Business Strategies: How To Judge The Risk Of Your E-Commerce Venture

The key to determining risk with any e-commerce venture begins with realizing the type of product you hope to sell.

You are planning to set up shop, at least a virtual shop, but the same question that all entrepreneurs must ask themselves remains. Is this going to make money? A better question to ask is: Will this venture lose money? Unlike other business models that have been used for centuries, e-commerce has been in existence for less than fifteen years. It has made possible the sale of information and merchandise on a global scale, twenty-four hours a day, every day of the week. Before you run out, hire a designer for your site, and begin setting up merchant accounts to handle the thousands of transactions you expect, treat the venture the same as starting any business. This means establishing risk and a conservative vision of profit.

When judging risk in e-commerce, the most important question you need to answer concerns the product type you plan to work with. Though there are millions of virtual shops, only three types of products are moved on the web and each of those products carries a different risk factor. The first is simply merchandise. In business terms, this category includes your 'widgets.' Whether you are looking to sell t-shirts, medicinal herbs, antiques, books, used and new computers, or insurance plans, the same truth remains, you are selling widgets. The second category is information. You may have compiled enormous lists of available government grants or directions to the stars homes. Either way, if you are looking to make information available on the web and then create revenue by selling access to this product, then you are dealing in information. The third type of product is advertising space. If your plan is to create a site that has a natural attraction and then capitalize on the traffic it creates, your product is advertising. This third category is complex when you realize the amount of reselling that occurs on the web. Reselling occurs when the owner of a site creates traffic and then makes an association with another organization whereby the owner receives a portion of the sales revenue for any products sold through the site. Outside of the web, this type of enterprise falls under the heading, 'Sales and Distribution.' On the web, it is easier at this stage in the planning process to think of your business as advertising.

There is one important question when it comes to merchandise. Is it widely available off the web? In the early days of e-commerce, so-called visionaries imagined that every piece of merchandise would sell through the web. Customers will turn to the internet for many things, but they are not going to bother if they can find the product close to home for a similar price. If your merchandise is readily available off the web, then there is a better way to take advantage of the internet without creating your own site. In this instance, you should research all of the available outlets that can list your product. Letting a distribution site take control of selling your product removes all pecuniary risks associated with an e-commerce venture.

For Merchandise that is a specialty in some way, determining risk is rather formulaic. You begin by tallying up the costs generally associated with opening a virtual shop.

You can buy the template for a website and register a domain name for less than three hundred dollars. These costs are low because the type of site that you would need for a simple product costs much less than what you would need to sell and distribute information. Many designers will argue with that price, but minimal research into the many companies offering templates or quick and easy design services will prove that the cost of a simple website is incredibly low. Hosting for the site will cost approximately thirty dollars a month. This depends heavily on the features you select. Such features would include the number of e-mail accounts you opt for, the amount of space you lease for the actual site and bandwidth. The greatest monthly expense is for merchant accounts. Merchant accounts are used for the transfer of funds through sales. Many companies sell these accounts and prices can vary. You should pay no more than forty-five dollars a month and a percentage of sales. Using Paypal, a popular website that performs the same function, is more economical. They do not charge a monthly fee to hold the account. The downside is that all transactions move off-site. That takes some control over the transaction out of your hands. Your final expense is advertising. The great thing about doing business on the web is that advertising is most always targeted. The majority of advertising on the web is pay-per-click, meaning that a link is established on a site other than your own and you are charged every time a person clicks through. There are various types of agreements surrounding pay-per-click advertising. With some programs, you are charged every time a person clicks through. In others you are charged only after a sale. The beauty of this is the guarantee that at least some of your visitors are actually interested in what you have to sell. You would need to establish the relative cost per visitor, the percentage of visitors that make a purchase, and the average sale amount. Once this is complete, you adjust your advertising revenue upwards until you find the point where increased marketing expenditure no longer carries increased profit.

So far, through very conservative spending, the cost of opening the virtual shop is less than a thousand dollars. Your monthly static overhead (costs not associated with product development) is thirty to fifty dollars to host the site plus the cost of advertising. Each year you will have to re-register your domain name. The expense of this varies, but if you factor it into a monthly cost, you are looking at less than ten dollars a month.

Advertising expenses are not as easy to calculate. Pay-per-click advertising can cost anywhere from a penny per click to a dollar, depending on the number of competitors you have buying the advertising and the price they are willing to pay. To determine this cost, visit a search engine's advertising section and research the costs associated with your market. Once you determine the cost per visitor, factor in the average amount you would make per sale. The only piece of the puzzle that remains is how many visitors will need to enter your virtual shop in order for you to make one sale. You will never know the exact figure until you are in operation, but a conservative percentage to use for e-commerce is half of one percent or one sale per every two hundred visitors. If your average sale is one dollar and it costs five dollars to traffic enough visitors to your site in order to make that sale then you have a high risk of failure with your venture. On the other hand, if your average sale is five hundred dollars and it costs one hundred to traffic enough visitors to make that transaction occur, then you can expect a lower risk. Always mind that you have to figure in all of the other expenses associated with creating or purchasing the product. Also, there are a number of ways to maximize sales, the most widely used being the collection of visitor's data so ongoing marketing can occur.

Altogether, if your product is available in a number of non-web based outlets, the risk of starting your own outlet is high. It is less expensive to place your product with a site such as Amazon or Ebay. However, if the product is specialized, your risk is low. You can easily create and manage a site with a budget of fifteen hundred dollars. The key to this is making sure that you have shopped for the best price on every service and realistically calculated the amount of advertising needed to make a sale.

Now there is the issue of information or advertising based enterprises. With both of these types of enterprises you can assume that the risk is going to be high without doing any calculations. There are a few reasons for this. Information sales require a great deal more advertising and labor to operate. In addition, these web sites cost much more to design and implement due to their reliance on programming. The greatest risk factor follows simply from the nature of the web. Once someone gains access to the information you have spent time and money gathering, they can inexpensively publish it. This is not to say that it is impossible to make money selling information on the web. It simply takes a great deal of planning and implementation, along with a deeper knowledge of how e-commerce works than an article such as this is going to provide. The same is true for advertising. The companies that have been extremely successful with the launch of advertising based ventures have budgets in the millions and a large network already in place. Furthermore, selling advertising on the web is much different from selling it off of the web. Companies use a logical system for developing traffic to websites. If you are planning a venture based on either of these types of products then you need to develop a clear, comprehensive, strategy and expect to work from a large budget.

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