Cost of setting up a e-commerce 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

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