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Do online businesses have lower startup costs?


Most online businesses do have lower startup costs, but it can depend on the kind of business you're starting.
Most online businesses do have lower startup costs, but it can depend on the kind of business you're starting.
Big Cheese Photo/ThinkStock

Most people assume that online businesses have lower startup costs, but is this really true? Often, yes — but it depends on the kind of business you're starting. An artist with an Etsy shop should have lower startup costs than a jeweler looking to open a boutique at the local mall. On the other hand, a guy who wants to open a physical watch repair shop might have lower startup costs than an online entrepreneur trying to launch the world's next great technology.

The Wall Street Journal, in a 2010 article called "Start-Ups on a Shoestring," introduced three low-cost Internet startup success stories. One story featured Kael Robinson, who started her online business, Live Worldly, LLC, with only $40. During a vacation to Argentina in 2007, Robinson noticed that everyone seemed to be wearing a simple woven "wish" bracelet. The idea was, you'd make a wish while tying on your bracelet and by the time the bracelet disintegrated, your wish would come true. Recently laid off from her public-relations job, Robinson had some time on her hands. She bought 100 woven wish bracelets wholesale for $40, and — through word of mouth — sold them for $2.50 each. By 2008, Robinson had earned enough to launch her business online with a sophisticated, professionally designed marketplace. By 2009, Live Worldly had expanded its catalog to include jewelry and apparel from all over the globe, and was selling its products online and in more than 500 shops worldwide [source: Debaise].

By contrast, Webvan, a doomed online grocery-delivery service launched in the Internet's early days, is a prime example of an online company with unnecessarily high startup costs. Whereas Live Worldly started small, ensured there was a market for its products before launching and scaled up slowly, Webvan raised millions of dollars in venture capital on the unproven promise that it could deliver upmarket goods for mass-market prices, built its own infrastructure from scratch and launched services in 10 cities before its spectacular flameout.

Online businesses often can have lower startup costs than brick-and-mortar businesses, but even online startups can require substantial investment. Website development costs can range from nothing to more than $5,000 for a simple informational site to hundreds of thousands of dollars for a customized online marketplace. Fast Company estimates that a new business owner might reasonably expect to pay close to $200,000 over six months to develop an online marketplace from scratch [source: Chowdhury].

Cash-conscious startups will want to explore templated e-commerce solutions like Shopify or Magento, as these platforms are less expensive than developing an online marketplace from scratch. In addition to one-time costs, such as setting up your website and designing basic marketing materials, you'll also want to budget for fixed expenses like rent, utilities and website maintenance, as well as variable expenses, like shipping or sales commissions. The U.S. Small Business Administration can help you estimate startup costs, and if you click over to the next page, we've put together a collection of resources that will help you gauge the real costs of starting an Internet business.


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