What is the Cost of starting a business in 2024?
Numerous entrepreneurs embark on their business journey armed with nothing but a vision and a limited budget.
Indeed, certain business models demand minimal initial investment, and at Shopify, we’ve witnessed firsthand the triumphs of numerous entrepreneurs who started with modest means. However, among the multitude of small businesses that launch but fail to sustain themselves, over a third attribute their demise to a lack of financial resources.
We aimed to delve deeper: What are the actual costs associated with running a business? And are prospective entrepreneurs harboring any misconceptions regarding these expenses during their inaugural year in business?
To uncover answers, we conducted a survey involving 150 aspiring entrepreneurs and 300 small business owners across the United States.
What is the Cost of starting a business in 2024?
In their initial year of operation, small business owners typically allocate an average of $40,000. However, the costs associated with starting a business exhibit significant variation and hinge upon several factors, including the industry, business model, team size, cost of goods, and more.
Moreover, we prompted respondents to delve deeper into their first-year financial records, requesting them to delineate the proportion of their total budget dedicated to various business expenditures. To streamline the process, we categorized the following functions and cost categories to aid in budgeting for the launch of a new online business:
- Product costs
- Operating costs
- Online store costs
- Shipping costs
- Offline costs
- Staff costs
- Marketing costs
1. Product costs
Product-related expenses are an unavoidable part of running an ecommerce business. Without spending money on raw materials, inventory, suppliers, manufacturing, or patents, you wouldn’t have anything to sell.
Product costs are the biggest expense by a country mile. Our study found that in the first year of trading, product costs account for almost one-third (31.6%) of a small business’s expenses.
They’re not only the most expensive; they also the hardest expense to keep down. Some 21% of businesses said that costs associated with their inventory, such as product testing and receiving and returning defective products, as well as surplus inventory, could quickly rack up bills.
2. Operating costs
Operating costs cover expenses to get your business functional, plus day-to-day running costs to keep your store active. These include incorporation or legal fees, accounting software, and services.
Small businesses spend an average of 11% of their budget on these operating costs. But some 23% of entrepreneurs cited one-time small business startup costs like licenses, permits, and business insurance as unexpectedly costly. They were also surprised that they were charged to incorporate both state-wide and federally in the US.
Plus, in the qualitative component of our study, business owners repeatedly mentioned taxes and accounting as painfully cumbersome—and worth hiring professional help for.
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3. Online store costs
When we asked our aspiring entrepreneurs how much they thought their first year of business would cost them, they wholly overestimated in one area: their online store. Aspiring entrepreneurs expected to spend 12% of their budget on online costs in their first year, but they actually spent only 9%.Â
The perceived cost and complexity of launching and scaling an online business remains a barrier to entry for many aspiring entrepreneurs. But it’s largely unfounded. For Shopify’s part, our core ethos is to enable precisely those entrepreneurs who don’t have coding or design skills to create an online store. And to do so affordably.
Our research corroborates this. Of the 300 business owners surveyed, we found Shopify customers spent an average of $38,000 on their business in the first year, compared to non-Shopify customers who spent an average of $41,000 in their first year.
4. Shipping costs
The process of getting a product to the end customer is an expense any ecommerce company needs to consider. Regardless of whether you’re shipping inventory from your own warehouse or using dropshipping suppliers, around 8.7% of your annual expenses will be spent on shipping. This includes packaging, labels, and shipping insurance costs.
Some34% of businesses cited packaging costs, damaged or returned items, and general shipping fees. This was particularly painful for businesses with low shipping volumes in the early stages.Â
5. Offline costs
Are you supplementing your online store with in-person sales? There are expenses associated with selling offline, such as stall or table fees, office space, rent, and gas to travel to the location.
How much you’ll spend on this differs depending on whether you have a permanent storefront or use the pop-up model. An online business that sells at the occasional craft market will have much lower offline expenses than one with a permanent brick-and-mortar store. But as a rough guide, the average business spends 10.5% on offline expenses in their first year of trading.
6. Staff costs
When you’re a solopreneur, you have limited resources: They start and end with you. You’re limited to the skills you possess and the skills you’re willing to learn. Many business owners reach a milestone in their career where they need to weigh the financial costs of hiring help with the time costs of doing everything by themselves.
Perhaps unsurprisingly, having employees dramatically increases overall spend. If you choose to go the solo business ownership route, you can spend less than one-third of what businesses with employees spend.
The average business spends 18.8% of its first year’s budget on staffing costs like salaries, benefits, and perks. But companies that reported higher revenue in their first year spent significantly more on team costs—almost one-third of their total budget.Â
The relationship between revenue and team costs may seem like an obvious one: If you make more money, you can afford to pay yourself and hire employees. But the relationship goes both ways. Adding members to your team can also drive revenue growth.
7. Marketing costs
Marketing is more of an art than a science, and getting the budget exactly right at the beginning is tough. Spend too little, and you won’t get your brand in front of buyers; spend too much, and you’re less likely to hit your break-even point.
When we asked business owners, “How much did marketing account for as a percentage of your overall budget?†we found a significant relationship between marketing spend and revenue. The less money a business made overall, the more it spent on marketing. And the inverse was true too: The more money a business made overall, the less it spent on marketing.