When starting an e-commerce venture, one of the first and foremost considerations is where to host your online shop. I know this because I just helped my family business through this major decision. My uncle has been in the promotional product manufacturing business for most of his life. His father started the business over 50 years ago and he inherited its legacy.
They make the pens you see in major hotels around the country. Traditionally, it’s been a Business-to-business (B2B) model that relies heavily on distributors to make relationships with big chains. In the past five to ten years, I repeatedly encouraged my uncle to get online and start selling direct to customers, and this year he finally came around to the idea.
As the family IT guy, the onus was on me to advise him through this brave new world. We evaluated many easy bake e-commerce platforms like Big Commerce and 1&1 but we decided that Shopify was the cream of the crop. At the last-minute, I decided to crunch some numbers and figure out if Shopify was really worth it.
I am a big fan of excel templates, so I created my own to determine whether or not Shopify is truly cost-effective for our needs. Below, I will walk you through this model and explain how it works. After, I will discuss some other considerations that cannot be distilled into this financial model. Use this tool to decide if Shopify is a good fit for your business.
To complete the tutorial you will need to download the following asset:
- Shopify Or Not Excel Spreadsheet
While this template was time-consuming to make, it is very easy for you to use. You'll only need to edit a few cells and those input variables are all highlighted in orange. These are the only cells you will need to touch in this Excel spreadsheet.
All of the inputs below can be can be guestimated by assessing your websites needs and reviewing Shopify’s offerings.
To get this information, I went to the Shopify Experts forum and solicited vendors for price quotes. The most basic shops cost $500 USD but if you want some bells and whistles the pricing jumps up quick. Some developers only do projects that start at $3k, $10k, or as high as $60K!
We were looking for something fairly basic but had some important requirements: a blog, email opt-in capability, product search filters, and product image zoom. We had a few developers get back to us with an average price of $1,000.
Shopify has three different levels of service. In my template, this variable input is a drop-down form and the two green cells below it are linked to it. You do not need to touch the green cells but should know what they represent.
- Monthly Hosting Fee: Each of the three levels of service have a separate pricing band. The basic service costs $29 a month, while the professional and unlimited packages are $79 a month and $179 a month, respectively.
- Credit Card Fees: A basic subscription has a credit card transaction fee of 2.9%, whereas the professional and unlimited accounts, have credit card transaction fees of 2.5% and 2.25%, respectively. All three levels have a $.30 per transaction fee.
Unsure of what level of service we would need, I called up Shopify’s sales support. We expected the limitations in hosting (basic is 1GB and professional is 5GB) to determine our choice. However, we learned that few businesses reach the 1GB space limitation and users are upgrading to the premium service levels when they reach higher sales volumes to get better reporting and reduced credit card fees.
Consequently, I added extra drop-down input cells in Row 2 of the Expense Calculation tab almost every three months for the first two years for those anticipating the possibility of upgrading plans after their initial Shopify deployment.
A basic setup is the equivalent of a Wordpress site without plug-ins. Consequently, Shopify has a dedicated App Store with hundreds of free and paid apps, some available for a one-time fee while others incur a monthly subscription fee. Shopify’s sales support noted many of the important marketing apps are free and recommended that we just “get started and figure out what we needed as we go along,” which was a little scary.
We were also informed that the most popular app was a shipping management tool. Since we have a physical product, we budgeted $45 per month for it. There are many useful apps for almost every business activity you can imagine, from accounting, inventory management, reporting to marketing, customer service, and loyalty programs. I anticipated that some would be useful, so I padded the budget with an extra $30 per month for apps we may need in the future.
Custom Solution Variables
Shopify puts everything together in a nice package. When you undertake a custom job, you need to shop around, review service providers, and consider vendors very carefully.
Wordpress Development and Design Fees
Ultimately, Shopify is a Content Management System (CMS) for e-commerce. A custom solution can be hosted on any of the major CMS platforms (Drupal, Joomla, and Wordpress) but requires a professional to code up the website and make it look appealing to customers. If you are familiar with one of these options and developing on it you can insert the value of your time here.
Custom jobs can be very expensive compared to a basic Shopify store, but at the same time Shopify can get just as expensive. Custom Wordpress shops start at around $2-3k and the sky's the limit! I was fortunate enough to find a great Wordpress developer who was willing to give us a sweetheart deal. It is a design and branding agency so we were able to work out a deal on branded pens that could be marked up and resold to their clients. The input variable here is the full price of your web development efforts.
The deal we worked out ;also requires that we add all of the text copy and images ourselves. This too is a cost factor that should be considered, but in our case it has no cost associated with it, as it will be handed off to a younger cousin, who will do it for free. If we had to pay someone, we’d incorporate that cost here.
Another benefit of self-hosting is that there are no monthly Wordpress plug-in fees. Most of the Wordpress plug-ins we needed are free or baked in to the price of development.
Going custom is where you will save a lot in monthly fees. Web hosting sites like HostGator, GoDaddy, and BlueHost all have reasonable pricing on more or less the same service, but after shopping around some we found a 25% discount on three years of hosting from HostGator, which would cost us $125 for three years of hosting. The variable input here should be your monthly cost for hosting.
Credit Card Processing Fees
One downside to going self-hosted is that credit card processing is its own separate service. Paypal, Stripe, and Square all offer a similar service to Shopify’s basic service package but vary slightly:
- Paypal: 2.9% + $.30 up to $3K/month, 2.5% + $.30 between 3-10K/month, 2.9% + $.30 up to $10K+/month, and further discounting available.
- Stripe: 2.9% + $.30, with a discount available at $1M sales volume.
- Square: 2.75% + $.30, with a volume discount available but not specified.
Each service has a slightly different pricing schedule so I built-in a choice of credit card processor into the template. All you need to do is pick your preferred vendor. However, if you go with Paypal there is a second variable to input, as they have three different service levels too. This variable is located in cell D18 of the Expense Calculations sheet. Three levels of service are:
- Free: No cost, as this is the basic Paypal shopping cart.
- Advanced: $5 per month, which integrates with 3rd party shopping carts.
- Pro: $30 per month, with the ability to completely customize the checkout process.
The data points below are crucial to the accuracy of this model and may require some serious detective work. The best way to source them is through diligent research of your market and competitors. In my uncle’s case, the competition was friendly and provided access to their analytics, which allowed us to collect all of the required data in minutes.
- Initial Order Volume: How much will you sell in the first month? This metric is required to figure out the variable and transactional components of credit card sales.
- Average Order Price: How much are your customers buying with each purchase? This is another key metric in determining credit card sales costs.
- Projected Growth Rate: This is a variable that can have a drastic effect on the model. If you have a large marketing budget, you’ll be able to move the needle quick. However, with a small budget you can expect single digit growth in the first year or two.
- Average COGS: Theoretically, this should be the easiest input to source. How much is your average product cost? This figure is actually not even required for the model to work. However, I included it because it is a key figure that could help us project profits, which will be rolled into marketing costs in successive months.
- Discount Rate: This term is perhaps the most foreign and unfamiliar (at least if you never took a finance class). It is a variable in the Net Present Value Formula, which is used to discount future cash flows and reduce them to dollars and cents today. Essentially, you can think of this as a the rate of return of the next best alternative.
Big corporations are constantly pouring money into new projects, and in text books this figure is 7-15%, but my uncle doesn’t have an alternative (aside from parking cash in the bank), so I set this 1% (this is generous with the current fiscal situation our country is facing). The lower the discount rate, the higher the NPV or savings/loss figure will be.
What’s Missing From this Model?
The one thing that is completely omitted are marketing costs. Sadly, Shopify has no marketing magic and the cost (and impact) of marketing will be the same with or without Shopify. In fact, it could be more if you opt to purchase some of the marketing apps which we can still account for.
At the end of the day, this model is about evaluating the cost of doing business on Shopify, so I left the marketing budget out. It is highly variable from business to business and obscures our end goal.
The Output: Shopify or Not
Now that you have an idea of what each field means, its your turn to go and plug-in all of the variables that are specific to your business. What you will get in return is:
- A simple recommendation.
- How much you will save by using that recommendation.
- A graphical depiction of how Shopify and a custom alternative stack up to each other.
Don't get to distracted by the savings or loss figure. This is strictly the result of comparing the options and you will never see that money in your pocket (physically). This will also vary substantially based on growth factor and discount rate but will give you a benchmark for what you might save or lose over the lifetime of the website (five years in this model).
Note the lumpiness you will see around the two-year mark is caused by the amortization of custom development costs over two years. After year two, this expense disappears completely.
Is There More than Meets the Eye?
While the numbers tell a compelling story, I still don't believe they really give the full picture.
If you decide to go with Stripe because of its aesthetically pleasing look and highly efficient check-out experience for the user, Shopify is actually the cheaper solution at higher volumes.
However, at the monthly cash flow level two years out, the expense differential was only ~$100, which is a small sum for a profitable business with $600K in revenue.
With a margin that thin, there are other factors to think about:
With Shopify you need to upgrade to the Pro level just to get detailed reporting for your store, which is ridiculous when Google Analytics offers the same capability for free.
Delayed Credit Card Processing
One thing many may not have considered is when your customer’s credit card gets processed. On Shopify, this will happen immediately. While that is great, what happens when you run out of inventory? You may have to refund the item and will still have to pay credit card transaction fees.
With a custom solution, you can actually set up your check-out to simply collect payment information and process it separately. This will give you a buffer to see if you can actually fulfill the order and create an opportunity to notify and cross-sell your customer. This may not apply to everyone, but was something worth considering for my uncle’s business.
Control of Design
Much of Shopify’s basic design comes in the form of cookie cutter templates. On the flip side, Wordpress offers a ton of flexibility. You can also use templates or themes as they are called in Wordpress.
Or you can opt for a completely custom design. If you do, you'll find a ton of great Wordpress designers. If you are a real stickler for how your site will look and feel, you will have way more control with a Wordpress site.
How much will future upgrades cost you? If you don’t have technical skills this all comes down to cost. We’ve been advised by our developer that all future maintenance costs will be $35/hr which was 33-50% of the cost that was quoted by Shopify specialists.
Renting Versus Owning
Sure on the way in, Shopify seems like a great idea. It has everything you need, ready to go in a nice package. If you need extra help there is free support and ton of free apps.
All of this good stuff comes at a price and is the equivalent of paying rent to a management company or landlord. This is all fine and dandy while you are making money and the fees are low.
What happens in a couple of years when Shopify decides to increase its hosting, app, or transaction fees? By then you are hooked into their system and have no choice but to go along with it. Udemy, a popular online course hosting platform, just raised its fees and it sent a shockwave through its community. Now many of its instructors are looking for new channels for their courses.
If you chose a custom website, all of your big costs are upfront. In a few years from your launch your "mortgage will be paid off" and you just have to worry about maintenance from their forward.
So Will You Shopify Or Not?
Using excel templates is a great way to bring clarity to your business decisions.
Ultimately, we decided against using Shopify for our company. With a custom solution it is a larger investment upfront, but when amortized over two years, it’s can be cheaper than Shopify, especially when using Paypal as a credit card processor.
If we decide to use an alternative credit card processor like Stripe or Square, the model would actually tell us to use Shopify. However, I would still end up selecting the custom solution because I’d have complete control over my site and would be protected from future price increases.