Operating Expenses – the Soft Costs

Part I of the blog post on Operating Expenses dealt with ‘hard’ costs, that is, cost that you had very little discretionary power on.  Most of these ‘soft’ costs discussed in this blog post are services which are discretionary.  You can choose a variety of ways of undertaking them, and the costs here can often be reduced significantly through the liberal use of pleading looks and good connections.  Yes, as a small business, who you know is going to count for a lot.

Insurance
This is probably a good idea to haveif you hold any significant amount of stock.  After all, a bad accident could wipe you out completely especially if you had to replace most of it out-of-pocket.  Figure at least $750 annually for insurance, possibly more depending on the plan that you choose.

Marketing expenses
I won’t provide numbers here since marketing expenses are truly dependent on the marketing and corporate strategy chosen by a company.  I’ve seen numbers range from 3 to 10% of gross profit, with most consumer good companies ranging to the higher end of that number.   In fact, I would say that next to development costs, this is probably the most expensive part of running an online business as one form of marketing expense or another is going to be necessary – unlike retail stores that will have foot traffic that “finds” them, an online store must actively draw customers to them.

The main ways to gain customers are via advertising on other sites or advertising on search engines.  A single month’s advertisement on a site could easily cost US$250 a month, while advertising on Google Adwords can cost a minimum of CAD$300 a month.  Figure more if you intend to go through their content network and/or are going for higher placement on broader keywords.

Search Engine Optimisation is a great strategy, but requires a high level of expertise and time.  Google generally will not index your site and rank it for at least 6 months from launch, and you can expect to be spending a large chunk of your time working on it.  If you do not have expertise in SEO, hiring a company to do it on an on-going basis can be expensive – I‘ve seen quotes starting from $46 (don‘t even touch) to $500 – 2,000 a month.  Larger sites, thus requiring more time dedicated, can expect even higher  quotes.

I’ll skip the other forms of marketing,  an entire blog post could be (and probably will be) written discussing those aspects.  But of all your on-going expenses, marketing is likely to be the one that fluctuates the most and is the highest as an online store.

Contractors
There are two contractors that you can expect to require – graphic / web design and backend coding.  As an online store, you are likely going to need new banners as well as changes to your site graphics on a relatively regular basis.  Costs on this can range but is generally about $35 – 50 an hour for graphic / web design support but this is not on-going.  Figure at least needing them once every few months for a couple of hours.

With regard to coding, the best option in our view is to put them on a retainer.  You’ll find that the site will give trouble for no apparent reason – sometimes due to updates on other browsers, sometimes due to capacity issues, possibly even because you added a new product to the site.  Having a 3rd party available to trouble-shoot problems can be extremely handy – especially if it’s stopping your customers from buying from you.  In addition, as you grow, you’ll find the constant need to update your site with better graphics and better options a necessity.   Again, having your IT personnel on retainer allows them to work on these side projects when your site isn’t crashing.  It’s hard to provide a fixed amount to this, but a couple of hundred dollars is a minimum that you can expect to be charged.

I’d note that if you went through a  3rd party software for your e-commerce backend (e.g. Yahoo! Shops), much of this will be done for you for one low fee.  It is all part of the package, and they will eventually pass on additional tweaks and updates.  On the other hand, you’ll always be behind the curve for the latest sales tools (not necessarily a bad thing) and many of these companies charge a % of your sales.

Legal & Finance
Yup, accountants and lawyers are a ton of fun.  They are also quite expensive, but necessary come tax season and registration.  This is again a variable cost – depending on the size of your business and if you get audited, it can range from a couple of hundred dollars a year to thousands.

Miscelaneous Costs
This is a catch-all and can include everything from the cost of paper for printing your orders to food and beverage expenses for really late nights at work to nails and a hammer to fix a broken shelf.  It’s all costs that will crop up, quite often unexpectedly, but which are relatively minimal individually but do add up.  I’d suggest you budget about $50 a month for this kind of thing.

Salary
Or what you’re paying yourself.  I’ll leave you to figure out how much this is, but let’s just say that in the beginning, the guy at Timmy’s is probably earning more than you are.

So, is there anything I’m missing? Want further clarification on something? Give us a shout.