Accounting Articles > E-commerce Accounting:

My website is losing money. Do you have an e-commerce solution?

Let’s begin by dispelling certain falsely held beliefs. Just because you’re selling something on the internet doesn’t mean that you don’t have to play the game by the rules.

Example:

Conventional transaction:
You walk into a store and need a picture frame. You go over to the display, look at them, pick out the correct color and size, maybe even talk to someone before making your choice. You take it up to the counter. It’s retailing for $10.00. After paying Illinois sales tax at 9%, the bill comes to $10.90. You hand them eleven dead presidents, they give you back a dime, put it in a bag, and you’re out the door.

vs.

Internet transaction:
You go to a website and find a picture frame that looks like it might be what you want, so you send the seller an e-mail asking particular questions. You get a response. This happens a few times. You decide to make this purchase and send them a credit card number. Three days later you get the item and couldn’t be happier.

How did the internet retailer loose money? As any CPA can tell you, they broke all of the rules of retailing.

There is a prevailing “wisdom,” or lack thereof, that when you are selling something on the internet, you only have to mark things up 30%. Just because you don’t have a brick and mortar store does not mean that you can break the rules. You need a full mark up of 100%. Here’s why:

1. Time.
   All of that e-mailing back and forth takes time. Time is money. Time is not free. If you make the mistake of thinking that your time is not worth something, then you’ll have a hard time succeeding as an entrepreneur.
2. Credit-based purchase markups.
   People never pay with cash online. If they pay with a credit card, a PayPal account, or whatever, it costs the seller a few percentage of the purchase, plus a transaction fee, cutting down his already low margin.
3. Partner website mark-ups.
   The seller usually doesn’t sell from his own site. He has to pay the site several percentage points, for the right to use their site, further cutting down his already low margin.
4. Shipping.
   This doesn’t come cheap anymore. Unfortunately, many web-based retailers don’t charge extra for it.
5. Sales tax.
   This has become a legal minefield. Individual states all handle this differently but they love to audit internet retailers just to make sure that they are reporting this correctly.
6. Being the middle man.
   When internet retailer are not selling from their own inventory, he is vulnerable. He’s “drop shipping” from the manufacturer. How is he actually going to build a customer base? As soon as the manufacturer gets the e-mail address and regular-mailing address of the customer, do you think they’re not going to cut out the middle man? Of course they will. Of course they do.

Now I am hearing a resounding chorus of “buts...”

• But I can’t sell it if I mark it up more than 30%.
• But I can’t charge for shipping.
• But I can’t afford to maintain an inventory.

E-Commerce provides special difficulties for CPAs and Public Accountants but the basic rules of retailing haven’t changed for several centuries. Just because we have a new avenue for the selling process doesn’t mean that anything has changed from a financial standpoint.

Play by the rules so you can succeed. Find a product to sell where you can make a profit. Let everyone else go broke trying to re-create the wheel.