This is the third in a series of columns chronicling the entrepreneurial journey of an aspiring e-commerce business owner and the ins and outs of starting an Amazon business.
By Jane Han
Renting a decent-sized retail space in an average neighborhood in the greater Seattle area costs a minimum $5,000 a month. When you're online, you can potentially reach far more customers scattered virtually anywhere in the world for not even a fraction of that amount.
This alone is the biggest financial edge e-commerce has over traditional bricks-and-mortar businesses.
Considering that leasing retail space is the single largest operating expense for many small businesses, eliminating this big chunk of cost and risk gives online businesses a head start and financial relief.
But is running e-commerce free? Far from it. The expenses, however, do look a lot different from a conventional storefront's.
For example, when it comes to popular online platforms like Amazon, eBay and Etsy, there are fees that must be paid for their services and ready-made convenience.
And by far, Amazon has the highest fee, which includes the storage of products, picking and packing, shipping and even providing customer service.
I pay, on average, a whopping 40 to 50 percent of my sale price as a fulfillment fee but I still find this to be worth every penny.
In my early days of business, I shipped many of my products directly from my warehouse, a.k.a my house, but soon realized that it was way too much work, took up an incredible amount of time and physical space and, most importantly, not a good money decision as the shipping costs ate away a large percentage of my profits.
So I quickly converted most of my products to be fulfilled by Amazon. Platform subscription fees depend largely on the size and weight of the product.
For one of my kitchen products priced at $13.50, I give Amazon $7.82 for every unit sold. For this particular product, the fee is on the higher side since I'm paying more than 50 percent of the sale price.
For a women's accessories product I sell for $25.50, I give up $6.75, which is just over 25 percent. The item is small and light so fees are much more favorable.
Various fees, aside from the cost of goods themselves, are really the only major expense for an e-commerce business.
But just because I don't pay for rent, electricity and all the other traditional expenses, does that mean the business is profitable?
In a perfect world, it would be. But I learned that wasn't the case for me. In my second year of business, I rung up close to $200,000 in revenue. Not a bad start, I thought.
Even my tax accountant complimented me on my early success ― until he actually saw my real, detailed numbers.
I sold so much, but my expenses were equally so high that my profit was surprisingly and significantly miniscule.
Sourcing all my products from Korea was and still is the biggest expense for me since the cost of goods is many times more expensive than buying from China.
For the kitchen product I mentioned earlier, I sell for $13.50, give Amazon $7.82, which leaves me with $5.68. But I buy the product from my manufacturer for $3.50 and each unit costs roughly $1 to ship, which leaves me with just $1.18 in profit.
Thank God my other products leave me with a better margin.
This is a slightly extreme example, but I learned from my early days of selling that a bad mix of e-commerce selling fees and a high cost of goods can end up making only two parties happy. And the seller isn't one of them.
The first party would be Amazon, since they're making money off sellers who faithfully pay up for each unit they ever sell on their platform.
The second party is customers. Sellers who refuse to sacrifice quality choose to pay a higher price for their goods. In my case, instead of making the same item from China for $.20, I have it made in Korea for $2.
Businesses take a hit on their margins, but customers are left with a higher quality product.
After bringing home so little in my second year after so much work, I experienced a period of resentment and frustration. But the answer was pretty simple.
Numbers showed that the customer base is very strong. I wasn't marketing or selling super aggressively, yet my revenue was easily six figures.
Businesses often struggle because there aren't enough people buying, but for an Amazon business, that's not often the case. There are plenty of customers ready to spend money.
What I needed to do was manage my expenses without sacrificing quality. So if I'm trying to bring premium quality products to the table, what can I do to increase my profit? The no-brainer answer was to raise prices.
This is something I was dead set on not doing in my early days because I didn't want to turn off potential customers, but I quickly realized that pricing too low invites an unfavorable consumer pool.
These people aren't looking for quality products. They're looking for cheap stuff. If I'm not selling cheap, I needed to price accordingly and, naturally, I'll have a different pool of consumers.
I marked up my prices across the board on all my products. I raised them by $2 to even $3 per unit.
Surprisingly, some sold even better after I upped the price. No one complained that the products were expensive. I was able to pocket more money, which in turn made everyone, I'd like to believe, happier.
So as many in business know, there is definitely a sweet spot when it comes to operating a business and netting profit. Making profit is essentially the reason why a business exists in the first place so it is crucial to nail the sweet spot where consumers are happy to pay and you make a consistent profit.
One things is for certain, e-commerce profitability is definitely not a sprint, but a marathon.
Jane Han (jhan@koreatimes.co.kr) is an e-commerce entrepreneur who currently owns and sells several brands of products on various online platforms. Based in Seattle, she also writes as a freelance correspondent for The Korea Times.
By Jane Han
 |
This alone is the biggest financial edge e-commerce has over traditional bricks-and-mortar businesses.
Considering that leasing retail space is the single largest operating expense for many small businesses, eliminating this big chunk of cost and risk gives online businesses a head start and financial relief.
But is running e-commerce free? Far from it. The expenses, however, do look a lot different from a conventional storefront's.
For example, when it comes to popular online platforms like Amazon, eBay and Etsy, there are fees that must be paid for their services and ready-made convenience.
And by far, Amazon has the highest fee, which includes the storage of products, picking and packing, shipping and even providing customer service.
I pay, on average, a whopping 40 to 50 percent of my sale price as a fulfillment fee but I still find this to be worth every penny.
In my early days of business, I shipped many of my products directly from my warehouse, a.k.a my house, but soon realized that it was way too much work, took up an incredible amount of time and physical space and, most importantly, not a good money decision as the shipping costs ate away a large percentage of my profits.
So I quickly converted most of my products to be fulfilled by Amazon. Platform subscription fees depend largely on the size and weight of the product.
For one of my kitchen products priced at $13.50, I give Amazon $7.82 for every unit sold. For this particular product, the fee is on the higher side since I'm paying more than 50 percent of the sale price.
For a women's accessories product I sell for $25.50, I give up $6.75, which is just over 25 percent. The item is small and light so fees are much more favorable.
Various fees, aside from the cost of goods themselves, are really the only major expense for an e-commerce business.
But just because I don't pay for rent, electricity and all the other traditional expenses, does that mean the business is profitable?
In a perfect world, it would be. But I learned that wasn't the case for me. In my second year of business, I rung up close to $200,000 in revenue. Not a bad start, I thought.
Even my tax accountant complimented me on my early success ― until he actually saw my real, detailed numbers.
I sold so much, but my expenses were equally so high that my profit was surprisingly and significantly miniscule.
Sourcing all my products from Korea was and still is the biggest expense for me since the cost of goods is many times more expensive than buying from China.
For the kitchen product I mentioned earlier, I sell for $13.50, give Amazon $7.82, which leaves me with $5.68. But I buy the product from my manufacturer for $3.50 and each unit costs roughly $1 to ship, which leaves me with just $1.18 in profit.
Thank God my other products leave me with a better margin.
This is a slightly extreme example, but I learned from my early days of selling that a bad mix of e-commerce selling fees and a high cost of goods can end up making only two parties happy. And the seller isn't one of them.
The first party would be Amazon, since they're making money off sellers who faithfully pay up for each unit they ever sell on their platform.
The second party is customers. Sellers who refuse to sacrifice quality choose to pay a higher price for their goods. In my case, instead of making the same item from China for $.20, I have it made in Korea for $2.
Businesses take a hit on their margins, but customers are left with a higher quality product.
After bringing home so little in my second year after so much work, I experienced a period of resentment and frustration. But the answer was pretty simple.
Numbers showed that the customer base is very strong. I wasn't marketing or selling super aggressively, yet my revenue was easily six figures.
Businesses often struggle because there aren't enough people buying, but for an Amazon business, that's not often the case. There are plenty of customers ready to spend money.
What I needed to do was manage my expenses without sacrificing quality. So if I'm trying to bring premium quality products to the table, what can I do to increase my profit? The no-brainer answer was to raise prices.
This is something I was dead set on not doing in my early days because I didn't want to turn off potential customers, but I quickly realized that pricing too low invites an unfavorable consumer pool.
These people aren't looking for quality products. They're looking for cheap stuff. If I'm not selling cheap, I needed to price accordingly and, naturally, I'll have a different pool of consumers.
I marked up my prices across the board on all my products. I raised them by $2 to even $3 per unit.
Surprisingly, some sold even better after I upped the price. No one complained that the products were expensive. I was able to pocket more money, which in turn made everyone, I'd like to believe, happier.
So as many in business know, there is definitely a sweet spot when it comes to operating a business and netting profit. Making profit is essentially the reason why a business exists in the first place so it is crucial to nail the sweet spot where consumers are happy to pay and you make a consistent profit.
One things is for certain, e-commerce profitability is definitely not a sprint, but a marathon.
Jane Han (jhan@koreatimes.co.kr) is an e-commerce entrepreneur who currently owns and sells several brands of products on various online platforms. Based in Seattle, she also writes as a freelance correspondent for The Korea Times.
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