September 1, 2010, 12:00 AM

Line by Line

A formal budgeting process is critical for e-retailers. Bernardine Wu of FitForCommerce provides guidelines.

Too few online retailers have formal budget processes, and that's a mistake. A detailed budget can help a retailer make the best investment decisions, and highlight areas that are not performing as planned. This article is aimed at helping e-retailers create a budget, by outlining the major expense areas and how much a retailer can expect to spend on each.

Costs will vary considerably from one e-retailer to another. A start-up will have different kinds of marketing expenses from a more mature retailer. Whether a retailer outsources most of its technology or manages it in-house will affect line items. As a result we can't say what every retailer will spend on each item as a percentage of revenue. But we can identify the components you need to consider in your e-commerce budget.

First, some basic terminology. To create a budget you must first project revenue; subtract projected cost of goods sold from revenue and you have gross profit, the starting point for your budget. Gross profit minus expenses equals net profit.

Expenses include the costs of developing and maintaining a web store, driving traffic to the site, features on the site that show products and encourage conversion, fulfillment and handling returns, and customer service. The major expenses for an online retailer typically look like the table on the next page. Here is a rough idea of how to budget for each of those categories:

Marketing expenses

These can vary widely. A new retailer will spend more heavily on customer acquisition than an established one. Acquisition activities include search engine marketing, purchasing e-mail lists and sending e-mails, and affiliate programs. Retailers should budget 10-12% of total revenue for customer acquisition.

Retention costs include customer segmentation tools, e-mail campaigns and site promotions. Retention costs typically are in the 5-8% range.

Below we break down some of the major subcategories of marketing expenses.

Search Engine Marketing includes the cost of paid search and organic search marketing. Fees for pay-per-click activity are driven by number of keywords and frequency of clicks. Most retailers spend thousands of dollars per month. Organic search does not require a 'spend' budget, but both paid and organic search do require resources to create and manage the programs, whether managed in-house or through a search marketing firm. Retainers for search marketing consultants start at $3,000 per month and can go beyond $20,000 per month. Some firms charge a percentage of a retailer's paid search spend, generally 10-15%.

Affiliate Marketing is not for everyone, but for some it can be as high as 20% of revenue. Most retailers start by using an affiliate network but can bring it in-house to reduce costs.

Comparison Shopping Engines are also not for everyone, but can be a great traffic generator. There are vendors who can provide one pipe to many comparison sites and marketplaces, including Amazon and eBay.

E-mail Marketing requires budgeting for an e-mail service provider that can create and track e-mail campaigns and manage e-mail blasts. The volume of e-mail determines the cost and is often priced in tiers. By segmenting your customer database, you can stretch your budget to be just as effective with fewer e-mails.

CRM (Customer Relationship Management) can mean high set-up costs because of the required integration with other systems and data scrubbing. But it's the heart of your marketing intelligence and often delivers ROI.

Social Media Marketing is a new line item for many. The only cost of creating Facebook fan pages and tweeting messages on Twitter is staff time. And that includes both creating and sharing content as well as listening and responding to what's being said on social networks.

Mobile Marketing is also a new marketing area. Generally, mobile marketing focuses on sending text messages and/or mobile-optimized e-mails for smartphones.

Content and Imagery creation and management can be a large part of a budget especially if you have to create your own or greatly edit what you receive from manufacturers. You may be photographing your own images, writing product descriptions and creating videos of products or how-to's.

Online Merchandising includes categorizing products for navigation and associating products with other items for cross-selling. Merchandising also includes any activities that a retailer does to "romance the products" online, such as enabling consumers to zoom in on products or rotate images.

Technology

Technology can be the most complex piece in this budget puzzle. It can become a distinguishing element of a retailer's site that drives sales or is a waste of time and money.

E-commerce Platforms are at the heart of a web store. Retailers can develop their own, license software or leverage an on-demand platform via the web. The e-commerce platform includes the front-end web store and the means to manage it, including adding and merchandising products and setting up tax, shipping and promotions rules. Budgets range from tens of thousands to a million dollars, depending on transaction volume and the complexity of the web store.

Order Management Systems are another key component. They handle orders placed and integrate with tools needed to fulfill the order, track its progress, and transfer data to inventory, financial and human resources systems. Some retailers use the order management system built into the e-commerce platform.

Fulfillment

Fulfillment includes the cost of warehouse real estate, shipping supplies, freight charges, warehouse management systems and staff. Fulfillment can easily add up to 20% of total revenue. Many retailers outsource fulfillment to a logistics company that receives and tracks inventory, and picks, packs and ships on behalf of the retailer. As a retailer grows their business and is able to self-fulfill, fulfillment costs may drop to 8-11% of revenue; those who outsource may be able to get the cost down to 10-13%.

Customer service

Customer service can be a large expense depending on the volume of calls and nature of the business. A customer service department needs space and call-routing systems, and pays 800-number fees and long-distance charges. Customer service agents represent the largest expense. The cost of customer service typically is in the 2-7% range.

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