The hidden costs of e-commerce sites

Sat, 09/24/2011 - 13:32 -- John Locke

Mavis asks,

I have already spent thousands of dollars on my [Zen Cart] website. What would be your advice for [a company] who wants to transfer their site to a new host but not redesign it?

Just like a physical store, the costs of running an e-commerce site very quickly exceed the costs of opening it. And any time you're handling money, you automatically become a target for thieves -- you need to take security seriously, or you're bound to get robbed.

You're far from alone in not realizing how much ongoing cost there is to running e-commerce -- I have seen an absolutely appalling number of small merchant sites running on cheap shared hosts, and several that have already been hacked. The only reason we haven't seen a huge wave of credit card theft on all the small e-commerce sites out there is that it's still so easy to target bigger companies, with bigger payoffs... Like Sony, for example.

Building the web site is just a fraction of the cost of running e-commerce. Lots of small merchants think that because it's so easy to get free shopping cart software, that running it will also be close to free -- but like a physical store, the cost of your shopping cart, and even of your cash registers, is a tiny part of the cost of running the store. And like a physical store, location matters -- if you put your store in a bad neighborhood, you need a lot more security than if you put it in a good neighborhood. And the problem is, there is no "good" neighborhood on the Internet, it's all right next door to any thief in the world.

Costs

So let's break down the costs of running an e-commerce site:

  1. Initial site development. Graphic design, shopping cart software, getting your products loaded.
  2. Hosting. This is like picking the building you're moving into -- are you going to get your own dedicated server (building?) Or are you going to be on a shared server (a storefront in a mall or shopping center)?
  3. Security system maintenance. How do you keep the bad guys out? Keep in mind that the thieves are constantly developing new lock-breaking techniques, and your store is in the worst neighborhood. If you don't stay ahead of the thieves with new locks, the thieves will figure out how to bump your old ones and break in.
  4. Detection of a theft. In the retail world, everybody knows about shrinkage -- it's the product you lose without being able to determine how or why. To account for it, you need to conduct inventories, basically count up your inventory to see what's missing. In an e-commerce site, you need to be able to detect if something has changed a file, or if something malicious has been added that might be intercepting your customer's credit cards.
  5. Merchandising. Successful retailers spend a lot of time and effort experimenting with different ways of presenting their products in a way that appeals to their customers, constantly refining and adjusting their displays to see what makes a customer actually plonk down some cash. With e-commerce, things like customer comments, ratings, recommendations, and product features can really help turn a visitor on the fence into a customer. Making these kinds of adjustments is a process of experimentation, and the most successful stores are always trying to keep their appearance fresh.
  6. Attracting new customers. Of course, if nobody comes into your store, you're not going to make much money. With so much competition out there for your customers' business, it's up to you to find creative ways to get visitors in the door, where they can become customers.

So you've got # 1 done, and you're looking for # 2. We provide all 6 of the above -- but we think you need at least the first 4 to run a responsible business -- if nobody is keeping the thieves out and actively looking for signs of theft, you could find that somebody has installed a card reader on your credit cart swiping machine, and has collected the number of every customer who has purchased from you. How much is that going to cost you?

At Freelock, we don't do just hosting. We provide application management, security updates, and basically mind the store to keep you out of trouble. We have built some systems that greatly help us accomplish # 3 and # 4, when the site is built upon Drupal. We can detect changes to files that indicate malicious code. We monitor security lists, evaluate and apply software updates, and check for signs of attack with our standard Drupal maintenance plan. For a Drupal e-commerce site with hosting, we charge $180/month for this service ($40 for e-commerce hosting + $140 for Drupal maintenance).

We would love to help you with # 5 and # 6 as well, and we offer a substantial discount on our regular hourly rate when you're on a maintenance plan.

We have built a number of Zen Cart sites in the past, but Drupal has emerged as a much better platform for doing the kinds of experimentation described in #5 and #6, necessary to make your store successful. And because of its underlying architecture and the scripts we've developed to maintain it, it costs us much less to keep secure, # 3 in the list above. For hosting and maintaining a Zen Cart site, we charge $290/month ($40 for e-commerce hosting +$250 for Zen Cart maintenance). We would much rather do a small project to move you into Drupal, than keep you on what we see as an inferior platform.

Options

So while you may have spent thousands on your site so far, you're going to spend even more on it over time. You have three options here:

  1. Invest in proper security for your site, and ongoing improvements in your site, and set yourself up for success! The downside of this is cost.
  2. Find a freelancer to move you to another host, and hope you don't get hacked. The downside of this is high risk, with the potential to put you out of business.
  3. Move to a managed platform that spreads the cost of security across all its customers, such as an Amazon Store, Shopify. The downside here is flexibility -- you are limited to the product configurations, shipping options, and payment methods offered by the platform. Plus you'll be starting over with moving your products.

Far too many small retailers have put up shopping cart sites without understanding the ongoing costs involved in keeping it running safely. If you don't have the budget to keep a dedicated, custom site safe, you really need to be looking at more of a canned store on a service that handles all of this for you.

So why would you spend more on a dedicated, custom e-commerce site? If you can't do what you want to do on a hosted site, there are far fewer limitations with a custom one. And having a site that gives you great content management capabilities first, with e-commerce tightly integrated, opens up a lot of interesting options. We regularly build sites with e-commerce subscription content, membership management, paid event registrations, and combinations of products you can't otherwise get on a canned platform. We've also built custom delivery modules, online invoice payment, and integration with other back office systems.

Budget

It all boils down to budget. A web site is not a single up-front cost with no ongoing expense -- it's very much an operational part of your business, especially if you're conducting e-commerce through it. What's a reasonable budget? I would suggest somewhere between 1% and 10% of your expected revenue, for building an e-commerce store as a sales channel for an offline business. If it's your only sales channel, you should be at the high end of that -- and keep in mind that you may need to invest quite a bit to make it succeed at first. If you have other sales channels, and you're not relying solely on the web, you can probably get away with the low end of that figure -- you will have other IT costs to consider.

We've come to believe that a custom, dedicated e-commerce site needs a budget of at least $5000 a year to stand a chance of doing very well. That should support somewhere between $50,000 and $500,000 of sales. As your revenue goes up, so do your costs -- it costs more to scale the site to handle more traffic, you become a bigger target for theft so your security costs go up, and you've hit the low-hanging fruit in terms of merchandising and marketing to your potential customers. If you're not prepared to spend that much on your site, I would strongly advise going to Shopify or Amazon and making do there, build up your customers and your brand to the point that you can grow into a custom site.

Your turn

Do you have a successful e-commerce site? What do you think of our recommendations -- have you found e-commerce success for less? Do you have war stories to tell? We'd love to hear from you. Please leave us a comment below! We are ruthless when it comes to spam, though -- if you're not adding something to the conversation and are simply adding a link, your comment won't get posted.

And if you'd like to talk to us about helping you improve your e-commerce site, drop us a line!

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Comments

Good post John. Great that you just put own the rails for guidance. Who is doing number 5 & 6 for you ;). Hope you are doing great!

Submitted by John Locke on

Hey, Arne-Per,

Thanks for asking! We provide technical support and lots of suggestions. For # 5, we can help by providing tools for managing user comments and ratings, suggest ways of matching up highlighted products with articles or stories that feature those products, and more. For # 6, we're usually talking about social media and search engine optimization, and again we support the technical side of things -- providing tools to allow users to log in using Facebook, suggesting ways of improving SEO, watching out for emerging online venues. For all of those, having a broad base of customers trying to achieve similar goals gives us hands-on up-to-date knowledge of the kinds of things that others find effective.

We do encourage our customers to seek other help in these areas, too. Most of our customers bring their own designers to the project, and we often support the efforts of our customer's marketing and SEO people. Our strength is the technical know-how to get things done -- not necessarily the knowledge of your particular market niche and what key words your best customers would use to find you.

Submitted by BrianBurnham (not verified) on

My biggest surprise after starting my store was how much I was being charged for credit card and debit transactions! It's ridiculous! And now with the Durbin Amendment, the banks are trying to pass off those debit swipe fees on the customers, which will deter them from utilizing their debit cards, which would have helped me because of the cap at 24 cents. Now, I suspect everyone will use credit cards online, which has me wondering if I need to change my credit card processing company to ensure I'm getting the lowest processing rate available. Every cent counts in this economy!

This is good guideline for running an e commerce website. Several components and techniques are available for increasing the traffic on website. First you should create an attractive site for your business. You can add good graphic or logo on your WebPages. You can add banner and advertisement. This is a good way to attract the viewers. Pay per click advertisement is good option for increasing the traffic.

Submitted by MOHANKUMAR (not verified) on

A wonderful post which gives a general awareness of what it costs to run a e.commerce website. I was thinking for almost an year to start a e.commerce website, hoping that it will not cost me more than $100.00 a month and this post gave me a fair idea about what it will cost in long run. The poster is not pressing to buy his product, instead giving a sincere advise for those looking to start a e.commerce website.

thanks for the post.

Mohankumar
Washington D.C

outsourcing your website to be managed can easily rack a bill of up to $20k to $100k per year depending on the type of maintenance that needs to be done.

Data entry updates. Promotions, security.... the list goes on and on. It's not as cheap as people think.

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  1. I wanted to touch base and thank you for your team’s quality work on the FHCRC eagle-i connection project.  The system is live and in production – pushing our Drupal content automatically to Harvard’s system.

    We’re very grateful for all the efforts your crew put into this project! Freelock is on my speed dial for future projects!

    Ann Marie Clark
    Fred Hutchinson Cancer Research Center

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