, Retail
You opened the online shop because there is no rent. Eight months later there is a packing bench, a part-time picker, a tape gun budget, a carrier account, a returns pile and an advertising spend that goes up every time you try to grow. The rent did not disappear. It changed shape.
Online is not cheaper than a shop. It is differently expensive, and the difference is that a shop's costs are mostly fixed while an online shop's costs are mostly per order. That single fact decides almost everything about how the two channels behave.
The rent is replaced, not removed
A shop costs you a large amount every month regardless of whether anyone walks in. Rent, business rates, heat, light, insurance, the person who has to be there to open the door. The marginal cost of one more customer is close to nothing, which is why a good day in a shop is disproportionately profitable.
Online reverses it. You avoid the trading floor, although you still pay for storage, and a warehouse or a unit has a rateable value set by the Valuation Office Agency like anything else. What you pick up instead is a cost per order that never goes away.
Count it honestly for a single order.
- Picking and packing labour. Six to ten minutes per order is normal for a small operation, which at the National Living Wage plus employer costs is meaningful money before anything else happens.
- Packaging. Box, void fill, tape, label. Rarely less than 50p, often over £1.
- Carriage. The number you negotiated, plus fuel and surcharges, plus the surcharge for anything long, heavy or going somewhere the carrier considers remote.
- Payment processing. Interchange on consumer cards is capped at 0.2% for debit and 0.3% for credit under the assimilated interchange rules, but scheme fees and your acquirer's margin sit on top, and the Payment Systems Regulator's own market review found the total cost is not always easy to see on your statement.
- Returns. Covered below, and the one most people leave out entirely.
Cost to serve, per order not per year
The useful figure is cost to serve: everything above, divided by orders. Work it out once and it will change what you do next.
Say it comes to £6.40 an order. On an average basket of £28 at a 45% gross margin, you make £12.60 of margin and spend £6.40 getting it out of the door, leaving £6.20 before any advertising, software, or the cost of the person answering emails. On an average basket of £14, the same order leaves £0.30. The margin percentage is identical. The business is not.
This is why the single most valuable lever online is usually basket size, not conversion rate. Free delivery thresholds, bundles, multi-buys and sensible cross-sells move the number that matters, and they do it without buying another customer.
Acquisition behaves like rent that goes up
A shop's footfall is partly paid for in rent. You chose a location and the passing trade came with it. Online you buy footfall directly, and the price is set by whoever else is bidding.
Treat customer acquisition cost as a real line: total marketing spend divided by new customers. Then compare it against contribution per order, and against what a customer is worth over a year rather than on the first transaction. A £14 acquisition cost is fine if people come back four times. It is fatal if they buy once.
The trap is that paid acquisition scales smoothly right up until it does not. Costs rise as you push volume, because you are buying progressively less interested people. Email and returning customers are the only part of the mix whose cost falls as you grow, which is why the list matters more than the campaign.
Note the rules while you build it. Under the Privacy and Electronic Communications Regulations, you can email existing customers about similar goods under the soft opt-in, provided you offered an opt-out at the point of sale and in every message. Buying a list and emailing it is enforcement territory, and the Information Commissioner's Office does fine for it.
The rules cost money too
Distance selling carries obligations a shop does not have. Under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, consumers have 14 days from receipt to cancel most orders and a further 14 days to send goods back, and you must refund the basic outbound delivery charge as well as the goods. You are refunding a delivery you already paid for.
Packaging brings its own. Extended producer responsibility for packaging, under the Producer Responsibility Obligations (Packaging and Packaging Waste) Regulations 2024, requires businesses above set turnover and packaging tonnage thresholds to report data and, for the larger tier, to pay fees based on what they put on the market. Check which tier you fall into, because the thresholds are specific and the reporting is annual.
VAT is the same in both channels, which surprises people. What differs is that online you often absorb the delivery charge inside a VAT-inclusive price, so a free delivery offer costs you the carriage plus the VAT on the part of the price that covers it.
Where online genuinely wins
None of this is an argument against selling online. It wins in three specific ways, and they are worth naming.
Range. A shop can hold what fits. A warehouse can hold the long tail, and the long tail is often where margin lives.
Reach. Your catchment stops being a two mile radius. For anything specialist, that is the difference between a viable range and an unviable one.
Information. Every online interaction is recorded. You know what people looked at and did not buy, which a shop will never tell you.
The businesses that make it work generally stop treating the two channels as rivals. The shop does what fixed costs do well: high value, high touch, immediate. The website does what variable costs do well: range, reach and repeat.
Where this shows up in the game
E-commerce is one of the five business types in Business Baron's free game, so you can run an online shop without paying anything, and high street shops are part of the full game. Every trade is simulated as that trade rather than as one business with different pictures, so the costs that replace the rent are there to be found. Running both well is a different problem from running either one.