2021 was another bumper year for new ecommerce businesses registrations in the UK, with a record 41,302 new ecommerce business registrations showing the continued growth of the sector.
The reasons for this continued growth is partly to shifting trends to online business, with the pandemic helping to accelerate this process. Other factors, shown in the 2020 data include furloughed employees starting new businesses; ease of starting up and the prevalence of online courses/mentors.
However, it’s not all rosy news in the ecommerce sector, with a huge proportion of ecommerce businesses being dissolved in the same period. The data below shows the rate of UK ecommerce business failure last year: with 22% of businesses created in 2020 dissolved by the end of 2021.
|New Ecom. Registrations||5,066||7,764||14,394||35,589||41,302|
|Cumulative No. of Ecom. Businesses||23,135||29,468||38,514||66,228||107,530|
|YoY % Growth in Registrations||22%||26%||37%||54%||38%|
|Ecom. Companies dissolved||528||1,431||5,348||7,875||N/A|
|Annual New Business Failure Rate||10%||18%||37%||22%||N/A|
Why do Ecommerce Business Fail?
The data above shows that almost a quarter of ecommerce businesses fail every year, but why does this happen?
Of course, market conditions have been difficult in the last few years so there are risks involved in setting up any type of business. Despite this, the reasons below are some of the most relevant difficulties ecommerce businesses face which often leads to closure:
1. Difficulty in Competing Against Established Brands
You can have the best product on the market but as a new challenger brand your market visibility will likely be close to zero. With the importance of online reviews, influencer recognition and online advertising ever more important, these are serious hurdles which are definitely most difficult within your first few years of trading.
Many startups think getting a website up online is all they need to do to start bringing in traffic, but it can take years for search engines such as Google to start ranking your site competitively. In the meantime, you may be paying for digital marketing including Search Engine Optimisation (SEO) which doesn’t bring in an instant ROI.
Even on marketplaces such as Amazon, eBay and Etsy, their algorithms prioritise more established brands with more reviews so unless you’re in a completely new niche, you’re likely to have to start from the bottom of the listings and build visibility over time.
Recommendation: Don’t expect quick fixes, be realistic that the first few years will be about growing and establishing the brand and – if possible – don’t be too reliant on generating large amounts of revenue in this period.
A tried and trusted method is to set up your ecommerce business as a side project initially, perhaps maintaining your regular job until you can start relying on a consistent revenue stream.
2. Unforseen Startup Costs
Starting a new business can mean many unforeseen costs that can spiral out of control such as website design, digital marketing and product sourcing.
Depending on your business model, you may be able to anticipate some of these costs by planning ahead – but always be prepared budgets can run over expectations.
Another area certain ecommerce startups can easily get stung is minimum order quantities (MOQs). When ordering from overseas manufacturers it’s usually their policy for the order quantity to be at least one full shipping container meaning a high initial cost for you. You’ll also need to consider storage space and whether or not the products will need to be maintained in special conditions.
In recent years, supply chain issues have become much more common for UK businesses importing from countries such as China, so be aware lead times may also be longer than advertised.
Recommendation: Write a comprehensive business plan before embarking on your ecommerce journey. If you can, get a specialist business advisor in your field to look over the plans and highlight any potential spending black holes.
3. Not Understanding the Numbers
There are several really useful great new accounting tools for ecommerce business owners, with automated cloud accounting solutions such as Xero and Quickbooks helping to automate everyday bookkeeping.
However, understanding these figures is often overlooked, questions such as: What is your profit margin? What are your Cost of Goods Sold? Have you budgeted for tax and VAT costs? Will you run into cashflow issues with your current business model?
Questions like these require a specialist ecommerce accountant to interpret the figures and give you bespoke advice on how to sustainably grow your business.
Many ecommerce business owners don’t fully understand their finances (understandable as it’s probably not the reason they started the business in the first place!), so can run into trouble without due diligence on the most important aspect of any business – the money coming in and out each month!
Grow Your Ecommerce Business Sustainably
Being an ecommerce business owner typically means you’ll need to have skills in many different fields: Sourcing products, marketing, customer service, understanding of IT systems and accounting to name just a few.
Accounting may be bottom of the list of priorities for you as it’s a specialist skill that can be difficult to understand, however it really is one of the most important guiding principles for the success of your online business.
At Your Ecommerce Accountant we deal with online sellers every day and the particular challenges that face online sellers. Whether you’re an early-stage startup or looking to take your business to the next level, we can help.
Get in touch today to book your free 30-minute ecommerce accounting consultation.
Data sourced from Companies House – 12th January 2022