If your goal is to start the next Facebook or the next Google, you’ll need a large amount of upfront cash to jumpstart your business.

If you want to start the next Amazon.com, you’ll need to invest a significant amount of money to hire engineers and web developers.

 

But if all you want to do is make enough money to quit your job and start a “lifestyle” business, you don’t need much money at all!

In fact, depending on what your end goal is, you can get started with an online business for less than $6 a month.

 

The Amount Of Upfront Investment Depends On Your Goal

 

When it comes to starting an online business, your startup costs will depend on several factors! Here’s a list of some of the other things you need to consider as well.

  • Revenue Velocity – How long after launch do you expect to make significant money?
  • Barriers To Entry – How hard do you want it to be for someone to copy your business?
  • Portability – Do you want to be able to run your business from anywhere?
  • Scalability – Do you want the business to scale easily once it grows?

Today, I’m going to provide you with an assessment of 3 of the most popular online store business models along with the startup costs involved.

Starting A Dropshipped Online Store

 

Dropshipping is by far the cheapest and easiest way to start selling goods onlinewhich is why it tends to be the business model that most new entrepreneurs gravitate towards.

Without going into too much depth, dropshipping is when the online business owner sacrifices some amount of profit in order to avoid having to carry any inventory.

When a customer places an order, the shop owner then places an identical order with their vendor and the vendor ships the product to the end customer. The amount of profit made is the selling price minus the cost of goods sold and a small dropshipping fee.

 

Cost To Start

Here’s the bare minimum investment that you need in order to start a dropshipped online store on a free open source shopping cart platform.

If you tally everything up above, that comes out to between $5.45 and $76.45. $5.45 doesn’t sound like a whole lot of money does it?

With a free open source cart, your monthly costs for a bare bones site will be on the order of $5-6. This is how my wife and I started out with our online store Bumblebee Linens.

In fact, we are still on the same open source platform as when we started in 2007 except our web hosting bill is higher due to increased traffic!

However if you are tech averse and don’t want to deal with any website setup whatsoever, you can opt for a fully hosted platform like Shopify or Big Commerce.

The main advantage is that they’ll take care of all of the setup for you including payment processing, security etc…

Here’s an idea of what it costs to run a barebones site on these 2 platforms.

  • Shopify – $29/month.
  • Big Commerce – $29/month.
  • (Optional One Time Cost)Purchase a template for your website – $50-$200

While dropshipping costs much less to start than the other online store business models, there are several disadvantages which I will outline below.

Note: If you want to easily find dropship vendors, consider signing up for a service like Worldwide Brands.

Revenue Velocity

For one thing, the revenue velocity of a dropshipped online store is much lowercompared to a store that purchases inventory up front. After all, not having to worry about inventory or fulfillment costs comes at a price.

When it comes to dropshipping, your wholesale price will be higher. In addition, most dropshippers also charge a small fee whenever a dropship order is processed.

All of these costs add up and the end result is that your profit margins will be much smaller.

The other thing to consider is that with dropshipping, you are selling someone else’s product. As a result, you will be competing with many other vendors who are are selling the exact same thing.

Well guess what happens when you have multiple sellers of an identical item? The price tends to spiral to the bottom.

Thanks to marketplaces like Amazon, the competition is fierce. And unless MAP(minimum advertised price) pricing is strictly enforced, you will just be another retailer trying to compete on the best bargain.

Barriers To Entry

In addition, the barriers to entry will be lower. Because of the low upfront investment involved and the ease of putting up a website, it can be relatively easy for someone else to copy and replicate your exact same shop.

While they still have to discover who your vendors are, sometimes finding out can be as easy as making a purchase from your store and looking at where the package came from.

Portability/Scalability

But the beauty of running a dropshipped store is that your business will be truly portable and scalable. Since you don’t have to worry about inventory, you can run your business from anywhere there’s an Internet connection.

This means that you could be at a coffee shop or in a foreign country and it wouldn’t matter.

Because you don’t have to worry about inventory, your business is also extremely scalable. With a computer server taking and managing orders, you will only have to hire additional help as your customer support volume rises.

Starting An Online Store With Upfront Inventory

 

Starting an online store the traditional way with inventory carries all of the same costs as starting a dropshipped store except that you also need to set aside money for your initial cost of goods.

Depending on what you plan on selling, this could range from hundreds of dollars to thousands of dollars depending on the minimum order quantity (MOQ) that your vendor requires.

There are many ways to mitigate the risk and be more intelligent about your inventory management which I may discuss in a future article but the bottom line is that you will have to put out more money upfront if you want to carry inventory.

Cost To Start

Once again, here are the costs associated with starting on a free open source shopping cart platform.

Here are the costs if you go with a fully hosted platform like Shopify or Big Commerce.

  • Shopify – $29/month.
  • Big Commerce – $29/month.
  • (Optional One Time Cost)Purchase a template for your website – $50-$200

In terms of initial inventory, I typically recommend that you be prepared to invest at least $1000. But this dollar amount depends on your sourcing strategy.

If you are using domestic vendors, this can be as low as $100. But if you are importing from China, I recommend around $1k.

Revenue Velocity

The main advantage of carrying inventory over dropshipping is that you will make a significant amount of money much faster. As with everything in life, more risk carries more reward which is why my wife and I decided to carry our own inventory when we first started out.

Despite having to risk more money(about $630), we were able to make over $100,000 in profit after only a year of being in business. And unlike dropshipping, the profit margins are much higher and you are in more control over your shipping costs and delivery times.

Barriers To Entry

Carrying your own inventory has other advantages as well. Because you have to secure vendors in order to source your goods and you have to purchase in bulk, the barriers to entry are much higher than dropshipping.

Since you are in control over your shipping and branding, it’s much harder to copyyour online store idea.

Not only would they have to copy your website but they would also have to find your vendors (much harder since you are shipping products yourself) and be willing to shell out more money upfront.

I’m not saying that it would be impossible to copy your business idea, but in general it’s much less likely due to the increased upfront risk involved.

Scalability/Portability

Of course the downside is that you have to find a place to store your goods and you have to take care of shipping your product. However there many ways to get around storing physical inventory.

For example, you can use a 3PL(3rd party logistics firm). A 3PL is basically a warehouse that will store and ship your goods for you on your behalf for a small fee.

In addition, many store owners who sell on both Amazon and their own online store are using Amazon multi channel fulfillment to ship orders as well.

But bottom line when it comes to managing inventory, there are going to be increased headaches as opposed to dropshipping and you’ll have to weigh the downsides compared to the increase in profit.

There are also cash flow issues associated with paying for upfront inventory that you need to consider as well. For example, we routinely invest hundreds of thousands of dollars on inventory every year and don’t see the returns until months later.

Related: 3 Ways To Sell Products Online Without Inventory, Shipping Or Fulfillment

Selling On Amazon With FBA

 

Selling your goods on Amazon is probably the fastest way to make money selling physical products online. Compared to starting your own online store, Amazon has an ENORMOUS built in marketplace of customers that are ready to purchase your products immediately.

In fact when I first started selling on Amazon, I just threw up a few products and made $3k in the first month doing practically zero work. Yes. The marketplace is that huge!

Now there are many different ways to sell on Amazon that are beyond the scope of this post. But bottom line, Amazon is going to charge you a lot of money for the privilege of selling on their platform.

Cost To Start

Here are the costs to sell on Amazon as a professional seller.

  • Amazon Professional Sellers Account – $39/month. This is required to list your own private label goods online
  • Amazon Sellers Fee – 15% of your revenues
  • Amazon FBA Fee – The cost to have Amazon store and fulfill depends on your product. But as a rough guideline, I would tack on an additional 10-15%

One thing you’ll notice is that the Amazon fees are extremely high. And if you take into account FBA fees, you could be paying Amazon 25-30% of your revenues just to sell on their platform.

As a result, you need to sell high margin goods. If you want to sell private label goods, I would be prepared to invest at least $1000 on initial inventory. You can get by with less, but it’ll be a much slower ramp up.

Revenue Velocity

The main advantage of selling on Amazon is that you will make a significant amount of money much faster than any other ecommerce business model.

They have a large built in audience and especially over the holidays, it seems like whatever you throw up there will sell. In fact, I’ve had several students in my class make 6 figures in less than a year on the platform. Here are a few examples.

Barriers To Entry

The main downside to selling on Amazon is that all sales are transparent to all other sellers.

For example if you use a tool like Jungle Scout, you can find out roughly how much money a certain product made in the last 30 days.

As a result if you sell a popular product on Amazon, it’s only a matter of time until copycats come in and flood the marketplace with similar or identical items.

Amazon is a cut throat platform and you have to be constantly on your toes and monitor your listings.

In addition because you don’t own the channel, Amazon could ban you, change the rules or raise the selling fees at any time.

Scalability/Portability

Thanks to FBA, Amazon takes care of storing your goods, shipping them to the end customer and handling returns. As a result, selling on Amazon is highly scalable.

You also end up spending less on customer support because Amazon handles the majority of it for you. In fact, the only thing limiting you is your cash flow and your ability to keep Amazon’s warehouses full of goods.

Once you have your product sourcing flow nailed down, the sky is the limit.

Decisions, Decisions

When it comes to starting an online store, there’s more to consider than just how much it costs to start. You also have to consider your end goals and how much you are willing to risk in order make money sooner rather than later.

After running my own online store, selling on Amazon, and helping many others start their own dropshipping stores, I can honestly say that there are pros and cons to each option.

What’s important is understanding what you want out of it, your tolerance for risk, and what you want your end game to be especially if your goal is to improve your lifestyle.