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The costs of e-commerce

Sure, it's cheaper to set up shop online than it is to erect a building, but e-commerce firms are finding that set-up costs can run to about $1 million-and marketing expenses can be several times that.

Many companies spend oodles of cash on setting up their e-commerce Web sites, only to find that they have to spend much more to market their online storefronts.

The Gartner Group released a study this week that companies are spending around $1 million dollars to set up shop on the Web.

Only 20 medium- to large-sized firms were represented in the study, but interviews with several companies seem to bear out the findings.

eBags chief executive Jon Nordmark, for instance, said his company spent in the "million-dollar" range to set up its Web site. But, he added that the company plans to spend more than 10 times that to establish eBags as a national brand and place eBags advertisements all over the Web., and also said they either are spending or plan to spend several times more money on marketing their sites than they spent on setting them up.

"Everything is about getting and owning all the real estate we can related to our category," Nordmark said. "That's far more expensive than building the site itself."

The Gartner study stems from surveys of companies with sales of more than $1 billion. But Gartner Group director of research Alyse Terhune said the study echoes anecdotal evidence collected by the company's analysts.

"It supported the assumptions that we made based on literally hundreds and hundreds of discussions with our clients," Terhune said.

According to the study, the companies Gartner surveyed spent anywhere from about $350,000 to more than $2 million to set up their sites. The companies contacted by CNET all said they spent within that range and that their labor costs accounted for the majority of their setup costs. However, they said their overall setup costs were in line with their expectations.

Although Gartner indicated that companies that spent toward the lower end of the range on setup costs were just trying to "get on the map," chief executive Alessandro Mina said companies that spent more than that could be overspending. Mina said that although has added features to its Web site since the site launched in November 1997, the total development costs were "significantly less than $1 million" and toward the lower end of the range given by Gartner. developed its Web site in-house, Mina said, which helped to hold down costs.

"When we hear these studies, we feel we got ours at a much better price than what other companies are doing," Mina said.

Like eBags' Nordmark, Mina said that's marketing costs were significantly higher than its setup costs. Including advertising that promotes both the companies Web site and its offline catalog, is spending 5 to 10 times more on marketing costs than it spent on setup costs, he said. president and chief executive Raghav Kher said his company's startup costs were within the broad range articulated in Gartner's survey. He said saved money by building its Web site in-house.

"We're a startup, so we know how to build it cheaply," Kher said.

Kher said planned to spend $50 million to $75 million over the next year to establish his company as a national brand. Despite the expense, he said such costs were necessary.

"It's become a highly competitive world," Kher said. "It has become highly noisy and in order to stand out, it's become expensive now."

Mina said he believes that marketing costs will continue to increase. As each e-commerce niche becomes more crowded, each new player will have to spend more to establish brand awareness. Because venture capitalists are flush with funds and eager to create national brands, they are willing to fund these marketing campaigns, Mina said.

Smaller companies with no national recognition who are just entering the e-commerce game could be locked out of the competition, Mina said.

"The window's pretty much closed unless they have access to VC funds," Mina said.