Illustration by Nicole Stevenson
You know that look? The one you get when you tell people that you have an online business?
They look at you, their brow wrinkled, head tilting to the left, with an ear cocked to hear your response to the question that inevitably comes next: “You have an online business? Really? What is it that you do?”
As you try and help them come to grips with what you do online, in the back of your mind you know they’re assuming (and sometimes saying out loud) that running your business online is the cheaper option to having a “real” business.
After all, you don’t have the same overhead, right? You can run it from your front room, parading around in your pajamas and hiding behind your computer screen?
The reality of running an online business isn’t so simple. But many people are still thinking about the early 1990s when it comes to online businesses — to the time when e-commerce coughed and spluttered its entry into the world of retail. At that time, the costs of running an online business were pretty straightforward. The majority of your costs were tied up in the design of the website, which would have been created by software developers using handcrafted code.
But does this simple business model still ring true, almost 30 years later? And have the costs of running an online business changed dramatically in this technology driven age?
Tara Gentile is the founder of Quiet Power Strategy®, and a thought leader on small business success who runs a very popular workshops on CreativeLive. She says many people don’t spend enough when they launch their online businesses and may wind up paying more in the end.
“One of the true costs, and I see this time and time again, is that people tend to under-invest at the beginning of their businesses by looking for either free or low-cost solutions to getting started,” Gentile says. “Often, this means they then have to pay much more later on when they outgrow the low-cost option. And the cheaper option usually restricts how quick they could be growing. They might think they are saving money but that simply isn’t the case.”
Gentile adds that this is often the case with women who are starting out in business.
“Part of this can be psychological for a woman entrepreneur,” Gentile says. “They aren’t confident enough to ask for the money they need to get their business off the ground. So when they start to see money coming in and the free option isn’t enough to grow, they have to spend even more money. Eventually, if you want to increase your revenue, guess what? You spend the money anyway.”
Kristin Link, owner of Sew Mama Sew! and co-founder of Craft Industry Alliance, also experienced the true costs of running an online business when she set up Sew Mama Sew!
“What people won’t have understood, from the outside looking in, was that I had to rent a physical space, as well as employ three members of staff, to fulfill the orders,” Link says. “The rental for my office space was $1,100 a month, which was eventually overtaken by the additional fees that we incurred by having to rent web server space at a premium rate of $1,200 a month.”
Eventually, the ability to absorb these costs became harder and harder to achieve. In April of 2013, Link decided to close down her fabric sales and concentrate on having a content-rich website dedicated to sewing projects.
Link’s move from selling a physical product to a model based on curating and supplying content was ahead of its time. Much of the online business world now revolves around supplying content — something that the first wave of online businesses could never have predicted. But being able to do this and make a profit also has an entirely different set of costs since the ability to stay relevant depends on technology trends.
Fiona Pullen, owner of The Sewing Directory, the largest online directory for sewing resources in the United Kingdom, found this out when she decided to move her website to a new format.
“My biggest costs initially were getting the website built. It was a custom design with a bespoke [content management] system and had a large database, so the quotes were rather high!” Pullen explains. “It cost around $7,500 to build the site, and this was back in 2010. It would be a lot more now. We’ve recently had a quote for almost triple that to build a new site today.”
Pullen says that she and her business partner are now saving up to move the site to a new platform and feel that putting a slush fund aside for future upgrades is essential.
In addition to upgrades to software platforms, throwing social media into the marketing mix also adds to your real costs. With new outlets being lauded as the go-to network for new business — at the time of this article’s publication, the newest social media favorite is SnapChat — it can be hard to know where to put your money.
Gentile’s suggests focusing on staying power when it comes to social media.
“Don’t be tempted to jump on the latest social media platform just because you are being told to,” she says. “There is a hidden cost moving from one to another — it can be confusing to your existing customers if you suddenly jump ship or add one without really understanding how it will benefit your business. This becomes a real cost versus the potential to make money, when you start to lose your following.”
Another cost that often goes undetected is the fact that entrepreneurs who create online businesses are using professional skills and earning a fraction of what these skills might earn in the private market.
A good example of this is Hawthorne Threads, an online fabric shop that sells a staggering selection of fabric. Owners Lindsay and Charlie Prezzano originally ran the business off Etsy, but later moved their thriving business from Etsy to their bespoke website. They created the website themselves, using both of their professional skills — Charlie as a software programmer and Lindsay as the creative driver — to create a unique user experience.
“When we initially conceived of our site, Charlie and I knew we wanted to streamline the experience for users on the front end (and for us on the back end) as much as possible,” Lindsay Prezzano says. “His degree is in computer science, and we would not be able to afford to keep him on staff if we had to pay for his services as an employee. To do so, we’d have to either charge more for our products or settle for narrower margins. Neither scenario makes for a thriving company poised to fulfill customer needs. The same can be said for my position as art director. I work closely with a couple of in-house graphic artists to design all of our collections, and we could not have our price point and subsequent margins if we had to hire for that role as art director. And I take all the photographs as well, which, again, is a cost that our skill sets allows to be absorbed.”
Using their skills to develop their company does have the potential for payback if the business is successful enough to be sold. This, however, could take years.
Gentile adds that the inability to factor in human costs can often skew the costs of running a business online. Pullen, who had a similar experience when setting up the Sewing Directory, concurs with Gentile: “For the first five years, I worked 50 to 60 hours a week on the site, without any holiday or time off whilst trying to look after a young child at the same time. If I calculated my hourly rate for that time it would be a pittance! It took a big physical toll on me as well, and I’m still suffering health issues as a result now. I had to take on a business partner last year because I couldn’t cope with the physical strain of working all those hours any longer.”
So how should online business owners calculate “real costs” and where should they put their money in the future?
“A few years ago, there was a movement to really make a distinction between online businesses as opposed to ones that operate off-line,” Gentile says. “And the reality is that most industries — craft included — are looking to use off-line more, to establish themselves in their individual sector, and this will become real cost versus an optional one. Attending industry conferences, such as the newly created SewPro 2016, will be as much about seeing what else is out there as it is a chance to meet influencers in the online community, with social media helping to bridge the gap between the two. If you want to help your business grow, you will have to commit financially to attending these — full stop.”
Link, of Sew Mama Sew! and Craft Industry Alliance, agrees that the expense of having to attend shows is a hidden cost that catches many people off-guard.
And, as with all things technology based, business owners will have to watch the trends that Google and Facebook set out for them to know where to shift their focus. Video is now quickly becoming the way to market your business, and one can’t help but notice how there are more professionally produced videos helping businesses promote themselves.
So what should small business owners be focusing on to be aware of costs and try to minimize the “cost creep” that can happen?
Two words — strategy and money.
“Women tend to co-mingle their monies with their spouse, so not having a clear division of the money as it relates to their company makes it even harder for them to know what their financial value is within the business,” Gentile explains. “The first thing is to keep the two pots separate so they can see clearly where the money is coming in and going.”
She adds: “Women are also less likely to understand the value of creating a strategy for their business, in order to really consider the costs their business will have to absorb. The first reaction that women tend to have when confronted with spending money on their business is ‘I can’t afford that!’ The main reason is that if they don’t know where they are going with their business, they don’t know what their next steps should be for investing money — spending now to gain later. When they find themselves saying, ‘I can’t afford that,’ they need to retrain their thinking to say, ‘OK, this might cost be money but is it part of my strategy and will it help me grow?’ And hopefully, the cost will turn into a profit maker.”