Here in Shopify Support, we hear a lot of the same questions from potential merchants:
How much does it cost to start a business? Is it free?
The answers vary depending on what industry the merchant is looking to start in and the business model that they are following but one remains true in all cases; it is never free. To sum it up briefly; it takes money to make money.
In this post, we will be taking a brief look at the history of business and we will really dig into why starting a business isnever free.
If you would like to learn more about the specific costs of running an online store with Shopify, I would recommend readingmy post here.
A Brief History of Business As We Know It
In the 8th Century BC, India we start to see guild-likeshrenitrading and crafting in an official capacity as our earliest forms of firms. These firms could own property, enter contracts, and even be sued much like the firms of today.
Moving forward to 500BC, Athens people start paying back to society in what was known as liturgies. Liturgies were a form of tax that people would pay with both money and time. Paying liturgies was seen as prestigious and many people went above and beyond what was expected of them as a stamp of status and morality.
In 960AD, China we see the invention of gunpowder, printing presses, and even paper money. Here we have the first examples of joint-stock companies that resemble our modern-day capital structures.
Fast forward to the beginning of the 17th Century Europe. Government-backed firms such as the Dutch East India Company and the British East India Company start traveling far from home, moving products, primary tea, and spices, over vast networks by sea.
These public-private enterprises laid the cultural basis for efficient enterprises and made vast sums of money for their investors. This methodology and variations thereof transformed the world.
Everything changed in the early 18th century with the discovery of fossil fuels and steam power. The discovery of steam power and the machines that sprung from this discovery meant that production could take place on an entirely new scale.
People were now employed by the hundreds in factories, mass-producing products that were once made by hand by artisans and craftspeople. This change meant that instead of one individual making a product it was a company making the product with employees making parts. And the numbers at which they were being produced meant that they needed to be marketed to a wider audience of consumers.
At this point in history, businesses began to change every 50 years or so, shaped by new inventions, trade, and changing consumer habits.
In the 1830s, US railroad companies became the first truly modern management organizations, with ranks of salaried middle managers expanding almost as quickly as the tracks themselves.
By 1870, as those early superhighways lowered the cost of moving goods and information, a new type of company, founder-led trusts, emerged, spawning monopolies in so many industries that the booming needed a little busting. Transportation costs were lowered and the business world saw an exponential increase in global trade
The Great Depression of the 1930s truly shook the ideology of capitalism to its core. The world saw titans such as banks being toppled due to high debt. After this, governments took more active control of their countries’ economies.
Eventually, business management took off as a career for people to pursue, and throughout the 1900s the business potentials began to appear endless.
World War II shook up business as we know it once again with a further focus on globalization. It was becoming apparent to economic superpowers such as the United Stated that selling to your own country was incredibly limiting. Better means of shipping and communication made it easy for entrepreneurs to sell products and services to a global audience.
Fast forward to the twenty-first century and you see the rise of ecommerce as we know it. Today anyone can start their own business, even from their own home. With the rise of dropshipping and different fulfillment services these new entrepreneurs no longer even have to bulk buy their own stock. This however does not mean that starting a business is free.
As stated, starting a business is never free and now I’m going to tell you why.
Why Starting a Business is Never Free
Whilesome business modelsrequire very little up-front costs, and at Shopify, we’ve personally witnessed thesuccess of countless entrepreneurswith humble beginnings. But among the small businesses that get their business off the ground and don't last, more than a third cite a shortage of cash as the reason.
In October, we surveyed 150 aspirational entrepreneurs and 300 small business owners in the US to find out how much they spent in their first year of business. According to our research, businesses spent an average of $40,000 in their first year of business.
This is not to say that these business owners had $40,000 worth of funds from the get-go. Most businesses cited that as the year progressed their costs ramped up and they were able to use their profits to pay their way forward.
But what are these expenses exactly? Well here’s what most businesses cited as their main expanses:
Product: raw materials, inventory, supplier,manufacturing, patents, etc.
Operating: incorporation/legal fees, additional software, accounting, etc.
Online store: website/platform subscription, hosting/domain, contract developer/designer, etc.
Shipping: packaging, labels, etc.
Offline: stall/table fees, rent, gas, etc.
Team/Staff: salaries, benefits, perks, etc.
Marketing: logo, branding, ads, printed materials, etc.
On average this is how these small businesses allocated their funds, please note that these figures varied greatly depending on the business model used, industry, whether it was a full-time business, side hustle, or hobby, and of course, whether the business had employees or not:
31.6% on product costs
18.8% on team costs
11% on operating costs
10.5% on offline costs
10.3% on marketing costs
9% on online costs
8.7% on shipping costs
Knowing and accepting that your first year in business may not be profitable is essential when managing your own expectations as well as adequatelyfinancing your business.In most cases, the founders are the very last to be paid.
In short, it does take money to make money. Even when starting a very low-cost business model such as dropshipping or print on demand you will need financing for operation, online, shipping, and marketing. If you are serious about starting a business you need to be prepared to invest.