What are the operating expenses for ecommerce?
When it comes to ecommerce, it is often perceived that the costs involved in setting up and running the business are relatively low.
So typically, you’d think that having a computer, a strong internet connection, and a product or service to sell should suffice for starting an online venture, but that’s not all. Many expenses come into play.
These vary, and a few of them even remain hidden. Ecommerce business owners need to identify them, prepare and plan to contain these costs as neglecting them can lead to logistical issues, legal battles, and eventually, business failure.
Simply put, operating expenses or OpEx are the expenses incurred by your business in the day to day running of its activities. It could be paying rent, purchasing office supplies, paying salaries, making, or the expenses towards advertising and marketing activities. These are costs a business incurs apart from that of producing a product.
Businesses must take these into account as it has a direct impact on profitability.
Let’s put it down this way - if you’re looking at improving your online venture’s bottom line, then you need to start by keeping the operating expenses under control.
How to calculate operating expenses?
Calculating operating expenses is relatively simple. Ensure that you have identified all of the operating expenses that your business incurs and simply add them up together.
A standard formula would look like this:
Operating Expenses = Salaries and Wages + Utilities + Shipping + Marketing and Advertising + Equipment and Asset Maintenance + Legal Fees + Platform Charges + Insurance
Operating expenses vary from business to business. The challenge lies in identifying the operating costs that essentially matter to your online store.
Why should reducing operating expenses matter to ecommerce business owners?
Operating costs constitute the essential component in the overall cost structure of an ecommerce business. Reducing operating expenses often give ecommerce ventures an edge over brick and mortar businesses.
If your intention as a business owner is to improve the bottom line, there are many options before you, but reducing operating expenses would be the best one. Here’s why:
- You can hike up tour product or service prices to increase revenues, but customers may not be ready to pay more.
- You can cut down your Cost of Goods Sold (COGS) using cheap labor or materials, but this may cause the quality to suffer.
That said, operating expenses do not directly impact the price or quality of the products or services offered. Reducing operating expenses will help you retain cash in your business with absolutely no compromise on the quality.
How to decrease operating expenses?
Some of the ordinary operating expenses that you should consider when running your ecommerce business are salaries of staff, sourcing of the right products, and fees associated with ecommerce platforms like Shopify, eBay, Amazon, and Paypal.
In addition to this, you may also have to consider the costs of shipping, cost of packaging, bank charges, marketing and advertising fees, and the cost of website building and maintenance.
Here are some critical steps that ecommerce business owners can take to cut down operating expenses:
- Do routine checks on inventory and get rid of excess stocks.
- Reduce the cost of packaging and shipping by buying packing material in bulk and by using them wisely.
- Negotiate pricing with manufacturers and suppliers. You could ask for bulk discounts or sign a contract for buying a particular quality time over time.
- Create and adhere to your budget. This is one of the critical steps to managing your expenses and cutting down costs.
- Outsource certain services; this would be cheaper than hiring staff to do them.
- Focus on customer retention. It is easier to retain existing customers than trying to get new ones as this would need added resources and marketing efforts. One surefire way to keep your customers happy is to offer unparalleled customer service using DelightChat.
That’s about it on Operating Expenses. Feel free to email us if you have any questions or topic suggestions.
