What your Ecommerce Sales Need to be to Justify using Magento?
Magento is the dominant platform for those who are serious about ecommerce. When implemented correctly, the sites are fast with a huge range of options for marketing, flexibility for integration and scope for evolving and scaling to any size of business. Unfortunately, all that flexibility and power expressed through the 3 million+ lines of open source code (ref) comes at a price. Magento sites are typically more expensive to develop, maintain and host. The consequence is that Magento is not the best fit for every type of online business. This article aims to approach the problem from the point of view of business turnover.
The rough cost for establishing an ecommerce business is:
Website + Staff + Hosting/Maintenance + Marketing + Support
Website: I typed “how much does a magento site cost” into Google. The answer came back as $20k-$42k for a basic site for a startup. The main factor that can cause costs to escalate is integration with any back-end or third party applications such as accounts or warehousing software. We know of examples where back-end integration has cost as much as the basic website itself. The other factor is migration. Almost all agencies that claim to offer a ‘full Magento service’ make a mess of the SEO migration. This can cause serious damage to an existing business (ref). Finally, the costs outlined so far are for a site that makes use of a standard design. Customisation work either to the appearance or the functionality of the site can again escalate costs.
Staff Salary: Ecommerce businesses don’t run by themselves. The bare minimum is to have one person whose full time job is to do all that’s necessary to add products and product details, check prices, answer queries and live chat, assist with service and coordinate the various third parties. As a bare minimum you probably need to consider an allocation of £30k for this for the year to cover the salary and overheads.
Hosting and Maintenance: It’s possible to make Magento sites run fast and to be very secure. These two items can be costly given that good performance and security are must-have requirements. Realistically, you probably need around £500 per month as a minimum to cover both items for low-traffic businesses. An important, often overlooked, component of maintenance is the patching and upgrading that’s essential if the site is to remain secure. Some sites may contain dozens of specialised plugins and each of these will require regular upgrading and patching. The key point here is that the more complicated the site, the more effort and cost that’s required for its maintenance.
Marketing: However good the site is, the ecommerce business will make no money unless it gets visitors. If you’re a startup then you can’t afford to wait many months for SEO to kick in plus you have no strong opt-in database of existing customers who have bought from you before. Apart from a few rare exceptions, don’t expect to rely on social media for high volumes of traffic (ref, ref). What you are left with is Paid advertising such as Google Adwords. If this is done correctly with well constructed pages for products, categories and general information, you will rank well and also match customers searches more accurately.
Because we are trying to estimate the minimum size of business needed to justify a Magento platform I have assumed a zero spend for support and development. Of the large number of ecommerce websites that we have built I’m struggling to think of a single one where, in the first year of operation, there has not been a need for at least some resource here.
So, let’s use all of the above to try to work out a ball-park figure that your business will need to turnover if you are to balance the books in year one.
If we assume that everything to do with getting the website launched is a conservative £30k minimum. Then assume an equally conservative £30k in salary/overhead costs and also assume that the investment costs for social media, SEO, marketplace setup, SSL certificate, plugins and domain names etc are all covered by an absolute minimum of £10k with a £5k contingency.
Let’s also assume that your final net profit margin is 20% — i.e. to earn £25k you need to turnover £100k in sales. So, to cover the £75k of first year investment costs you would need to generate £450k (£375k+£75k) in ecommerce sales. There are plenty of smaller items of cost such as setting up the email marketing, product photography and training that should get built into any plan for online business. All in all this would mean that your accounts would need to show something approaching half a million Pounds of business turnover before you started to make any money at all. Although small startups will always find creative ways to shave costs and squeeze business performance.
Depending upon the business model adopted, it’s likely that the worst-case cash flow position for a minimal Magento venture would be -£100k. With a strong focus around marketing and sales and with competitive products the worst cashflow position would probably take place around six months after launch. The exact shape of the accounts can be engineered depending on the level of business ambition adopted by the company.
Before you get too worried about ecommerce being a high-stakes game, remember that once all the marketing channels such as SEO start to kick-in then the net margins will start to increase. On top of that, paid marketing, if done correctly, will provide a low-risk predictable Return On Investment that can be easily scaled. If Adwords consistently generate a good profit then the quickest way to move the entire project into profit is simply to invest more money on paid marketing.
This article was first published on INDEZ on 20th March 2017.