Three ways e-commerce companies can manage their overhead costs

Overhead costs will vary depending on the type of e-commerce operation and its offerings.
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Illustration: Amelia Kinsinger, Photo: Andrii Yalanskyi/stock.adobe.com

4 min read

When startups announce fundraising rounds, that money from investors could be used in many ways.

Often, e-commerce businesses will use the funding to improve their product or service, which, in an ideal world, allows the company to expand its customer base, bring in more revenue, and continue to scale the business. But there are other places where those funds can help run the business—overhead or operating costs. While some overhead costs like rent and property taxes are fixed, there are others that are much more variable, and e-commerce companies looking to control costs can look at reducing them. Three examples are packaging, inventory, and staffing.

  • Overhead costs are directly related to keeping the business afloat as opposed to producing goods or services, per Shopify.
  • These costs have more variation for e-commerce-only companies, at least compared to brick-and-mortar operations that need to consider rent costs.
  • Overhead costs for e-commerce companies, according to Volusion, include website hosting, payment platforms, utilities, storage, and shipping.

“The weight of each of these costs will vary based on the type of e-commerce the retailer is offering—home delivery, pick up in store, common shipper, etc.,” Patrick O’Mara, senior solution principal at Relex, told Retail Brew via email.

Packaging costs can vary widely

Product management—the cost associated with getting the product to the consumer—is one of the most variable overhead costs for an e-commerce operation. One component of product management is reducing packaging costs, according to B2B payments platform Kriya.

  • Packaging costs can account for anywhere between 10% and 40% of a product’s retail price, according to Entrepreneur.com.
  • Kriya suggests one way to reduce packaging costs is by minimizing its use, which can entail reducing packaging size or using different materials. It may also behoove retailers to shop around with different vendors to find better deals on packaging.

Unsold inventory can add up if not addressed

A major overhead cost incurred by e-commerce operations is dead stock, or unsold products. Making the most out of dead stock requires thorough inventory management, as Retail Brew has reported. However, dead stock, no matter how robust the inventory management operation, is an inevitability.

  • The easiest way to mitigate extra inventory, per Kriya, would be to sell at discounted prices. This could be through your e-commerce site or third-party vendors like Amazon and eBay, but it should be noted that the discounts should be at a price point where it will actually be sold.
  • Jamyang Tenzin, CEO of inventory management firm Centro Commerce, told Retail Brew via email that using inventory management software tools to identify what products are selling the most helps reduce this overhead cost.
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“We’ve seen that as businesses grow, their overhead costs increase, and they can’t risk missing a restock because of human error. Keeping bestsellers in stock and moving stale inventory is crucial for reducing overhead costs,” Tenzin said.

Staffing levels need to match the scale of the business

Although tools to minimize human error are valuable, e-commerce companies still need to carefully manage their workforce. Although e-commerce companies might not have a physical store, they still need the right number of workers to manage operations across the business—not too many, not too few.

  • Labor is a variable cost that will change over time, so having an understanding of demand from customers is critical, O’Mara explained.
  • “Each channel carries unique costs, so understanding how much demand will exist on each channel is critical for proper staffing,” he said. “Properly staff e-commerce businesses based on need, rather than guessing through accurate labor forecasts.”
Retail news that keeps industry pros in the know

Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.