Payback of an online store

This is because initial and monthly expenses exceed profitability. There is always a risk of not reaching the break-even point (the mark where all investments in the store are paid off). However, this risk can be significantly reduced if you take into account all the factors that affect profitability and develop a business plan right from the start. Calculate profitability after each month of operation, note overall trends, plan, and improve results. It sounds complicated, but in reality, it’s much simpler: let’s break it down step by step.

What does profitability depend on?

Niche

Choosing a niche is where any business starts, and e-commerce is no exception. Many beginner entrepreneurs make the mistake of choosing a too popular niche or, conversely, a type of product that potential customers are unfamiliar with. In the first case, the advantage is high demand, but in a highly competitive environment, it will be difficult for the online store to survive. In the second case, the store will have a minimal number of competitors, but there will be difficulties in introducing the product to a large audience and creating a need for its purchase.

You can do this using tools like Yandex Wordstat, Google Trends. Among the selected niches, preference should be given to the one in which you, as an entrepreneur, have better expertise, have supplier connections, or at least a genuine interest. In this case, you will have an advantage over competitors in the form of a good assortment, flexible pricing, and the ability to provide comprehensive customer consultation.

If you’re unsure about your choice or can’t decide between several options, test each niche by running ads on free platforms. The number of responses will help you understand which type of products to focus on to ensure sales and profits for the store.

Product Characteristics

The second thing to consider in terms of online store profitability is margin. Low-margin products only bring profit with a high volume of regular sales. The markup on a product takes into account not only the owner’s personal profit but also covers current expenses. Therefore, if the sales plan is not met, there is a risk of cash flow gaps.

Organizational Aspects

The next step in creating a business plan is organizing the future online store’s operations. Where and on what terms will products be purchased, how will delivery to the end consumer be carried out, how will purchases be made, logistics, and warehousing? The supplier of the products for the store can be either the manufacturer or an intermediary (wholesaler, semi-wholesaler, or middleman).

If in a small store, the owner handles most of the processes, then with a wide assortment, it will be necessary to involve additional personnel, such as couriers, managers, warehouse workers, etc. The costs of paying for hired labor and warehouse rent should also be included in the expense category.

Revenue and Profitability Forecast

Before launching your own store, you need to determine the monthly revenue target that will make the project profitable. Accordingly, you need to determine how many sales per month are necessary to achieve this and what the average check should be.

Marketing and Target Audience Acquisition Channels

In an offline store, signage and outdoor advertising attract customers. In an online store, this role is fulfilled by contextual advertising, SEO promotion, and targeted social media advertising. You can learn more about how to attract visitors to an online store in our blog article.

This part of the online store business plan concerns regular expenses. To optimize spending in this area, you need to calculate the cost of acquiring each customer across different channels, then choose the most profitable ones and eliminate unprofitable ones (where profits after purchase are lower than the acquisition cost).

Startup Investments and Monthly Investment Budget

At this stage, you are almost ready to implement your online store idea. The final step is to plan your initial budget and calculate approximate regular expenses.

Startup costs will include:

• Renting, creating a store on a ready-made platform, or developing an online store from scratch.
• Hosting and domain name rental.
• Content creation, filling the site with products.
• Purchasing the first batch of products to start sales.
• Official business registration (if you are not yet registered as an entrepreneur).
• Initial advertising campaign.

The monthly expense budget is intended for:

• Advertising campaigns and search engine promotion.
• Covering operating expenses.
• Purchasing new product batches, expanding the assortment.
• Paying hired employees.
• Renting premises (warehouse, office).
• Domain renewal and hosting rental.

After these expenses, the owner should have a remaining amount for personal use. That’s why it’s important to optimize costs, timely eliminate unprofitable investments, and strengthen the directions that generate profit.

How to Calculate Online Store Profitability

The profitability of an online store equals the revenue minus expenses. To calculate the profit your store generates, use this formula:

Profit = V*C*AC – T – GP – OA – AC

V – the number of visits to the online store. When calculating monthly profit, use the monthly traffic metric.

C – conversion rate. The ratio of purchases to website visits. For example, if 3 out of every 100 visitors make a purchase, the conversion rate will be 3%.

AC – average check. The average amount visitors spend after shopping in your store. To calculate this metric, simply divide the total monthly revenue by the number of checks.

T – taxes. When the business is officially registered, taxes are automatically included in the expense category.

GP – goods purchase. You will need to restock your online store’s inventory and expand the assortment to grow and develop. These expenses are also deducted from the revenue to calculate profitability.

OA – organizational costs. Logistics, delivery, salaries, rent, etc.

AC – advertising campaigns. The budget spent on attracting potential customers from various channels.

7 Ways to Increase Profit

If your online store’s profitability is far from desired, use these proven tips to improve the situation:

1. Increase the average check. Offer similar products, accessories, consumables, and items from related categories (upsell and cross-sell).
2. Maintain a smart pricing strategy. Don’t try to undercut prices to attract customers—this is a direct path to cash flow gaps and the closure of your online store. Differentiate yourself from competitors through unique selling propositions, concepts, services, and significant advantages for your customers.
3. Sell services and additional options. Express delivery, at-home fitting, setup/repair of equipment, etc.
4. Expand your assortment within the selected niche and concept.
5. Implement a loyalty program for regular customers and large checks. This can include discounts, bonuses, free shipping, and gifts.
6. Offer various payment and delivery methods so that customers can choose the most convenient option and don’t leave the site with an unpaid cart.
7. Build a loyal audience and extend the customer life cycle. Continue communication after purchases, ask for feedback, inform about discounts and promotions, send holiday greetings, “retarget” them on social media, and unite them in your groups and communities. It’s much easier to sell something to a loyal customer, for whom you no longer need to pay for acquisition, than to continually invest in advertising and overcome objections before the first purchase.

Try implementing these tips one by one and monitor the results. We assure you, they will pleasantly surprise you.

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