So you’ve decided that you want to quit your day job and start your very own e-commerce empire. That’s great!
But before you become the next Jeff Bezos (and definitely before you quit your job!), it’s worth spending some time to think about a business plan. In this article, we’ll dive into the key elements of an e-commerce business plan, which is very different than writing a traditional business plan.
We know that starting an e-commerce business is exciting and it can be tempting to jump right in, without constructing a business plan. READ: PLEASE DON’T DO THIS.
If you haven’t put your ideas, questions and concerns on paper, then you haven’t given your business model enough thought.
Taking the time to write a business plan might seem like a lot of work but it can save you a lot of time and money in the long-run by better preparing you for potential challenges and opportunities that you’ll face as a first time entrepreneur.
When writing a business plan, YOU are your target audience! The point of a business plan is to help you get your ideas down on paper – so don’t worry about making it fancy or excessively long.
So what should one hope to get out of a business plan?
Now that you know you need a business plan lets jump into the sections you need to think about.
Is your idea simple to explain?
Creating a short, crisp value proposition is a good gauge for how clear your idea is. Write this section as if you had one minute to explain your business to a potential investor or customer. Then practice it over and over and over again until you feel really confident in explaining it to someone. Once you write this and are happy with it, use it on your website as your company description.
Let’s say you’re looking to start a hiking company, called Atlas Hiking Co., which sells premium performance hiking shirts. A possible company description could be the following:
Atlas Hiking Co. is a lifestyle hiking company that produces high performance hiking shirts for outdoor lovers. Our proprietary SPF40 fabric is one of the lightest fabrics on the market, providing mountain lovers with maximum comfort, both from a breathability and sun-protection standpoint. Our product is made in the U.S.A. and a portion of our profits are donated to preserve national parks around the country.
Notice all the sensory words.
How wil you make money?
Before you start diving into the weeds, it’s a good idea to first develop a framework for your business model. Once you go through the different sections of the business plan and conducted extensive research, you will definitely want to make some tweaks to your business model so no need to make this perfect.
There are a number of ways to sell a product on the internet and several different business models one could employ. Depending on what you intend to sell, it’s important to think through which business model makes the most sense for your product.
What are you selling?
Who are you selling to?
How are you sourcing your product?
Where can you compete?
Here’s a fact you can bank on: there has never been a successful e-commerce entrepreneur that didn’t understand his/her market, cold. That’s why this section is one of the most important in the entire business plan. It will force you to understand the industry in which you operate, the overall industry outlook, the existing competition, and your target customer demographic.
Before you even get started in writing this section, you need to spend several hours researching the market.
Here are some of the most efficient ways to research a particular market:
Google is your best friend. Look for any recent industry reports on your market of choice. This will give you a good sense of how much growth the industry is experiencing, why this growth is happening and what are the largest customer segments. In our example of Atlas Hiking Co., we should research the outdoor apparel market.
Let’s say that through our research of the outdoor apparel industry, we discovered that there was a huge boom in youth hiking apparel. Perhaps parents were increasingly concerned of their kids’ exposure to UV rays while hiking so began to spend more money on their kids. We could use this valuable information to guide our business strategy.
There’s only so much you can read online. Go to a nearby store that sells similar products to yours and interview the store representative. The store rep has interacted with hundreds of interested customers which can lead to thousands of valuable insights! It’s amazing how these insights can translate into a meaningful business opportunity.
Here’s an example:
If I was going into a Billy’s Outdoor Store to research the outdoor apparel market, I would probably ask Billy the following:
Create an excel spreadsheet of all of your competitors. In your excel spreadsheet, you should have the following columns:
What is the competition missing? Is there a gap in the offering? Where you can add some additional value?
After conducting the competitor analysis, Atlas Hiking Co. might find that the competition’s hiking shirts offer very few features at a low price point, but no one offers a luxury hiking shirt with additional features at a higher price point.
This is just an example of the types of insights one can gain from market research which can drastically alter your business model
By using Google’s keyword planner and trends pages, you can get a good sense of how in demand your product is and whether it’s trending upward, or downward. Google is great for a general idea, just don’t bank on it.
The video below is a good guide on how to use Google Trends and Google Keywords
Are there nearby trade shows that you can go to? Again, creating connections with other people in your industry is a sure-fire short-cut to countless hours of reading on the internet. Trade shows are also a great opportunity to talk to competitors, meet manufacturers, and better understand where things are heading in your industry.
Once you finish researching the relevant industry, you should summarize your findings by answering the following questions:
How will you reach your customers?
So, now you’ve concluded that you have a great business idea and it’s in a growing market. That’s great – but how are you going to drive traffic to your website and get customers buy it? And how much can you afford to spend on your product?
In order to come up with a marketing strategy, you need to first know your customer inside out. You should be able to answer such questions as:
With so many channels to reach your customer, which one is best for you?
Once we know pretty much everything there is to know about our target customer, we can shift focus to our marketing strategy. What channels should you use to grab the attention of your customer demographic? Some of the key marketing channels include:
Finding the optimal mix of these advertising tools depends 100% on your customer segment as well as your product type. For example, a SaaS product targeting millennials will require an entirely different marketing strategy than an e-commerce physical product targeting baby boomers. Perhaps that should be a post on its own for another day!
How much should you spend to acquire a customer?
In order to understand this, we need to first discuss a concept known as Lifetime Value of Customer or LTV. In essence, this is a formula that helps you better understand how much an average customer will spend over time.
Here’s a good read on how to calculate LTV.
It’s important to remember that for new businesses, you don’t have a lot of data on customer purchase habits so it’s a good idea to be more conservative with your assumptions in calculating LTV.
Let’s say, for Atlas Hiking Co., I determine that the average LTV per customer is $300. This means that over time, the average customer will spend $300. Let’s say on average, if I receive $300 in revenue, $100 of that will translate to gross profit before I factor in my marketing costs (basically I’m just subtracting out the cost making the shirts).
Knowing that my gross profit is $100 per shirt is a critical piece of information because it tells me that I can spend up to $100 in marketing to acquire a customer and still be profitable!
What platforms will you use?
With so much technology and SaaS products out there, it’s important to understand the various moving parts and diagram how they all integrate with one another.
Some of the different elements include:
Come up with a detailed list of the different products and services you need to run your business as well as the monthly and per transaction cost of each of them. This will be important in understanding the impact of these services to your margins.
What other products can you sell?
So we know we want to sell hiking shirts, that’s great!
But for some of us, we’re not quite sure as to what we should sell. To succeed in online retail, you need a product that is trending upwards in a growing niche.
Come up with detailed specifications for each product or service you intend to sell. If it’s a hiking shirt we’re selling, we would want to have:
Future product pipeline
What are other products that you have in the pipeline? Perhaps once you’ve successfully sold hiking shirts, you’re able to leverage your manufacturing relationships to sell hiking socks and shorts. Include that information in this section.
How will you stay profitable?
The financial section is used to forecast sales, expenses and net income of the business. Ideally, you’ll want to create a monthly excel schedule showing the following:
This helps business owners better understand what they need to achieve to hit their profit goals. In reality, projections are usually always off the mark, but it’s good to give yourself some measurable goals to strive for.
This section should aim to answer the following questions about your product offering:
Careful planning is crucial to get your e-commerce business from the planning phase to the launch phase, and to ensure its successful future.
Going through the exercise of writing a business plan will cement your own understanding of your business and your market. It will also position you to take advantage of lucrative opportunities while mitigating harmful threats to your business down the line.
James is a technology and marketing writer with 20 years experience in advertising, media relations, and eCommerce. His articles have appeared in numerous publications around the web.