This article was published in the 19-June-2014 issue of Finweek Magazine.
If you’ve been bitten by the entrepreneurial bug and are deciding to start your own business, one of the key factors you need to consider is whether it should be an online business (website) or a physical bricks and mortar business, and why. What makes online such an attractive option compared to bricks and mortar? In this article, we build a strong business case for an online venture.
What are the business advantages of an online venture over an offline one? Here are the major upsides:
- Low start-up costs and low running costs
Entrepreneurs who launch online ecommerce stores have markedly lower set-up costs than their bricks and mortar counterparts. Both online and offline stores must pay salaries for staff. However, the “bricks and mortar shop” entrepreneur must also rent or buy office space (and pay for electricity, water and rates), they must buy physical stock, printed stationery and more. As an Internet ecommerce entrepreneur, besides staff costs, your only real expenses are a domain name, a hosting account, web development, and marketing.
For all Internet businesses, on the web development side, even if you don’t know web development code, nowadays there are fantastic tools to help you build your website yourself for negligible cost and in very little time. If your website has information pages and isn’t a complex site like a social network, Weebly allows you build your own website in a few hours for free or only a few dollars per month. If you’re looking to start an ecommerce business, Shopify is a powerful online ecommerce solution that provides everything you need to build an online store in a few hours, also for only a few dollars per month.
Even if you buy inventory or tools to make running your Internet business easier, your overall outlay will still make a much smaller dent in your capital than an offline business. And on top of this, online businesses tend to have lower staff costs than offline businesses because they usually employ fewer people than offline, physical businesses (although this isn’t always the case).
Low start-up costs are the reason why many South African-born Internet businesses like Thawte and Everlytic could start out as home-based businesses, being run out of garages by their founders.
- Quicker to launch
With online tools like Weebly and Shopify, you can set up a professional-looking website in a few hours. Good luck getting a physical store up and running in that little time!
- Lower long-term commitment
With Internet ecommerce businesses, month-to-month server hosting replaces the costs of physical premises. So you don’t have the financial commitment of renting a bricks and mortar shop on a long-term lease. Commercial property leases can be a hefty three to five years long, where you’re obliged to pay rent for the entire period even if you leave the premises or your business closes down (and don’t forget cancellation fees if you terminate the lease prematurely). Because online businesses are hosted month-to-month, this means less risk than long-term property leases, a big plus considering that a scary 71% of new small businesses (i.e. five out of seven) don’t survive past Year One.
- Low barriers to entry
For internet businesses, lower start-up costs and lower time to launch translates into lower barriers to entry, because you need less capital and less time to start up an online business.
- Longer operating hours
Unlike a bricks and mortar store, an online business can operate 24 hours a day, 365 days a year. If you’re selling a downloadable product like software, and you’ve set up automated marketing like Google Adwords to send worldwide customers to your site all day, every day, sales can pour in. Thanks to the Internet, if it is set up well, an online business has the potential to operate itself as an efficient, low-maintenance, money-generating machine. Whether it realises that potential is another story altogether.
- Quicker and cheaper product testing
With the Internet, you can test the sales of different products and the effectiveness of different marketing campaigns quickly and inexpensively. In a physical store, to test a new product, you’d have to design and build a physical prototype, manufacture and distribute it, and sell it to customers. All of this would take months and cost a lot. However, on the web, you can build a free site for a different product line in a few hours, and set up a Google Adwords marketing campaign in a few minutes to test if customers buy it. If it doesn’t sell, you haven’t lost much time or money. But if there is lots of demand, you can easily ramp up production and marketing spend. It’s that simple with the Internet.
Because of this speed and low cost of online testing, it’s also much easier to make tweaks to your product in response to customers. This means you can constantly enhance and reinvent your product until you find the offering that the market wants and is willing to pay for. In entrepreneurial speak, we call this pivoting until you reach product-market fit. This simply isn’t possible with physical products that have to be manufactured and distributed, and where everything takes much longer.
- Shorter product cycles
Because online offerings don’t need to be physically manufactured and distributed like real products do, the cycle from idea to end-product is shorter. Think about manufacturing a real fridge that works properly and getting it into stores, as compared to making a downloadable e-book and uploading it onto your ecommerce website. This shorter product cycle means you can get going on selling and earning income quicker.
- Access a wider network of clients and buyers
Building your business online and having an online product expands your access to a much bigger pool of clients and customers. With bricks and mortar businesses like a Builders Warehouse store, you compete against similar businesses in your geographical area for the same small network of customers. However, with an Internet-based business and an online product, the sky’s the limit. You can reach clients and buyers globally in order to grow your business radically. Think of Slovakian company ESet which sells its Nod32 antivirus software in 160 countries worldwide (incidentally, they got funding from 4Di Capital in South Africa).
In addition to having an online product, using the Internet for marketing also increases your reach. Replace costly print adverts in newspapers with search engine advertising such as Google Adwords and you can reach a global audience. So internet advertising opens up the opportunity to sell to the world.
- Achieving scale
Online businesses can be scaled to suit your needs. If you want to run a lifestyle website at home with only you as the staff member, you can. You can also run a website while having your daytime corporate job – this is a great option if you want to have the security of a salary while starting your online business. Once the website has grown and generates enough revenue, you can quit your job and go into the online business fulltime. You could also get venture funding to aggressively grow your online business and staff count and scale globally like Groupon did. It’s up to you. Online businesses also take up much less time than offline ones because software can automate much of the work that human beings do.
- Competing with the big players
Thanks to the Internet, even the smallest online businesses can compete with multi-national corporations. Because there isn’t a physical store, often customers cannot tell how big your business is. Without misleading customers, an efficiently operating, well-designed site can create the impression of being as professional and credible as a big global company like Amazon. For example, 37signals is a small team of 43 staff spread around the US. It has developed web-based organisational software like Basecamp. Over 15 million people have accounts on Basecamp, which works out to roughly 349,000 customers per staff member.
According to its website, Dropbox, has 538 employees. With over 200 million users around the globe, that’s over 371,000 customers for each employee. Not bad for an online business that started in 2007.
Locally, there is South-African-born company Fundamo, which was acquired by Visa for $110m in 2011. Fundamo is one of the largest specialist providers of mobile financial services in the world, and the platform is used in over 34 countries throughout Africa, Asia and the Middle East. Not bad for a Cape Town-based company with less than 200 employees.
A note of caution:
Some of these upsides can also be the downsides of starting an online business. If you have low start-up costs and can get your business live quickly, the same will be true for your potential competitors. If there is money to be made and low barriers to entry, expect others to jump in and seize the opportunity. We’ve seen this with the high number of new daily group-buying sites in South Africa, like Groupon, Vuvuplaza, Daddy’s Deals, and many more.