If are looking to start an online business, but want to better understand what you'll be getting into, you are in the right place.
In this article, I am going to discuss the pros and cons of starting and operating an online business and (where relevant) contrast them against traditional brick and mortar businesses.
Some of the key areas I will cover include costs, competition, operational flexibility, customer service, and growth opportunities. I will also provide pro tips throughout the article to help you navigate through some of the issues that online business owners face.
It's a lot to cover, but before we dive in, let's tackle some introductory questions around online businesses, including what they are and the different types of online businesses out there.
What is an Online Business?
An online business is a business that operates exclusively on the internet. You can sell almost anything on the internet, including goods, services and any combination of both.
E-commerce is perhaps the most well-known type of online business. Think Amazon, E-Bay, Alibaba, etc. If you are thinking of starting a small e-commerce store, you can partner up with Amazon (though its Amazon FBA program) and get off the ground pretty quickly. Or you can set up your own online storefront on platforms like Shopify, Etsy or Poshmark.
Of course, you can also go in a completely different direction and run an online publishing company.
That sounds intimidating, I know, but it's just another way of saying you can start a blog. Some huge players here include Nerdwallet (which went public not too long ago) and the Huffington Post. These mega-blogs earn millions of dollars per month.
It's a proven business model and I can confidently say that you can make great money doing this (for example, this blog generates reliable and passive income for me every month). If you want proof of how successful even small blogs can be, check out empire flippers and see the blogs they have for sale (and the income that those blogs are generating!).
Most of those blogs are just individual operators, but many are generating thousands or even tens of thousands of dollars per month.
When it comes to blogging you can start small and work your way bigger. If you want to learn how, check out my detailed article on passive income blogging.
Another huge area for online business is SaaS (which stands for software as a service). Basically, you create some software code (or hire someone to do so for you) that performs a service and then you sell it to people who need that service. Adobe and Salesforce are some of the largest SaaS providers in the U.S. If you work in corporate America, you have probably heard of these online businesses – their SaaS applications are very widely used.
If you have a technical bent, this may be the perfect online business for you. I love the SaaS business model because of its subscription-based structure. You can get steady monthly, recurring income, which is hard to beat.
Ok, now that we've got the introductory stuff out of the way, let's get into the pros and cons of online businesses.
Advantages of Online Business
Online Businesses Are Easy and Cheap to Start
One of the primary benefits of starting an online business is its low starting costs. For example, if you want to start a blog, all you really need is a domain name (which costs less than $20/year) and a web hosting company to host your website (which, on the low end, can run less than $5 per month). You normally get both of these things though your webhosting company.
I use Siteground (as do around 2 million other sites). BlueHost is another popular (and slightly cheaper) option. Both are easy to implement and they take you through the process pretty much step-by-step.
Similarly, starting an e-commerce business can be relatively cheap.
You may need to spend some money upfront to buy inventory, but even here, there are ways to save money. You can use dropshipping services, like Oberlo, so that you don't have to purchase the inventory upfront – the manufacturer ships directly to your customer after they have placed the order. That means less risk and hassle for you.
Online Businesses Have Lower Overhead
In addition to having lower start-up costs, online businesses tend to have fewer ongoing expenses.
That's because you don't have a physical location. Brick and mortar storefronts are expensive because you need to pay monthly rent, gas, electric, phone and other bills. You bypass all of that with an online business. In addition, when you own a physical storefront, you will need someone to be there all of the time. Whether that's you or an employee, that is going to be a significant cost in terms of time or money.
With an online business, you don't need anyone minding the store, which is liberating and allows you to focus on more important things, like growing your business.
Online Businesses Have Less Inventory Risk
I already mentioned dropshipping as a terrific way to manage inventory risk. Inventory risk is just the risk of buying too much inventory that you can't sell. I used to own a flower shop and 100% appreciate this risk (if you miscalculate an order for an easily perishable item like flowers, you can lose a ton of money).
The good thing is that many online businesses are immune from this risk. If you own a blog, your articles are not going to spoil. The same holds true for SaaS code and even most e-commerce goods.
More Customers Are Shopping Online
If you operate an online business, you can enjoy the benefits of a rapidly growing sector. According Statista, retail e-commerce sales worldwide have grown from $1.336 trillion in 2014 to nearly $4.9 trillion in 2021. It is expected to further grow to $6.388 trillion by 2024.
That's an eyepopping amount of sales and it's great news if you want to be an online retailer. But you don't have to limit yourself to e-commerce. There are plenty of ways to make money online – one area that I think is poised for massive growth is YouTube.
If you have a creative streak and enjoy making video content, you can start your own YouTube channel and monetize it with ads once you get enough traffic coming to your channel.
Pretty cool way to make money on the internet and you don't need much to get started.
Fewer Customer Service Burdens
Because you won't be operating a physical storefront, you won't be dealing with walk-in traffic and all of the customer service issues that come with that. Sure, you will need to deal with some customer complaints and issues if you decide to run an e-commerce shop, but that is usually handled through emails.
The level of personal interaction (and hassle) is way less – you will never have to deal with an angry customer screaming at you and making a scene at your store because their fries were soggy.
Of course, if you run a different type of online business (like a blog), there are no customers at all. Sure, you want to keep your readers engaged and happy, but they're not going to ask you for a refund if they weren't happy with your article.
You Can Operate From Anywhere
This has to be one of my favorite pros of operating an online business. You can work on your business from literally anywhere in the world. All you really need is your laptop and an internet connection.
Want to spend 6 months traveling the globe and still keep the money rolling in? An online business lets you do that. Just awesome.
You Are Always Open For Business
One of the great things about an online business is that it never closes. Most brick and mortar establishments have set hours of operation. But an online business doesn't have those limitations. You can be making money at any time, from anyone, living anywhere. If you've ever dreamt of making money in your sleep, an online business that never closes will literally make that dream come true.
Online Businesses Are Easy to Expand
When you own a single storefront and want to expand, it is a huge undertaking. You have to find another suitable location, set that second storefront up while still managing the first one, and hope that the new location is a hit. It's going to take a lot of time, money and work to successfully pull it off.
But expanding your online business takes far less work. Sure, you will need to identify how you want to expand (new product lines, new services, etc.), but you won't have the added burden of a new location to complicate matters. It's generally a lot easier to expand online, which is why many online businesses experience rapid growth.
Business Metrics Are Easier to Track and Improvements Can Be Rapid
When I worked for a very large US bank, a common saying was “that which gets measured, gets done.” In business, information is critical to growth and success. If you know that certain online ads work better than others, that can be a huge advantage. If you can track how visitors to your website interact with various elements of your site and see what draws their attention, that can be valuable information that can drive sales.
Fortunately, that type of information (and so much more) is easily available to online business owners. You can really get into the details and get insights into customer behavior that are just not possible when you are operating a physical storefront. Having access to this type of info is incredibly helpful, especially if you want to pinpoint what is going right and wrong with your business. It also gives you a really clear roadmap for improving your business, which is no small thing.
Ok, so that sums up the key advantages of an online business (and there are a lot of them!). But you don't want to jump into any business until you know the ugly side of owning that type of business. With that, let's get into the disadvantages of online businesses.
Disadvantages of Online Business
Online Businesses Face Intense Global Competition
While online businesses enjoy the benefits of having a global customer base, they also face competition from all around the world. A neighborhood business usually only has to worry about competitors in the local area, but your online business is competing with every other online business in the world that is offering the same (or similar) product or service as you.
That means competition is fierce and unrelenting. You will need to distinguish yourself somehow and rise above your competition.
Online Transactions Are Impersonal
Because online transactions are impersonal, you are not really developing any personal connection with any of your customers. It is all about what's the best deal out there.
On the other hand, if you operate a brick and mortar business, you do have a chance to build relationships with your customers and create repeat business because of those relationships. They will be much more loyal to you even if you are not the lowest priced option.
In addition, word of mouth advertising plays a much stronger role for the neighborhood store than it does for an online business. As any business owner will tell you, word of mouth advertising is a powerful advantage and you lose a lot of that when you operate solely online.
Because of the high level of competition, you will often see people try to mimic things that you are finding success with. There are laws that may protect your intellectual property, like patents, copyrights, trademarks, etc., but the law can only do so much.
You will need to be smart about protecting your most valuable trade secrets and find ways to prevent your competitors from stealing your best ideas.
You Are at the Mercy of Platform Providers
Most online businesses rely on some sort of platform to conduct their business. If you are selling on Amazon through Amazon FBA, you are beholden to Amazon's rules and policies (and fees). They have complete control of that platform and can kick you off it if they want. The same holds true for many of the other large e-commerce platforms.
Even if you aren't in the e-commerce space, you are subject to the whims of some very large internet players.
For example, my blog gets traffic from Google search, but if Google chooses to change its search algorithm (which it does several times a year), that could result in my traffic being hurt. And there is nothing I can do about it. If you also get traffic from Facebook or Pinterest (or any other social media platforms), they can also change their algorithms and reduce the traffic that goes to your site.
In the early days of the internet, people were very apprehensive about buying online. With the emergence of huge and reputable e-commerce companies like Amazon making online shopping commonplace, much of that fear has evaporated. But there are still people who are worried about transacting online, especially with an online business that does not have the reputation that Amazon does.
If you want to succeed as an online retailer, you will need to build trust in your business. Make sure you have robust security around your website and the transactions that will be taking place there. At a minimum, make sure your site has a SSL certificate so that people know they are on a secure site.
Be transparent about who you are, what you are offering, and what you will do. Fewer things are more important to an online business than trust.
Finally, because you are on the internet, you face many technical risks. They include the risk of being hacked, web hosting servers getting overloaded or going down, or any number of other technical issues that could cause your site to perform poorly or not at all.
While there are plug-ins that can help protect your site against being hacked and web hosting providers that provide really great protections against downtime, you will never have 100% protection against these types of events.
You should do the best you can to mitigate the risk of these things happening, but you should know going in that these things may happen from time to time. It's just a part of doing business online.
So there you have it – the advantages and disadvantages of online businesses (and some tips sprinkled in to help you navigate through it all). Hope you have found the article helpful.
If you want to learn more about how to start a business in general, check out my ultimate beginner's guide to starting a business. I take you step-by-step through every phase of the process from ideation all the way to launch (with detailed instructions and tips along the way).