Forrester Research Inc. conducted a survey of online retailers and in addition to finding that most online retailers are doing better so far in 2010, they also discovered some fascinating information about what it costs to operate an online business. This information is extremely helpful to you as an online retailer because it helps you place your own costs into perspective and may lead to improvements in your processes.

Revenues

It is useful to look at costs in the context of revenues. This information allows you to get a sense of the size and scope of the retailers in the survey, compared to your business. Forrester found that the average order value was $183 and average number of items per order was three, suggesting that the average price of an online item for retailers in the survey was approximately $61. The survey also noted that six percent of retailer revenues comes from shipping fees, and one percent of revenue comes from gift cards.

Clearly, gift cards have not yet made much of an impact yet and at least some retailers are finding it possible to actually gain some revenue on shipping. This strategy may or may not be possible for you as an online retailer. The shipping issue is a hot one as shipping costs often become the reason for shopping cart abandonment. Many retailers discount shipping or at least pass along solely the actual costs in order to lessen the effects of shipping costs on purchase behavior.

Costs of online retail

As you know, there are many more costs associated with selling online that just the wholesale cost of the products being sold. Managing these overhead costs can make or break your ability to turn a profit. Forrester discovered the following average costs for some online retail overhead costs.

Cost category | Cost (dollar) | (percent) of order value |

Marketing cost per order: $14.30 | 7.8%
Fulfillment cost per order: $4.30 | 2.4%
Customer service cost per order: $8.15 | 3.5%

On a per item basis, there is $8.92 in marketing, fulfillment and customer service costs associated with each item sold (at $61/item).

Comparisons and strategies

How do these figures compare with your own data?

Marketing cost

Marketing costs can include pay per click fees, banner fees, paid links, costs of newsletter writing and distribution, email server costs and so on. This category represents the largest of the overhead costs studied but obviously the most important in terms of getting traffic to your site. You need to market; the question is, is your marketing effective and can you do it more efficiently? You can generally consider your marketing effective if some of your other data matched industry benchmarks such as no more than a 27% bounce rate and a 3.5% conversion rate. If you are not achieving these averages, you need to look at effectiveness.

It is also useful to know if you could be marketing more efficiently. You might look at your own business habits for a clue. Are you testing keyword routinely? Are you conducting A/B testing on your pay per click ads? Are you analyzing your web analytic data on a routine basis? If not, it is likely that you could get more efficient if you spent more time fine tuning your techniques.

Fulfillment costs

Fulfillment is a tricky business. Some retailers conduct their own fulfillment using the kitchen table and their family to pack and send their products. Others use a drop shipper that handles the entire fulfillment spectrum of services at a fee. Yet other retailers use some combination of employed staff and outsourced services. Since fulfillment is not only a cost, it is also a huge customer Viagra Professional service issue that can dramatically impact the possibility of return purchasing (the industry average is 28 percent return purchasing), you need to look at this issue both in terms of cost and in terms of quality.

Customer service

Customer service can be a staffed, 24 hour phone line, an email response within 24 hours or a set of FAQs. Your customer service costs can range dramatically depending on how much your customers need from you and that depends on the kind of product you are selling. The data here about customer service are interesting and a useful benchmark but this component of sales is very driven by your product. You can gauge whether you are spending enough to some extent by looking at your return rate (the industry average is 7 percent) and your return customer rate (shown above).

Benchmarking data is an invaluable way to understand how your business performs, and how you can improve it to generate higher profits.

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Category: Internet/E-Business
Keywords: online retail, ebusiness, ecommerce, increase sales, reduce costs, analysis, analyze, profits