Online Buying ecommerceNextBigWhat published an article about a year back, outlining the costs of setting up an eCommerce business in India

The market has evolved a lot since then. Marketplaces such as Shopo and Craftsvilla have gained traction. There is significant competition to MartJack in the form of Zepo, Shopnix etc. Several payment gateways such as PayU, PayTM and CitrusPay have really taken off. Payment solutions provider CCAvenue has introduced a small-business friendly starter plan. Logistics providers are improving.

Here is a look at what it is like to setup an ecommerce business in India now. 

The ‘business plan’ below is based on real-life experience from expanding an eCommerce operation from Shopo to Shopo + Zepo.

At the outset, let me clarify a few points:

» This article is not a commentary on either Shopo or Zepo or any of their competitors. [We have been pretty happy with both, if that helps]

» A storefront set up at a marketplace doesn’t necessarily have to be ‘Basic’

» A store set up with a SaaS provider doesn’t necessarily have to be ‘Small’

» The model outlined below would work best for products that are fairly unique or not widely available. E.g. designer apparel or handicrafts.

Most importantly, this is just a superficial model that considers only the ‘e’ part of eCommerce. The ‘Commerce’ part is the row highlighted in red. This is domain specific. Success or failure will depend on how well you manage your sourcing, operations and marketing so that it costs you less than Rs 500 per order while creating value worth more than Rs. 1000 per order for your customers. (The numbers are just examples).

Basic

Small

Medium

Scale

1 person operation out of home. Either as a hobby or as a side business

1 -2 person operation. Likely as a primary source of income

Serious business

Indicative Turnover

< 1 Lakh /month

1 – 10 Lakhs / month

10 – 100 Lakhs per month

Ave no. orders per month (@ ave size of Rs 1000)

50

500

5,000

Typical IT infrastructure

Online marketplace – E.g. Shopo, Craftsvilla

SaaS – E.g. Zepo, Martjack

Self-hosted on AWS, Rackspace etc. Software could be Magento or a similar product

Legal status and formalities

Proprietorship: PAN card, VAT / CST No.

Proprietorship: PAN card, VAT / CST No.

Pvt. Ltd. / LLC: VAT/CST, Accounts, Audits, Payroll

Payment Gateway

Not needed

Economy / Basic Plans – PayU, PayTM

Premium Plans – PayU, PayTM, CCAvenue, EBS

Shipping / Logistics

Retail rates

Small business account with negotiated rates

Discounted rates

Employee count (excluding founders)

0

< 5 (mostly temp / ad hoc skills)

5 – 10 (including professional skills – tech, marketing, accounting etc.)

Setup costs

Legal formalities

10,000

10,000

100,000

IT infrastructure

0

0 – 25,000

100,000 – 200,000

Office space (Assuming Hyderabad)

0

15,000 – 30,000

30,000 – 60,000

Payment gateway

0

0 – 6,000

20,000 – 40,000

Operating capital – (3 month fixed operating costs + 15 days variable operating costs)

Rs 20 – 25K

Rs. 3 – 4 Lakhs

Rs 34 – 38 Lakhs

Total initial investment

Rs. 30 – 35K

Rs. 3.25 – 5 Lakhs

Rs. 36 – 42 Lakhs

Ongoing fixed costs (monthly)

Employee salaries

0

20,000

500,000

IT infrastructure

0

1000 – 10,000

5,000 – 10,000

Office rental

0

5,000 – 10,000

10,000 – 20,000

Utilities (Power, Internet, Maintenance)

0

2,000 – 5,000

4,000 – 10,000

Payment gateway

0

0 – 200

200 – 1000

Total ongoing fixed costs

0

28,000 – 45,000

520,000 – 550,000

Ongoing variable costs

Sourcing / manufacturing
(Assuming 100% markup)

500

500

500

Shipping

100 – 150 per order

60 – 100 per order

30 – 60 per order

Photography
(~ 5 orders / product)

0 – 100 per product

0 – 20 per order

200 – 500 per product

40 – 100 per order

200 – 500 per product

40 – 100 per order

Marketing

0 (Assuming the marketplace handles this)

250 per order
(Assuming CPC of Rs 10, Conversion rate of 2%, 50% paid traffic)

125 per order
(Assuming CPC of Rs 10, Conversion rate of 2%, 25% paid traffic)

Transaction costs

150 – 200
15 – 20% charged by marketplaces

50 – 70 per order
5 – 7% charged by payment gateways. CoD & Paypal not considered

20 – 40 per order
2 – 4% charged by payment gateways. CoD & Paypal not considered

Total cost per order

750 – 950

900 – 1050

750 – 850

 

Gross margin / order

150 – 250

-50  – 100

150 – 250

Operating margin / order

150 – 250

-100 – 50

50 – 150

Total profit

7,500 – 12,500

-50,000 – 25,000

250,000 – 750,000

 

Summary

» Zero fixed costs means risk of losing money is low.

» Margin is not highly dependent on order size (within certain limits)

» Hard to scale since you will not be spending money on SEO / marketing (if you plan to, you are better off building your own website)

» Average order size of less than Rs 1000 will most likely mean losses for new sites where proportion of paid traffic is high.

» This can be overcome if the sourcing costs are low (E.g. if you are selling your own paintings) or markup is high (E.g. designer wear)

» Marketing cost will come down after 3-4 months as you build a base of loyal customers

» You are in business if you have reached this scale.

» Fixed costs are mostly salaries. Need to plan your hiring well.

About the Author
Haribabu Thilakar has been in the software services industry  for 17 years, and has worked for Infosys, Kanbay and UnitedHealth Group. His current focus is on Data & Analytics. Ecommerce is a side interest of his which was first ignited while he was managing a large program for a retail giant, and flared up recently while he was helping his wife set up her online store. You can catch him on Quora here.