Is eCommerce profitable in Australia?

Oath!

(For the non Aussies, yes.)

However, as with any business it depends how you run it.

Remember an eCommerce store isn’t just a website. Your business needs to be set up in a way that allows you to make a profit.

(You know taking more money than it costs to sell stuff)

What profit margins can you make?

The term profit gets thrown around a lot. It has many different meanings, and can be before or after taxes and include other costs etc.

So lets define what profit is for an Australian based eCommerce business.

Our geeky accountant friends call it “Net Profit”. That is the money left after everything is paid for except for income or corporation tax.

I say income or corporation tax, because this depends on your businesses setup (sole trader, limited company, partnership etc).

Just to hammer home the point, Net Profit is profit left on paper (not cash in the bank, which is different) after all expenses are paid for.

In an eCommerce business, the main expenses are…

  • Paying for the product (Cost of Goods Sold COGS)
  • Getting the product to your warehouse
  • Advertising
  • Website fees
  • Staff
  • Delivery
  • Office/warehouse rent
  • Accountants and other “professional” fees

To name a few, but there are others, depending on your business.

Yeah, yeah, yeah we get it, what percentage can you make?

I’ve seen good eCommerce businesses consistently make a net profit of between 5% – 25% (And lots of badly run ones lose money).

For example, if the eCommerce business sells $1,000,000 AUD a year (It’s always AUD because Boom Ecommerce is about helping Aussie eCommerce businesses), then they are making a Net Profit of between $50,000 and $300,000 a year.

The (Net) Profit margin depends on your eCommerce setup.

Successful eCommerce businesses with high volume sales often make lower margins. For example, Amazon is all about growth and its net profit margin in 2019 was 3.6%.

But lets face it most people reading this aren’t Amazon (If you’re reading this, Hi Jeff).

Lower volume business can achieve high profit margins, this is where you see the 15% + profit margin businesses.

More on those types of businesses later in the post.

Ecommerce business types

Not all eCommerce business are the same. The profit and longevity of them often depends on the business model.

What is the point of making 40% profit margin for 2 months, when you can make 25% for 5 years!

If you’re all about the get rich quick scheme dream, you might as well stop reading now. We’re dealing with reality here, not Insta ads selling you the dream of a no work lots of cash business.

With that out of the way, lets look at some different eCommerce business models and the profit they can make.

Dropshipping – Bad

It sounds simple, all you do is find a product someone else has made (normally on Alibaba). Set up a website, run some ads, cross your fingers and hope you sell loads.

You’re aiming at high volume sales (if it’s high margin, everyone and their dog copies you. Then you end up competing on price which ends up in a race to the bottom on price).

If you’re lucky, after all your costs (mainly advertising) there is some money left. In most cases not because you’re dealing with 1%-9% profit margins.

Then you’ll have to deal with all the angry customers who have been waiting a month or more for the product they fell in love with on Insta because dropshipping delivery times are REALLY slow.

You may be sensing I’m not a fan of this type of eCommerce business? You’d be right, it’s not a sustainable business model, it’s get a rich quick scheme that works for less than 1% of people.

That in my humble opinion isn’t a business.

Great article here by Wired UK from a drop shipper on the reality of it.

Reselling – Better

You buy products from brands and resell it. For example, Footlocker is a reseller (mainly). They buy Nike and sell them.

The amount they make from each sale is less because Nike has to make a profit too. Foot Locker doesn’t have to to pay for all the advertising, Nike does that and creates the demand.

Although this eCommerce business model is vastly better than drop shipping and very common, you’re competing with other eCommerce businesses that sell the same product.

The challenge here is eCommerce businesses often resort to discounting to sell, which reduces your profit margins and profits.

Add to that, it’s easy for the product manufacturers to sell direct. Nike announced in Aug 2020 it was starting to shut down wholesale accounts. This shows a clear intention to cut out the resellers.

Not ideal, but all being well you can get 10% – 15% net profit margins.

$1,000,000 in sales $150,000 profit on top of what you have paid yourself (depending how you structure your business, there is always a “depends” with accounting!)

Direct To Consumer (DTC aka making and selling directly) – Best

Get it made, sell it directly online.

An example of this is All Birds. If you haven’t heard of them they make stylish, comfy and environmentally friendly shoes.

Then sell them gloably through their site.

Because they cut out the middle men, manufacturing brands (i.e. a Nike) and the retailer (i.e. a Foot Locker) they get their product for cheaper and control the price (very few other sell them, so less competing on price).

They do have to deal with the manufacturing, but that has become much easier these days.

These Direct To Consumer brands, if run well and aren’t spending everything on growing, can get sustainable profit margins of 15% – 25%.

Another poster child DTC eCommerce business is Gym Shark, which is a well built profitable business.

If you want to know more about Gym Shark there is a great review by Jason Andrews from SBO (Specialist eCommerce accountant in Brisbane).

Hello to you Direct To Consumer eCommerce business model!

Why is DTC (making and selling directly) the best eCommerce business model?

In summary of above…
(You read all of the above right?)

Better more sustainable Gross Margins which allow you to pay your other bills like staff rent and marketing and still have money left for profit.

Is Australia a good place to run an eCommerce business?

Yes, but it does have some challenges compared to other English speaking countries.

On the plus side

  • Less competition
    The population of Australian in 2020 is 26 million, which is significantly less than other English speaking countries, so the basic economics means there is less competition, lowering advertising costs and choice of products for customers.
  • Less savvy competitors compared to the US and UK
    When I first arrived in Australia in 2011 I was amazed at how little eCommerce activity was happening, especially from big retailers.

    Things have changed since then, but the competition here in Australia generally isn’t as savvy (don’t take that as slur, I love being an Aussie citizen). This means you can take inspiration from overseas and be one of the first people to do it here.

On the negative side

  • Population is smaller
    The pool of people we get to sell to is smaller, so if you just sell in Australia your growth will be limited. Not a bad thing but if you have a low margin product that you need to sell high volume of, you’ll need to expand overseas.
  • Delivery is difficult
    S’traya, she is a big old place. In fact, it’s roughly the size of Europe. This makes it difficult to delivery quickly and cheaply, which is key for eCommerce success.
  • Less people shop online
    The COVID pandemic in 2020 has changed this, but the percentage of online shoppers in Australia is still behind the UK and US.

Do I need a big eCommerce business to be profitable?

To the contrary, big eCommerce business can be very unprofitable.

Large eCommerce businesses have this strange fascination with growing really quickly (I think they get jealous of software businesses that can scale quickly).

To grow quickly they spend a lot on advertising which often means they lose money.

They justify this with saying we’re worth $X.XXX,XXX because someone bought 10% of our business that is losing money for $XXX,XXX.

Koala mattresses in 2018 was a very good example of that, they were losing money on revenue of $40m (AUD) See this AFR article.

How can I make sure my Aussie eCommerce business is profitable?

5 main areas you need to get right…

  1. Have a product that people want (Duh)
  2. Use the right technology for your needs (Your nephew can’t or won’t build it for free)
  3. Have a healthy gross profit margin
  4. Make sure target customers see it (promote it)
  5. Hold stock in Australia so you can deliver quickly (Customers don’t like waiting)

If you want to learn more about these 5 areas, sign up for the Boom No BS Ecommerce Tips.

Who you need on your eCommerce team

You can’t build a great Aussie eCommerce business without a little help.

But what type of team do you need?

Choose people who get your brand/product

Anyone who uses or has a genuine interest in your product will understand what customers want, because they are customers! This will help your eCommerce business serve customers better.

“Serving customers better” is often said, but rarely done. This will become your competitive advantage as eCommerce gets more and more competitive.

Ecommerce really clicked for me when I started working for Billabong. As a skateboarder and snowboarder, I was the target customer. This helped me apply my technical eCommerce knowledge to a brand I understood.

They can be based anywhere

Long gone are the days you could only work with people driving distance from the office. With remote working becoming the norm, you have the whole of Australia or wider to choose from.

Aren’t “Experts” expensive?

“Experts” tend to be technical experts, i.e. Facebook marketers. Too much importance is put on this.

You need experts on your customers who are good at solving problems.

They can learn Facebook marketing (plenty of good free courses out there) or good customer service.

What about overseas?

Like most things in life, it’s all how you do it.

We’ve all heard the horror stories, but it can work really well.

Need a specific technical skill like website coding and know exactly what you want? Someone overseas who is cheaper can be a good way to go.

However, you can’t expect a Philippino who has only lived in Manila to write a useful guide on where to walk a dog in Perth.

It’d be like me writing about the best dog walking locations in Russia. I’ve never been and don’t have a dog!

Do I need full time employees?

No, not for every position. You can have contractors for things like advertising, web development and quality assurance in the factories.

How do you expand eCommerce sales from S’traya to the US?

Ah the old good US of A. The home of fast food and over confidence.

They speak the same language as us Aussies, so surely we just turn on some Google Ads in the US and off we go?

Wrong.

Successfully expanding sales to the US is a big job.

You’re smart, so you’re selling products you stock meaning you can deliver quickly (because drop shipping is only for galahs who think they can get rich because someone on a Facey ad they said you could, and why would they lie?). Delivering quickly keeps customers happy and coming back.

Therefore to sell in the US you need stock there. Which means splitting the stock you hold here in Australia, which will limit your sale here.

Selling to 50 countries

Selling to US is like selling to 50 different countries. Each state has different import and tax rules. There is this really painful thing called Nexus, which basically means you collect the US equivalent of GST for each 50 states you sell in.

If you’re massive fan of paper work and bureaucracy then it’s right up you street. Otherwise, avoid untill you can.

Also there is 328,000,000 (thats million) people in the US. If you decide to launch Facey ads with a $1,000 budget for the month “to see how it goes” you’re going to be very disappointed.

That adspend isn’t going to go far, it will be spread too thin.

It will be about as effective as trying to put out a bush fire by pissing on it!

Are you ready to start selling in the US?

This is the real question you want to ask.

Have you maxed out all sales in Australia first? Has this generated a large pot of cash to buy more stock and run some big ad campaigns there to test if yanks want to buy from you?

If the answer is no, then I highly recommend you don’t start focusing on the US until you have done the above.

I’ve seen a lot of eCommerce businesses (very well known brands here) try and fail, because they under estimated the scale of the challenge.

Is your store suited to the US?

I often joke on Boom Ecommerce that yanks just want to teach Aussies to sell thigh masters via drop shipping.

Us Aussie are more genuine. After living in the US I saw first hand how different the culture is there and what buyers respond to.

For example, in most cases people in the US won’t care that it’s Aussie made, although that can work well here. You’re sales pitch often has to be over confident and loud.

Unless you have a uniquely Aussie product that yanks want, it’s basically like starting all over again.

Remember how hard that was setting up and find the sweet spot to grow you business here?

I’m not saying don’t do, but just realise what a huge undertaking it is selling in the US from Australia.

How to start selling in the US

Firstly you’ll need a US version of your site. Because the good old US have come up with their own version of English, it’s called English US.

In S’tray we use Commonwealth English or English UK.

Side note, when I lived in the US someone asked me where my accent was from, I said England (I grew up there), they then asked me where I learnt English!!!!!

If your website says your product “colour” is X, they will think you have typos. They spell it “color”.

US dates are month/day/year, not day/month/year.

Another side note, my birth is on the 16th of the month. I went to a bar, they ID’d me and said you have a fake ID, there is no 16th month!

As I said, the US is different to S’traya.

So you have a dedicated US site, with…

  • English US
  • US Dollars
  • Stock in the US
  • US brand propositions that appeal to them
  • Customer support that works US hours

Now you need to start running ads to get traffic. Pick a state that you have already made sales in organically (they just found you and somehow managed to order from you paying more for shipping than the actual product, you know the ones).

Limit your ad targeting to that state or city.

Make sure you do loads of remarketing as most people won’t of heard of you and will need some convincing.

Run it for 2 months and see what lands.

If you make sales, scale ad spend and expand other marketing.

If you don’t make significant sales you’ll need to find out why US consumers don’t want to buy from you. Which is literally the million dollar question, and never easy to answer.

How to forecast startup DTC eCommerce sales and costs?

You know what to sell, the site is being setup or you’re already trading.

But how much revenue will your Direct To Consumer (DTC) eCommerce brand do and what will your expenses be?

Excel is demanding answers, and your pulling more figures out of the air than Trump!

Sound familiar?

You’re not a lone. To make things worse it’s the most important thing you’ll do in your eCommerce business.

However, to create an accurate forecast you need previous sales data.

If you’re a start up, you don’t have that.

Bugger.

Start up DTC brands need to take a different approach to forecasting

Ideally you’d know your eCommerce conversion rate and how many visitors you can get with all your marketing activity (you have a marketing plan right, course you do).

However, until you start selling you won’t know these figures, and averages, in this case, are about as useful as a drunk bogan at an economics convention. Entertaining but ultimately a distraction.

Every site performs very differently.

You’ve told me all the things I can’t do, what is the answer?

All smart DTC eCommerce sites buy and hold stock so they have higher margins and quick delivery times.

If you’re drop shipping I suggest you pay an online guru who works from a hammock far to much money to help you and find out it doesn’t work. See you in 6 months.

Anyway, you have or need to commit to certain amount of stock. The more stock you buy the greater the opportunity for sales.

Buuuuuut the more stock you buy the greater the risk.

Time to put on the big girl/boy pants and commit some cash. Otherwise this thing will never work.

Take your stock cost amount (what you paid for it), lets just says it’s $10,000AUD (At Boom Ecommerce it’s always AUD, because we’re about helping Aussie Ecommerce stores).

Work out how much you plan to sell that stock for. Lets say your gross margin is 50% your retail value is $20,000AUD.

You can only sell the stock you have, so until you order more, your revenue will be $20,000AUD.

Now split that into months.

The amount of months will be depend on how aggressive your marketing is.

If your approach is “I’ll build my site and they will come”, then forecast those sales to be over 120 months or 10 years. Because unless you get so lucky that you should buy a lottery ticket, you won’t be selling much anytime soon.

Not sure where to advertise? Watch this Youtube video on “Where to advertise your eCommerce business in Australia” (That’s me in the video, hi Mum!).

Back to the forecasting.

You should now have sales by month for the stock you have, but what are your other major costs?

  • Advertising
  • Technology fees (Shopify, Xero etc)
  • Staff or warehouse fees
  • GST and other super fun taxes
  • Usual business costs

These will vary on your setup.

How much you spend on advertising will depend on your Gross Margin and how aggressive you want to be.

After 3 months of trading you’ll have some data to work with that will make for better forecasts.

If you’re not sure of any of the figures (start-up eCommerce costs or % of marketing spend to revenue) or terminology i.e. Gross Margin, how much you’ll need to get your DTC eCommerce business started, signup for the Boom Ecommerce Training course. It has everything you need to know.

Forecasting sales accurately is ESSENTIAL in eCommerce

You want to sell as much as you can.

Sell too much, you’ll run out of stock.

Run out of stock, no cash flow.

Bad

Sell too little, your cash will be tied up in stock.

Bad

The most important activity in any eCommerce business in getting your sales forecast right.

It dicates how much stock to buy and when.

How much you can spend on adverting.

Who you can hire.

The list goes on.

Don’t skip it or half arse it.

Dedicate time to getting it right.

Your future self will thank you.

You don’t just want growth from Facey and Insta Ads…

Most people reading this will be getting help with Facebook and Instagram Ads. On the surface you want sales to explode.

Explosions are exciting.

However, what you really need is sustained growth or results.

Facebook and Instagram can struggle with this due to the way it’s algorithm works.

The best thing you can ask of your Facebook and Instagram ad person is consistent results.

A consistent Return On Ad Spend (ROAS), or Cost Per Acquisition (CPA).

Consistency allows you to forecast sales and stock better.

Consistency builds solid businesses that consistency generates returns for owners.

Challenge your Facebook and Instagram person for consistent results.

If they can’t it’s time to move on.

Aussie Ecommerce Podcast

There is no end of eCommerce advice from the yanks.

Normally how to sell thigh masters via drop shipping (which is about as useful as tits on a bull) and they generally like to tell you how awesome they think they are.

Let’s face it, we’re not the US.

Here at Boom Ecommerce we’re all about helping Aussie eCommerce businesses.

When we discovered the Add To Cart podcast which is produced here in S’traya, we were pretty excited.

Learn from Shopify APAC team and other eCommerce professionals who work here.

It’s a gold mine of insights, treat yourself.


Australian Ecommerce Podcast Add To Cart

What are Australians buying online?

Setting up an eCommerce store or looking to expand your product range, but not sure what to sell, you’re in the right place.

A quick and easy way to find out what Australians want is looking at what they are searching for. Google Trends is a good way to do this.

Below is data from Google Trends comparing searches in Australia for two products water bottles and dog treadmills over a 5 year period.

Water bottles searches compared to dog treadmills

It shows us more Australians are interested in water bottles than dog treadmills. On top of that water bottle searches are growing year on year.

Why are you comparing water bottles to dog treadmills?

I use dog treadmills as an example product, just because I find them ridiculous!

How to use Google data to pick an eCommerce product

Go to Google trends type in the product you’re thinking of selling and compare it to other products that sell well.

You have to compare at least two product as Google Trends doesn’t give you exact search volumes, just comparatively if it’s up or down.

The geeks call this indexing, but that doesn’t really explain what it is to us non-techies.

If there’s a lot of search demand in Google (which 95% of Australian searchers use) then you’re probably on to something.

What if I don’t know what I want to sell?

Firstly I’d suggest selling you normally buy. That will help you understand the market (as you’re selling to more people like yourself).

However Google does offer more insight into what Australians are actually buying. You’ll need to setup something called a Merchant Centre account. It’s free, but will take a bit longer to get the data than using Google Trends.

If that sounds like hard work, you’re probably not cut out for eCommerce. Although it can be rewarding it’s not the easy option the gurus on Facebook and Instagram would have you believe.

If you’re serious about eCommerce, read on.

Buying trends from Google Merchant Centre

At the time of writing (July 2020) these are the most sort after Fashion and Apparel products in Australia online…

Or best selling brands in electronics in Australia (again for July 2020)

Best selling online brands in Australia July 2020

(No surprises with Apple)

How do I access Australian eCommerce best seller list?

Another good question.

Step 1
You need to create a Google Merchant account. Normally have to do this to run Google Shopping ads, so you may already have one.

If you don’t there are instructions on how to setup one here.

Step 2
Once you have access to a Google Merchant Centre go to…

Growth > Best Sellers > Australia > Select Product Category

Where to find best selling product categories in Google

Now you can easily see what Australians are buying online by different product category and work out how to expand your product range or start something new.

A word of warning

Popular means competitive. Competitive means expensive. If you want to find out how successful eCommerce brands pick products sign up for Boom Ecommerce tips.

Get Australian Ecommerce Tips

Should you quote plus GST on eCommerce pricing?

Firstly you should consult your accountant, and this shouldn’t be taken as financial advice.

Quick GST Refresher

Having said that, here are some basic things about GST.

If your business entity has revenue over $75k AUD in any tax year (July 1st – June 30th) then you will have to pay GST to the ATO in most cases.

More details on the fun subject that is GST here.

Should you add GST to the retail price?

With that out of that way, how should display charging GST to your eCommerce customers?

A mistake we often see here at Boom Ecommerce is eCommerce stores adding GST to the displayed price of a product. For example…

$99.00 +GST

When a business is selling to another business (aka B2B) that is expected, because the business can often claim it back.

However, when selling directly to a consumer, they can’t claim it back. Therefore $99.00 becomes $108.90.

Even though you have been upfront with your customer the price is plus GST and not everyone buying from you understands GST.

Therefore if you’re selling directly to a consumer (i.e. not a business) always quote your prices including GST.

It will save your customer service head aches later on.

Why do eCommerce businesses quote prices plus GST?

Many business owners are used to dealing with GST. 

They are essentially collecting a 10% tax on everything sold in Australia then passing it straight to the tax office minus any GST they have paid for things they need to run their business.

Because of that, they never like to include GST in their revenue and charge it on top of the product price.

The issue is, end consumers don’t understand GST as well as them and it leads to confusion.

Long and short of it, if you’re selling to consumers include GST in your pricing to avoid annoying your customers.

Is Ecommerce A Passive Income?

In short no. 

Passive income or businesses require very little input after being setup. Ecommerce businesses that last more then a few months require careful management, no matter what team and processes you put in place.

An example of a passive income is stocks and shares, for example you could buy an Exchange Traded Fund (Company buys all the top stocks in Australia, charges a tiny fee and you get the returns). With an ETF all you have todo is buy it, keep an eye on how it’s doing then report it in your taxes each year.

That is a passive for or income.

Ecommerce businesses aren’t passive. In a usual month you’ll typically need todo the following…

  1. Upload new products
  2. Write new products descriptions
  3. Setup or manage advertising campaigns
  4. Respond to customer enquires your team can’t handle
  5. Make sure your site is uptodate (WooCommerce needs constant security updates)
  6. Order new stock
  7. Process returns (Some fashion stores get 40% returns)
  8. Quality check manufacturing
  9. Manage cash flow to pay for everything

Even if you have someone or an agency helping you do each of these, you’ll have to manage all of them.

 

Is Ecommerce A Good Business Model?

If done correctly yes. They can generate a lot of cash (cash is better than profit on paper) and they can scale better than service based businesses, but not as well as online service businesses.

Don't Expect To Turn Up On Monday To Lots Of Orders

This is common misconception. Setup eCommerce site orders will follow and I just send them off.

That is the easy bit, it’s everything else llisted above that is hard.

Is Dropshipping Easy?

The dropshipping gurus selling course on Facebook Instagram would have you believe it is (for gods sake, don’t click them or it’s all you will see for the next month).

“Don’t deal with stock, just sell”

It is never that simple. Dropshipping means delayed deliveries (30-60 days), which means lots of customer complaints. You can’t control product quality and who sells it, which leads to price wars and decreased gross margins (percentage you’re left with after you’ve paid for the product to pay all your other bills).

Then if you do get a product that sells well, it might only last a few months, leaving you to search for the next “hit product”.

That’s a very hard business model to sustain.

This Wired UK article on dropshipping is well worth a read.