Starting an e-commerce business in 2022 offers the potential for profits and large-scale growth. E-commerce is an ever-growing industry that doesn’t appear to be stopping anytime soon. Revenues from e-commerce businesses have nearly quadrupled since 2014, reaching $5.2 trillion in 2021. Statista projects that e-commerce revenues will reach $8 trillion by 2026.
This is mostly possible due to the fact that consumers are becoming more comfortable with online shopping. Nearly 19% of all shopping occurred online in 2021, and experts project the percentage to increase to 25% by 2026.
Clearly, starting an e-commerce business presents lots of opportunities for entrepreneurs seeking to try their hand at owning an online store. But there are a few things you should know before jumping right into this hyper-competitive business space.
Our comprehensive guide explains how to start an e-commerce business from scratch. You’ll learn what to expect in your e-commerce journey and how to make it successful.
What is an e-commerce business
An e-commerce business is an organization that derives its revenue from online sales of goods or services. Sometimes, e-commerce businesses support physical storefronts clients can visit to purchase items they need.
E-commerce businesses can offer a variety of products, or they can sell goods to a specific market segment.
For example, the e-commerce giant Amazon sells a wide variety of goods, including books, clothing, toys, and household products. Consumers can also rent movies, watch TV shows, or purchase audiobooks through its different channels. The numerous options available on Amazon make it highly attractive to consumers.
In comparison, the e-commerce store Modcloth specializes in vintage women’s clothing and accessories, a niche that attracts women who prefer classic clothing designs.
Entrepreneurs seeking to build a business up from scratch find e-commerce attractive since the expenses are much less than establishing a physical store. You can reach consumers worldwide rather than customers in a specific region, which can significantly enhance revenues.
10 steps to starting an e-commerce business
While starting an e-commerce business is cheaper than opening a mortar store, there are specific steps you’ll need to follow to ensure your business complies with laws and regulations. You’ll also want to perform market research, understand what it takes to build an e-commerce website, and decide on an advertising strategy.
1. Conduct market research
Conducting market research is a crucial part of establishing an e-commerce business. Market research allows you to determine your target market, the issues you can help your customers resolve, and how much you can charge them for your product or service.
Market research can help determine if there are enough consumers to support your idea. If you don’t have a solid potential customer base, it won't be easy to build a successful business.
1.1 Competitor research
Start your market research by performing an analysis of your competitors. Identify the companies that sell similar products and services you intend to compete with. When you start your research, some of your competitors may be unknown. A thorough internet search can turn up companies that are your competition.
As you review each competitor’s website, note specific details. You’ll want to understand all the aspects of your competitor’s business, including its pricing, products it offers, customer service availability, and marketing strategy. Make a note of any strengths and weaknesses of your competition. You can capitalize on your competitor’s weaknesses to differentiate yourself and develop a competitive advantage.
1.2 Market gap analysis
A market gap analysis identifies holes in the market that your competitors aren’t addressing. Ideally, you’ll be able to fill in market gaps with your company’s offerings.
You can look for market gaps by checking your competitors’ reviews. Pay close attention to informative negative reviews that indicate problems with the organization’s performance or products. Negative reviews are often a gold mine of opportunities for business owners seeking to differentiate from their competitors.
You should also consider opportunities for niches. A niche represents a small slice of a larger market. While a niche may appear tiny, e-commerce stores can benefit from it since they can reach many more potential customers than a physical storefront.
1.3 Target audience research
Target audience research involves identifying the characteristics of your customer base. You’ll want to consider their demographics, like their location, average income, age, gender, and education.
Once you understand your target audience, you can design a digital marketing strategy to attract clients.
2. Validate your product idea
If you plan on introducing a brand-new product to the world through your e-commerce business, you’ll want to ensure there’s a market for it and that people will buy it. The best way to ensure you’re not wasting your time making a product that won’t sell is by validating your idea.
There are a variety of ways you can validate your product. You can produce a few prototypes and sell them at local trade shows or markets. As customers purchase your product, ask if they’d mind providing you feedback once they use it. You can provide them with an email address or phone number so they can reach you.
Another way to validate your product is through crowdfunding. You will need to develop a few product prototypes and make them available through a crowdfunding website like Indiegogo or Kickstarter. Review how much interest your product generates and determine whether it’s enough to warrant production.
3. Write a business plan
Think of a business plan as your guide to developing your company. With a business plan, you outline all the aspects of your e-commerce business, including the business idea, market research, the products or services you’ll sell, and your potential advertising strategy.
You should include the legalities of starting your business, like choosing a structure and model and how you’ll manage it.
A business plan helps owners to translate all their ideas and thoughts about the new company onto paper. As your concept further solidifies, you can modify your plan to accommodate the changes.
Business plans are also great tools for obtaining e-commerce financing. Most banks and investors will want to review your plan before granting you money to support your new business.
4. Choose a business name, model, and legal structure
Selecting a name for your business is critical to setting up your own e-commerce business. Ideally, you’ll want to choose a name that reflects what you’re selling. You should also ensure that you find an available website domain that mirrors the name of your business. If the domain name isn’t available, your customers may have trouble finding your company on the internet.
4.1 Types of business structures
Your business structure is the legal form of your business. Certain structures have various legal and tax advantages, so you’ll want to choose your structure carefully. The five most common business structure types are sole proprietorship, partnership, corporation, S-corporation, and limited liability company.
A sole proprietorship is the simplest type of business structure. It’s best for people who work independently and don’t expect to employ staff. However, owners of sole proprietorships are fully responsible for their company’s financial liabilities. If you’re planning to take on significant debt to start your organization, you may want to consider other structures to avoid putting your personal assets at risk.
A partnership is best for a small business that has multiple business owners. Individuals planning to run the business and pool their resources may consider a partnership. However, like a sole proprietorship, owners will be personally responsible for the organization’s debts.
A corporation offers protection from personal liability for business losses. However, corporations are expensive to set up and highly regulated. In addition, you’ll be subject to double taxation on the company’s profits. A corporation structure is best for owners seeking outside investment by selling shares of company stock. It’s also a good structure for organizations with a high risk of legal problems.
An S-corporation offers the liability protection that a corporation does but limits exposure to double taxation. Owners of an S-corporation can offer shares to investors, allowing the company to obtain funding as it expands.
Finally, a limited liability company offers liability protection to business owners. There are no corporate taxes on a limited liability company; owners pay taxes based on their total annual income.
All business structures have advantages and disadvantages. If you’re unsure which one is best for you, speaking with a business consultant or tax advisor can help you make a suitable choice for your company.
4.2 Types of business models
The type of business model you choose should reflect the products or services you intend to sell. The three most common types of business models for e-commerce include products, services, and subscriptions.
A product model involves an e-commerce store that sells tangible goods to its customers. For instance, a business that sells clothes follows a product model.
A service model provides specific services to clients. An example of a service model is a company that sells language lessons online.
A subscription model charges customers a regular payment for goods or services on a recurring basis. An example of a company that uses the subscription model is Spotify, which sells access to millions of songs to consumers who pay a monthly fee for access.
5. Register your business
Like any other business, you’ll want to obtain the necessary licenses and tax registrations to operate in accordance with your local laws.
5.1 Get the necessary licenses
You’ll need a business license to sell your products or services in your state. All states have different licensing requirements. Check out your state’s requirements to determine what you’ll need. The type of license you need will often depend on your business structure.
You may need to acquire additional state licenses if you sell goods and services across state lines. Since the world of business regulations can be murky for average people seeking to start a new e-commerce store, working with an attorney is advisable.
5.2 Obtain an EIN
An EIN is a unique tax identification number specific to your organization. All corporations and limited liability companies must have an EIN. Owners of a sole proprietorship or partnership do not need an EIN and may use their Social Security number as their tax ID. However, establishing an EIN is advisable to keep your Social Security number private.
Setting up an EIN is a free and straightforward process you can handle with the IRS. Simply visit the IRS website and follow their instructions.
6. Choose an e-commerce platform
Multiple e-commerce platforms are available for beginners setting up their first online store. A few of the most common include Shopify and WooCommerce.
Shopify offers exclusive e-commerce software designed for online stores. The platform is easy to use, even for individuals who aren’t incredibly tech-savvy. Setting up a Shopify store will give you access to many plugins you can mix and match to personalize your online business.
WooCommerce is a plugin that you can insert into any WordPress website. If you already have a WordPress site or prefer to use the platform for its additional features, the WooCommerce plugin might be the right option for you.
WooCommerce provides lots of features to help you personalize your site. However, working with WordPress and WooCommerce requires more technical skills than Shopify.
7. Build an online store
Your next step is to build your store on your chosen e-commerce platform. If you don’t have prior experience building a website, you can use the various tutorials available through Shopify and WordPress for help. There are also numerous books available that can support your efforts.
If you’re still not confident enough to build your site, consider seeking help from a professional website builder. Working with a professional can help ensure your site is user friendly, has good functionality, and is attractive. You can also ask your website builder to use search engine optimization practices to improve web rankings.
8. Decide on the best sales channels
Once you’re ready to start selling and have your website in place, you’ll need to identify the sales channels you use to sell your products. Your website is one sales channel, but it will likely take a while to generate much traffic.
You can take advantage of other preexisting sales channels to gain early revenues. Depending on your product, Etsy, eBay, and Amazon might be good options. Millions of consumers visit these sites daily, and if you list your product, you can attract early interest.
9. Manufacture or obtain your products
If your e-commerce store is primarily reselling products, you’ll want to have them available for buyers. If you are manufacturing products, make sure you have enough available to support sales.
Some sales channels, like Amazon, will handle the shipping and delivery. Otherwise, you must ship products yourself.
If you are handling the shipping process independently, make sure you use shipping labels with your company’s logo and business information. Handwriting shipping details on a package can make your business appear less professional.
10. Create and roll out a marketing campaign
Creating a marketing campaign may be the most challenging hurdle you’ll face for your business. Most e-commerce businesses rely on digital marketing to attract customers. However, someone unfamiliar with the various digital marketing methods may struggle, especially if they don’t have lots of extra time.
Most e-commerce businesses use a combination of strategies, including social media, content marketing, influencer marketing, email lists, and online ads through various platforms. Hiring a professional e-commerce marketing firm can help if you're unsure where to start. If you need to keep your advertising spending in check, video tutorials, online courses, and e-books can provide guidance for establishing your digital marketing strategy.
Best practices for starting an e-commerce business from scratch
There are a few best practices you’ll want to consider as your e-commerce store begins to gain traction.
Invest in omnichannel selling
Omnichannel selling is an advanced digital marketing strategy that creates a sales funnel for each of your customers. You’ll use various methods to stay in contact with your clients, including content marketing, social media, and email lists. Some established e-commerce stores also use SMS marketing to communicate further with clients.
Omnichannel marketing is not simply a series of repetitive ads through every marketing channel. Instead, it uses each channel for various promotional activities. For instance, the business owner can use blogs to inform customers about topics related to its products, social media for visual ads, and emails for special promotions.
Omnichannel marketing expands the e-commerce store’s presence and helps develop brand loyalty from customers.
Offer in-demand products
You’ll want to ensure you’re offering products that attract customers. If no one’s interested in your products, you’ll be stuck with inventory you can’t get rid of and a lot of sunk costs. Ideally, your initial market research should alert you to the potential demand for your product.
Ensure excellent customer service
At the heart of any organization is its customer service. If you can’t support your customers and help them with their questions and concerns, they’ll leave and go to your competitors.
Make sure you provide all your clients with a way to reach you if they have concerns or need to make a return. You can use email for customer service issues when you start your store, but as it grows, you may look at other options to improve the customer experience.
Engage with your customers
Staying in regular contact with your clients can help determine if you’re meeting their needs and how to improve your products. Pay close attention to the feedback you get from customers and make necessary adjustments as you go along.
Don’t be afraid to experiment
One of the worst things you can do is declare your business a failure if you don’t meet your sales goals in the first few months.
Remember that e-commerce is a relatively new and constantly changing industry. Be open to new ideas to expand your company’s online presence and build brand loyalty.
Don’t obsess over early profit
In the beginning, you’re not likely to see lots of profits. It will take time to grow your business and its online presence. If you’re not meeting your sales goals, give it time before significantly adjusting your prices or offerings.
Most e-commerce stores take anywhere from six months to a year to see regular customer traffic. Sometimes it can take even longer. Ideally, you should see an increase in traffic and sales each month until the business grows more steadily.
Once your revenues begin to roll in, you can use financial planning and analysis tools to predict future sales and expenses.
Track your finances from day-1
Building good financial habits is essential when you first start your business. Various automation solutions can help you track your finances and minimize the daily accounting you’ll need.
You’ll want to establish and build business credit as your business grows. Building credit can help when you need additional funding to expand your business or keep it afloat if sales dive.
How much does it cost to start an e-commerce business?
Various expenses are associated with setting up an e-commerce business, and not all are cheap.
Some of the most common expenses include:
Cost of a website domain: $1 to $20 per year
E-commerce website platform: $20 to $300 per month
Manufacturing of your own products: Varies, but can go into the thousands of dollars
Business licenses: Up to $500 per state
Legal/tax advisory services: Up to $5,000 for basic advice
Digital marketing services: Varies, but may cost several hundred dollars per month for a new company
Website builder: Up to $5K for a functional website with best SEO practices
Starting an e-commerce company isn’t cheap but can result in a very profitable income stream. New startups may earn minimal revenues, but as your business grows, there is no limit to your potential earnings.