and run your online business. This way, you can prepare for any expenses that may come up while starting your digital business.
Some expenses you can expect for your e-commerce company include setting up a website and maintaining it. In addition, you also must fund your digital marketing campaigns to increase traffic to your site and encourage customers to buy from you. You might also need to hire someone to handle customer service inquiries, item returns, and inventory.
After that, you have to track the performance of your e-commerce store to ensure that it is profitable enough for you to continue operating it. This can help you adjust your budget and make changes to fund the right areas to maximize profits and minimize costs.
Ultimately, budgeting for your e-commerce business is vital in ensuring its success by helping you keep costs down while ensuring that all critical areas are adequately funded.