Ecommerce is complicated. Anything with money always is. But understanding how WordPress ecommerce works is important for building awesome ecommerce sites. As complicated as it is, it doesn’t have to give you a headache. We can walk you through the WordPress ecommerce process.
Why WordPress & Ecommerce?
So why would you want to build an ecommerce site with WordPress? Maybe because WordPress is awesome? And adding ecommerce turns awesome into a moneymaker? That sounds pretty good.
WordPress is one of the most popular platforms out there, and it gives you the power to control your own store with a plugin such as iThemes’ Exchange.
We go into more detail on why you should go with WordPress in some of our ebooks:
WordPress & Ecommerce: A Simple Guide for Selling Products Online
The Ecommerce Opportunity: How Freelance Developers Can Build Ecommerce Websites With WordPress
You can also learn more about all of this from last year’s Ecommerce Summit.
How WordPress Ecommerce Works
So how does this complicated process work? There are two ways you can set up an ecommerce site:
Standard
Third Party Processor
Each method has its own pros and cons, and we’ll cover both.
The Standard Ecommerce Process
The standard process is, well, standard. This is the primary way that ecommerce works. It’s an involved process and has four main steps:
Shopping Cart – Software that manages the purchase process.
Payment Gateway – Approves transactions and keeps a list.
Merchant Account – Completes transactions and collects cash.
Bank Account – Where your money ends up.
It’s easier to understand the process if you just follow the money. It starts in the shopping cart where a customer checks out and enters their credit card info. Then a payment gateway talks to the bank and confirms the transaction. Later, the payment gateway sends approved transactions to the merchant account to start collecting money. Your merchant account collects all your hard-earned cash from the various banks backing your customers’ credit cards. Then your merchant account deposits that money in your business’ bank account.
That’s how you make your money. Score.
Now that we’ve done a quick overview, let’s look at the details:
Shopping Cart
The shopping cart manages the shopping process. It communicates with the payment gateway and keeps the user happy. In the real world the shopping cart just holds our goodies, but an online shopping cart does a lot more. And that last role, keeping the user happy, is the most important one.
The number one problem you’ll face in ecommerce is shopping cart abandonment. People browse and put stuff in their cart, but then they never check out. Finding ways to convert more shoppers to purchasers will literally make more money for your clients.
How WordPress ecommerce works is with a plugin. The shopping cart is determined by whatever ecommerce plugin you choose. There are a ton of options out there, including our own Exchange ecommerce plugin.
Payment Gateway
Up next is the payment gateway. It works like the point of sale system in a retail store. The cashier swipes your card, and the machine either approves or denies your credit card.
Your shopping cart delivers the credit card data to the payment gateway and the gateway talks to the banks to get an approval or denial. You’re finding out if your customer’s card is going to work, or if it’s maxed out. This usually takes just two to three seconds.
If the transaction is approved, the payment gateway collects the approval code. Those authorizations are collected throughout the day—like a list of IOUs—and delivered in a single batch, usually once per day, to the merchant account. Then you can get paid.
Payment gateways charge several fees, including a transaction fee (often 10 cents per transaction), a batch fee (often 25 cents) and they usually have a minimum monthly fee (maybe $20).
Merchant Account
The next step is the merchant account. It’s like a collections agent that takes the list of credit card authorizations from your payment gateway (the IOUs) and collets your money.
This is called the settlement process, and this is what it looks like:
Your merchant account collects all those payments and holds them in your account. Some merchant accounts have automatic deposits to your bank account, but you’ll need to initiate a transfer with others.
Like any bank, the merchant account doesn’t work for free. All this collecting and transferring of money costs money. There are a host of fees including a percentage of the transaction, monthly minimum fees, customer service fees, annual fees and chargeback fees.
Setting up a merchant account is a very complex process. There’s a lot of money changing hands, so they want to make sure everything is legit. How complicated is it? It’s comparable to getting a loan to buy a house.
Tip: Merchant Account First
Because a merchant account is so complicated, it’s smart to set it up first. Not all plugins or payment gateways work with all merchant accounts, so you need to get this squared away early. The process of getting one can also take a while and being denied is common.
Bank Account
The final step in the ecommerce process is easy: Get paid.
All your money collects in the merchant account until it can? be paid out to your business bank account. Sometimes this is automatic and sometimes it’s not. There’s also usually a waiting period before you can get your money.
This step is simple, but it’s important to keep in mind because the money you make selling stuff on a site isn’t yours until it’s in your bank account. Your merchant account might require you to maintain a minimum balance (to cover chargebacks and other fees) and can put a hold on your account if it sees suspicious activity.
These issues happen on the merchant account side and have nothing to do with your bank, but it’s worth keeping them in mind because sometimes it means you’re not getting cash into your bank where you can use it.
Third Party Processor
While the standard process combo of payment gateway and merchant account is the most common in ecommerce, there are also third party processors. The third party processor combines the role of a payment gateway and merchant account into one.
Instead of this:
Shopping Cart > Payment Gateway > Merchant Account > Bank Account
The process is simplified to this:
Shopping Cart > Third Party Processor > Bank Account
PayPal, Stripe and 2Checkout are a few third party processors you’ve probably heard of.
A third party processor handles both the authorization (can we accept this credit card) and collection of money. It approves the transaction, collects the money and gives you access to the cash.
Third party processors use a streamlined process that has several benefits, but also some downsides. This is where it’s crucial to understand how WordPress ecommerce works. A third party processor might sound simple and awesome, but you need to understand the costs involved. Likewise, the standard process might sound like a win, but you need to understand the time and investment involved to set it up.
Standards vs. Third Party Processors
Let’s compare third party processors to the standard payment gateway and merchant account:
Standard
Third Party
Cost:
Lower transaction fees
Higher transaction fees
Appearance:
Looks more professional
Can appear amateurish
Deposits:
Quick automatic deposits
No automatic deposits or only weekly
Security:
Requires SSL on site
Usually SSL is not required
PCI Compliance:
Rigorous PCI compliance
Not required or simple
Setup:
Complicated setup process
Easy setup process
Time Involved:
Weeks/months
Hours/days
Cost: Third party processors generally have higher fees than standard processors. You might be paying a straight fee across the board (usually 2.9% plus 30 cents per transaction) while with a standard processor, that rate will vary based on the card used and the volume. A good rule of thumb is if a client is doing more than $3,000 per month, then it will make financial sense to go with a standard processor.
Appearance/Usability: Standard processors give you ?the freedom to set up your cart and checkout experience however you want. Depending on how you set it up, this can often look more professional and polished. Third party processors can be more limiting, depending on who you go with. Sometimes you might be stuck with an off-site payment system that’s a drain on your usability. Third party processors are getting better, but sometimes this is still an issue.
Deposits: Standard processors usually deposit your money fairly quickly, generally within three days and usually automatically. Third party processors can take up to a week and it’s generally not automatic.
Security: Standard processors require a Secure Sockets Layer (SSL) certificate, while third party processors don’t usually require one (though you might want one anyway to build trust with customers).
PCI Compliance: Standard processors require very rigorous Payment Card Industry (PCI) compliance, while third party processors either don’t require it or only have very simple requirements.
Setup: Standard is complicated and involved. Remember that it’s comparable to a home loan. That’s a lot of paperwork. Third party is easy.
Time Involved: The standard process is complicated and that can take a lot of time. In some cases it could take months to get a merchant account set up. Third party can be set up quickly, sometimes in a matter of hours.
In general third party processors are easier to set up and get working, but you pay for it with higher costs and fewer options.
Taxes
We’ve covered the guts of how WordPress ecommerce works, but don’t forget about taxes.
You can’t escape taxes, even online. And just like the real world, taxes can be complicated. Thankfully there are some easy solutions. Using the power of TaxCloud, our Exchange plugin handles taxes with Easy U.S. Sales Taxes, Easy Canadian Sales Taxes and Easy EU Value Added Taxes add-ons.
Make sure your ecommerce plan takes care of the taxes.
How WordPress Ecommerce Works
Now that you know how WordPress ecommerce works—at least the basics—you can start building and selling ecommerce sites for your clients with confidence.
To learn more about how WordPress ecommerce works, be sure to check out these resources:
Ebook: WordPress & Ecommerce: A Simple Guide for Selling Products Online
Ebook:The Ecommerce Opportunity: How Freelance Developers Can Build Ecommerce Websites With WordPress
Video Trainings: Ecommerce Summit.