Why Your E-commerce Store Needs a Business Plan from the Start
Over the last few decades, e-commerce has grown from relative obscurity into a veritable retail powerhouse. Statista reports that e-commerce was responsible for around $2.3 trillion in sales in 2017, an impressive number given the fact that e-commerce only accounted for about 10 percent of total retail sales that same year.
In general, an “e-commerce” business is any company that provides goods or services over the internet. The term encompasses myriad businesses and stores, from individuals who operate under the banner of eBay, Etsy, or Amazon, as well as innovative startups including digital marketing agencies and Steelo Sports, a baseball glove manufacturer.
If you’re looking to enter the world of e-commerce, you should take a page from Steelo (and countless other successful startups) and craft a business plan prior to launch. Especially in the wake of the U.S. Supreme Court June 2018’s decision in South Dakota v. Wayfair Inc., which gives states more authority to collect sales tax for online transactions, having a concrete business plan in place is essential.
This article will discuss Wayfair in further detail below, as well as the components of a strong e-commerce business plan.
Table of Contents
- 1 Crafting a Realistic E-commerce Business Plan
- 2 Essential Components of an Online Store Business Plan
- 3 How South Dakota v. Wayfair Will Impact E-commerce Sales Tax
- 4 Final Thoughts
Crafting a Realistic E-commerce Business Plan
An e-commerce business plan will help you lay out your goals and determine how realistic your startup idea is. It also serves as a sort of blueprint for your business, similar to the small business plan of a brick-and-mortar store.
Your startup business plan template should answer a variety of questions, including:
- What are your short-term and long-term business goals?
- What is your target consumer group?
- What are the e-commerce sales tax laws in your state?
- Is your startup idea based on a trend, or does it have lasting potential?
These were some of the questions Steve Friend, founder of Steelo Sports, asked himself when his company was just an idea in his head. Friend, who played baseball professionally for the Texas Rangers before entering the world of corporate sports e-commerce, clearly laid out his goals from the start.
“Being able to provide a premium quality glove from one of the top glove manufacturers in the world, while also providing an industry leading customer focused e-commerce experience will give us the foundation we need to attack the market and grow our business, player by player, on all levels,” Friend told Get News in 2016.
Two years later, his brand made history as MLB’s first African-American owned baseball glove company.
And it all started with a smart and pragmatic e-commerce business plan.
Essential Components of an Online Store Business Plan
Whether your startup is looking to tap into a market dominated by a single competitor, or you’re up against a large number of online sellers catering to your target audience, your first step is research, and lots of it.
It’s never a good idea to go into business without knowing what you’re up against. You should have realistic expectations regarding expected profit, consumer demand, and trends within your market niche. This type of information is the foundation of any business launch.
Calculating Market Potential
At its core, market potential is an estimate of the amount of money you expect to make from your proposed service or product. There are a number of useful formulas that can be used to determine market potential. Researchers at North Carolina State University, for example, use the following formula:
MP = N × MS × P × Q
MP = market potential
N = total number of potential consumers
MS = market share (percentage of consumers buying from you)
P = average selling price
Q = average annual consumption
Those numbers may be fluid, or they may vary drastically depending on the season and/or the overall state of the economy. Further, the number of potential consumers in a given market can be determined based on numerous factors, including age, gender, household income, race/ethnicity, and more.
Identifying Market Trends
Consumers are fickle in virtually every industry; thus, understanding market trends and consumer habits is integral to every startup business plan.
Market research will help you identify market trends and build the business plan for your online shop or e-commerce store. You can either perform the research yourself with potential customers, a practice known as primary research, or refer to information provided by outside entities, such as research groups.
Marketing professionals also recommended that those conducting market research read blogs and industry-specific publications as often as possible. This practice will help you gain a well-rounded perspective on your industry, form a variety of reliable sources.
Short- and Long-term Goals
Your e-commerce store goals are deeply personal, and they can change over time. Although the future of any online startup is uncertain, it’s essential to lay out your short- and long-term goals in your plan. Long-term goals should span the entire projected life of your company, including the expected growth of your startup, culminating with its potential sale to a conglomerate.
As for the short-term goals laid out in your e-commerce business plan, include provisions that account for any potential sales slumps or significant market changes.
How South Dakota v. Wayfair Will Impact E-commerce Sales Tax
South Dakota v. Wayfair Inc. was decided on June 21, 2018, and it effectively changed the e-commerce landscape. Prior to the decision, online and other remote sellers were not obligated to collect state sales tax from their customers if their business was not physically located in the state where the sale occurred.
The Wayfair decision overturned 1992’s Quill Corp. v. North Dakota, with a Supreme Court decision of 5-4. Modern e-commerce “does not align” with the physical storefront requirements of Quill, Justice Anthony Kennedy wrote in his majority Wayfair opinion.
Indeed, the commodities market has changed drastically since 1992: The online marketplace giants Amazon and eBay, founded in 1994 and 1995 respectively, were not even on the radar at the time of the Quill decision.
Quill Corp. v. North Dakota
The Quill Corporation, a Delaware-based office supply chain that has since been purchased by Staples, operated a mail-order business that was immensely successful throughout the 1980s. As of 1986, Quill’s revenues totaled about $180 million. The following year, the North Dakota Office of State Tax Commissioner demanded state sales tax from the company for sales made by customers within North Dakota state lines. Quill challenged the state, and the case went before the U.S. Supreme Court in 1992.
In a unanimous decision, the Court sided with Quill. The Dormant Commerce Clause was cited as the reason for the Quill decision, as the clause effectively blocked individual states from “interfering” with interstate commerce.
Prior to the landmark Wayfair decision, only one state required e-commerce stores to collect sales tax: New York. The Empire State passed its “Amazon law” in 2008, which mandates retailers based out of state to collect and remit sales tax, but only if that company made more than $10,000 in affiliate sales on an annual basis.
Several other states followed New York’s lead, including California, Rhode Island, and Colorado.
Further, five states will not be affected by the e-commerce sales tax requirements of Wayfair, as those states do not collect sales tax:
- New Hampshire
When putting together your online store business plan, understanding individual state tax requirements is essential so that you don’t find yourself in hot water down the road.
Sales Tax Policies of Online Platforms
If you operate an online store under the blanket of a major platform, such as Etsy, eBay, or Amazon, you are considered a “third-party” seller. The tax collection procedure of each platform varies, and you should consult with that particular merchant for specific regulations. Etsy provides a comprehensive handbook on collecting state sales tax as a seller while Amazon calculates and collect taxes on behalf of its third-party sellers.
Whether you’re the founder of a startup or hope to operate a high-performing Etsy store, having a business plan in place from the outset is necessary. Once you have a solid product or service idea in place, your work is just beginning. Start by researching your market, identifying trends, and calculating market potential. Determine your goals, both in the short-term and over the long haul. And always keep your eye out for situations and events that could impact the profitability or scope of your business, such as the Wayfair decision.
Image Source: https://www.pexels.com/
This post was updated February 28, 2019. It was originally published September 25, 2018.