Costs of Setting up an E-Commerce Business in India [Analysis]

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.