E-commerce

The ever-saturating sphere of e-commerce: how to stay alive and prosper?

The spread of the coronavirus has brought a leap in the adoption and utilisation of e-commerce, but when moving your business online, it is necessary to first consider taxes, marketing and the choice of business model.

On Äripäev’s podcast “Kasvukursil” Erik Suits, Grant Thornton Baltic’s digital marketing strategist and an e-commerce entrepreneur, pointed out: "We witnessed a significant leap this spring. In April, at the beginning of the COVID-19 pandemic in Estonia, the e-commerce industry almost doubled their sales".

Suits further iterated that e-commerce is often more efficient due to lower administrative costs, as compared to a physical retail shop. However, economies of scale are required to obtain the advantage of efficiency. This can be obtained through a phenomenon known as the long tail "There are no limitations imposed by a physical space, meaning that thousands of products can be added to one store, while also allowing enabling access to international markets." Suits explained.

However, in order to take advantage of these benefits, it is necessary to consider all the necessary aspects for doing so – for instance, how to deliver the goods to different markets, what payment methods to provide to the customers and how do you deal with taxes in different jurisdictions. According to Suits the matter regarding payment methods is simple - the more the better. "We use a variety of different banks and payment providers, Estonian bank links make up 60-80 percent of the payments in e-commerce, while credit and debit+ cards are also used by a significant proportion of our clients."

Start by choosing the appropriate business model

Before launching your very first online shop you should consider which business model is the most suitable to your business. “The best known and most conventional model is the one where a business owner opens up an online store to sell and market their existing product range to a wider audience. However, there are multiple other forms of e-commerce that ought to be considered, as they might provide the benefits of a larger product range or more sustainable cash flow.” Suits further highlighted that one such model of e-commerce is dropshipping, by which the owner of the store does not store or fulfil the products, but rather acts as an intermediary, forwarding the order to the supplier to be fulfilled. Furthermore, there are entrepreneurs who operate based on business models, such as subscription-based models, which can potentially provide a better customer lifetime value and thus, reduce the amount of resources and effort that goes into the marketing funnel. The expert concluded that these models can often be applied side by side and it is important to consider which model will be the best fit for your business.

When opening an e-store, it is equally important to decide which online platform to use. There are both software and service-based platforms available to an e-commerce entrepreneur. Suits shortly highlighted the advantages and disadvantages of both: "Software-based platforms usually requires a more significant up-front investment, but allow the environment to be better adapted to a company’s internal processes, while service-based platforms offer an out of the box solution allowing the entrepreneur to get started cost-effectively and fast."

One shouldn’t forget about the legal side of things

Once the model is chosen, it should be ensured that all the rules are met on the legal side. "A merchant must ensure the transparency of his business and formulate rules. It is important that the consumer receives all the necessary information about the product or service, but also about the trader himself,” Grant Thornton Baltic's legal advisor Lee Laanemäe empathized. She gave an example that the contact information found on the e-store's website must correspond to reality and the customer must be able to get in contact with the merchant.

Furthermore, whatever the operating model, it is important to note that the order must be completed within 30 days. "If this requirement is not met, the consumer can withdraw from the contract and demand compensation for damage," Laanemäe explained. You also need to check that the prices in the store are correct. "There have been situations where the prices have been displayed incorrectly in some online stores - in this case, the trader must be able to prove that it was a clear error in pricing to refuse the transaction. I have witnessed myself how the price of some products is close to zero and the products can be ordered.”

The merchant must also take into account that the customer can return the ordered goods within 14 days without justification. "The 14 days will take effect when the customer receives the goods, not from the moment of ordering. In the case of services, from the moment of concluding the contract, "said Laanemäe. "If the merchant wants the consumer to bear the costs related to the return, he must also be informed in advance." Laanemäe added that in some special cases the merchant can legally justify not accepting returns. For example, custom-made products and perishable products are not refundable.

Be vary of tax issues

Tax issues play an important role in e-commerce. A clear distinction should be made here between whether the goods or services are offered on the internal market or across borders. "In the first case, the online is no different from a regular company, while with cross-border transactions issues arise with regard to import and VAT," said Kristjan Järve, Head of Tax Consulting at Grant Thornton Baltic.

Järve pointed out that global e-commerce may be subject to very different consumption taxes in different target markets. "Especially if sold outside the European Union, the taxes may differ from what the Estonian entrepreneur is used to," he noted. "Globally alone, for example, there are already seven VAT systems," he exemplified.

Import duties must also be taken into account when organizing the transport of goods. In the European Union, there are certain thresholds above which VAT must be declared at the rates in force in the country of destination. "It is a rather bureaucratic process," Järve warned.

Never forget about marketing

Finding the right marketing mix is the most crucial element when conducting business online. Erik Suits further elaborated on a typical mistake for beginners: "Many entrepreneurs often just channel their marketing budget into Facebook ads without having a complete and strategic view of the marketing funnel.”

He recommends that before starting off your marketing activities, think about how and which customer do you want to reach, then start raising customer awareness and continue to influence the decision-making process to produce conversions, while not forgetting about maintaining customer loyalty in the bottom of the funnel. "There should be some marketing activities at each stage of the marketing funnel, which will allow for a more holistic and thought through marketing" Suits suggested.

Suits stressed that marketing activities must always be measured. "Only then it is possible to really tell how much turnover each marketing euro has produced, otherwise you are just burning through your marketing budget with no idea whether your marketing efforts are paying off."

Lastly, Lee Laanemäe advised not to forget about protecting your intellectual property (IP), as this is something that is often disregarded by entrepreneurs chasing to make their first online sale. The easiest way to protect your IP is to apply for trademark. "As a rule, a trademark is applied for in Europe, with one application you can obtain protection in all European Union member states," Laanemäe explained. "A trademark has a clear property value and can be later licensed, sold and pledged".

Author: Karl-Eduard Salumäe

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