Why do internet retailers have lower operating costs than brick-and-mortar stores?

Comparison Between Retail and E-commerce Cost Structures

Note: For a $150 apparel piece.
Source: Adapted from the Wall Street Journal and Onestop Internet Inc.

Inhaltsverzeichnis Show

1 - Locations
2 - Sale Transactions
3 - Omnichannel Flexibility
4 - Marketing
5 - Customer Attention
6 - Operating Expenses
Why is online shopping better than brick and mortar?
Why is it more expensive to operate a brick and mortar business?
What is the difference between bricks and mortar and an online retailer?
How does internet reduce transaction costs?

Conventional retail and e-commerce have very different cost structures even if they provide the same goods. The above cost structure is derived from the sales of high-end apparel (jeans). Both the retailer and e-retailer have the same factory costs (cost of the good, often labeled as factory door cost; 30% of the retail price) and are assumed to spend a similar amount of resources for marketing purposes (10% of the retail price). Outside these basic similarities, their respective cost structures vary significantly:

Retail cost structure. Payroll (18%) and rent (15%) are the most significant retail costs that are location specific and cannot be effectively mitigated. A good retail location usually commands high rent and labor costs, which are associated with higher sale volumes. Other retail costs mainly involve utilities and store supplies. Transportation costs account for 3% of retail costs, depending on the origins of the goods.
E-commerce cost structure. Operating costs (20%) are the most important component of e-commerce costs and include the software and transaction platform, which requires maintenance and updating. Then, shipping costs (7%, often free or highly discounted) are the most significant costs, which also include returns. Since many e-commerce distribution centers are located in low-cost areas, warehousing and fulfillment costs are usually in the range of 3% of the retail price.

Thus, if the same retail price is used, an online retailer can achieve a 30% profit margin compared with 15% for a standard retailer. To further improve their market share, online retailers offer goods at a lower price. In this case, an online retailer could reduce the price by 10-15% while maintaining a similar profit margin. Thus, a $150 piece of apparel sold at a retail store, could be sold online for $130 with the same profit margin.

Both brick-and-mortar and e-commerce businesses are often shoved into the same classification of retail. After all, to shoppers, it's all just "shopping.".

However, while the two have their similarities, there are a few key differences that are worthwhile to understand if you're planning to launch a retail business.

1 - Locations

It's understandable that one might conflate brick and mortar business and e-commerce, since both involve strategies with which to move products and services. The biggest differences may be in the ways the items are sold.

E-commerce operations don't necessarily include a physical storefront, particularly when they begin. Instead, these "digital natives" sell products online through a website and virtual shopping cart. Orders are entered remotely, and the goods are then mailed to the customers.

Brick-and-mortar businesses, by contrast, have physical locations. They might consist of a single outlet or a chain of stores. However, more and more brick and mortar businesses are adopting e-commerce platforms, merging the two to create a seamless shopping experience for their targeted audiences.

2 - Sale Transactions

Although technology is steadily advancing to allow remote exchanges such as Apple Pay and mobile transactions, most brick-and-mortar outlets accept only cash, credit cards, or checks as legal means for purchase of their goods and services.

E-commerce outfits also accept cards, but they don't have a way to take payment by cash or checks. They can accept other options for completing a transaction such as PayPal. Some e-commerce platforms - but only the rare physical store - also accept cryptocurrency tender like Bitcoin.

Thus, there's payment flexibility on both sides, when you compare brick and mortar versus e-commerce, but the options differ due to the structural capabilities of each approach.

3 - Omnichannel Flexibility

Many large chain stores, such as Walmart, Target, or JC Penney, have adopted an omnichannel focus, which means they can connect with shoppers through more than a single channel or shopper touchpoint.

They can send out SMS messages, contact you by email, provide information via their website, or chat with you via customer service representative on the phone. They can also accept alternate payment options, like Google Wallet or Amazon Payments.

Many small physical retailers struggle to effectively deploy an omnichannel approach to selling their goods or services. E-commerce vehicles, on the other hand, tend to have more omnichannel flexibility as they accept more payment methods, do most of their advertising over social media, can connect with shoppers through phone or chat, and use mobile apps to help shoppers discover products and services.

4 - Marketing

Brick-and-mortar and e-commerce stores can market and promote their organizations differently as well. Brick-and-mortar stores will often use traditional forms of advertising such as television and radio commercials, newspapers, and billboards.

E-commerce organizations, on the other hand, can purchase advertising through traditional methods, but those are rarely regarded as effective when compared with social media and digital advertising. Because they operate generally in the online space, digital advertising tends to be more effective for these firms, so they see little reason to venture into older marketing approaches.

The clear majority of brands - both brick-and-mortar and e-commerce - advertise on social media and other online platforms. However, some brick-and-mortar businesses have not caught up and have failed to take advantage of the online advertising available.

Additionally, as digital native e-commerce businesses grow, many have expanded into complementary physical locations to offer a seamless, branded, cross-channel experience for their shoppers. In these cases, all forms of advertising can be used effectively.

5 - Customer Attention

A prime challenge for e-commerce organizations is how to deliver a personalized experience to every consumer. You're not physically present while people are shopping; although you're effectively just an email, phone call, or chat box away, and consumers tend to crave instant gratification, which means they'll often abandon a cart whenever they have a question rather than wait (or worse, have to search) for a response.

Brick-and-mortar shops, on the other hand, have an advantage in being able to provide - and even volunteer - immediate customer service. There is almost always someone right there in the store for visitors to talk to. Even if the customer service is subpar, most consumers prefer to speak with a real person face to face, rather than through a phone.

6 - Operating Expenses

Intuition says that e-commerce expenses are significantly lower than brick and mortar retail, which is one reason so many have started online businesses. However, it's not always reality.

Pure-play e-commerce retailers can build a brand identity and begin to realize revenue, making a simple, advantageous start for themselves. But after an initial period of growth, infrastructure costs make it difficult to stay profitable. There are expensive shipping and return expenses, the massive costs of new customer acquisition, lost customers to a close competitor, and growing expenditures for increasing web hosting.

In the last few years, we've seen a large number of e-commerce retailers turn to brick-and-mortar platforms because it's cheaper, even though there are expenses such as rent, inventory warehousing, employee labor, property taxes, and more.

E-commerce is not always more expensive, as a variety of factors influence this, including the industry segment, market values, marketing campaigns, business plans, and the owner's financial dexterity. In all, depending on your business abilities and industry, one retail platform could be more affordable than the other. Increasingly, however, retailers are turning to both.

There's a lot to consider in the conversation about brick-and-mortar and e-commerce retail. It's vital to weigh both sides of the spectrum carefully before you decide on the best business platform for your new company, but keep your shoppers' best interests in mind as you do so.

About the writer: Anna Johansson is a freelance writer, researcher, and business consultant. A columnist for Entrepreneur.com, Forbes.com and more, Anna specializes in entrepreneurship, technology, and social media trends. Follow her on Twitter @Number1AnnaJo and LinkedIn.

Join the #retail, #inspiringretail and #SmartStore conversations on Twitter @RetailNext, as well as at www.facebook.com/retailnext.

Why is online shopping better than brick and mortar?

Customers can shop the products from anywhere, but they cannot touch them or see more than a picture or video. Online stores have a huge advantage over physical retailers because they are able to sell to customers over a wider geographic area.

Why is it more expensive to operate a brick and mortar business?

Running a brick and mortar store is typically more expensive because business owners have to pay for rent, utility bills, decorating costs and store upkeep. Store owners may also have to ensure that they meet building and zoning codes. Brick and mortar stores place owners at increased risk of theft through shoplifting.

What is the difference between bricks and mortar and an online retailer?

Traditional brick and mortar stores only sell products in physical locations and that is people can only shop during working hours. On eCommerce platforms, customers can shop at any time of the day (or night), but they will have to wait for their products to be delivered.

How does internet reduce transaction costs?

An online business can reduce transaction costs by smoothing out supply chain administration and streamlining transportation management. Comfort and the capacity to shop day in and day out makes online based shopping an engaging approach for some purchasers.