eCommerce Profitability: Sales vs Profit on Amazon/eBay/Shopify
All the profitability calculators that currently exist in the market, are really not doing their job! They don’t even provide us with complete information. To be precise, they never advise you with the ways to increase your profit margins.
Don’t trust my words?
Let me show you how the existing calculators are a mess and, can even eat our money without us realizing.
What Amazon calculator is all about?
To sell on marketplaces like Amazon/Flipkart, you have to consider the deductions done at their side. Taking into account the Amazon calculator for a kitchen Appliance sold by me.
Amazon has shown the charges based on its deductions, Referral/commission fee (charges based on product category); Closing fees; shipping fees; sales tax.
If you price your products based on the above calculations, you are doomed to lose money. Want to know why? Its because the expenses aren’t limited to the above calculations, you also need to take care of Product returns; reverse logistics; damages; branding expenses; warehouse storage charges and more.
Let us now see how you can be on a safer side by considering Profitability affecting factors.
What are Profitability affecting factors?
An organization selling products have to bear additional charges apart from the product cost price.
For e.g. My organization sells kitchenware products and there are employees working for the company who needs the system to operate on, which uses electricity.
The company expenses will involve,
- Salary/commission for employees
- Warehousing charges
- Electricity charges
- Marketplace deductions/ returns/damages
- Employee discounts
- inventory shrinkage
- Shipment charges
- Loan interests (if any for the company).
If your inventory is stored in a third-party warehouse, they do charge extra on storage and logistics (forward and reverse).
So, one has to take care of these expenses while planning on selling the products. This profit will not be generated overnight; you need to have patience to win over the industry.
To work on this better, one has to break these into two categories, Fixed and Variable charges.
- Fixed charges remain constant, generally includes building rent/employee salary.
- Variable charges increase at a constant rate, it includes the products/utilities (electricity/phone bills)/wages, etc. These charges increase with time depending on the sale.
The image shows the fixed cost remains same and variable cost increases with time.
Keeping the above data handy, will always help you determine and be ready to overcome the challenges involved with your expenses. Now let’s talk about eCommerce specific factors:
Breakdown of charges applied by Amazon on a return
Please consider how much a marketplace (like Amazon/eBay/Shopify store) (in this case Amazon) charges on receiving an order.
The user orders the product and makes the payment
If you see the below screenshot, it says the selling price of the product is 799 USD.
When the customer orders the product of 799/-,
MP deduction is based on,
Transferred amount to seller = 799 – 262.97 = 536.03
What seller gets?
An amount of +536.03
What marketplace gets?
An amount of +262.97
After seller returns the product, 799 USD is refunded to MP
Let us now see what amount is refunded and what extra charge does the seller holds from MP,
What MP gets here?
Seller refunds the whole amount to marketplace, (536.03) + MP extra deduction, (133.78) = 669.81/-
MP received amount before return = +262.97
669.81+262.97 = 932.78 – 799 = +133.78
What the seller gets?
The seller ends up paying an extra amount of -133.78 to the marketplace.
In addition to this, the brands are being charged extra for advertising their product on Amazon.
So, if we consider only the return charges we see that the product which a seller had got for 100, lists it on Amazon for 799, ends up paying extra 33.73 Rs. on return.
With handling the return rates, one should keep in mind to take care of these losses in the product listing rate on Amazon.
How to figure a product selling price while ensuring profitability–
Choosing the right marketplace to sell online is very important. Every marketplace has their own features when it comes to security, accessibility and fee structure. These sites take their commission based on your sales from their website and some others charge you in a different way. It’s like every e-commerce website has their own commission structure.
Let us now see what do these marketplace charges are based on,
- Commission fee which is charged based on the product category; it differs based on the category and marketplaces. The average commission being collected is around 15%.
- Fixed closing fee is based on the transactions done within a particular price range (M.P. e.g. Amazon/Flipkart) or based on per units sold by the brands (M.P. e.g. eBay).
- Shipping fee is charged based in Domestic and national shipping by the marketplaces. Brands can choose to offer free shipping or charge an extra amount. Few MP like Amazon and eBay allows self-shipment as well.
- Reverse Logistics charges are applicable for sellers on the returned products
- Payment Gateway fee, which is charged at 2.5% by few of the MPs like Flipkart/Paytm for transactions.
- Marketplace Penalties are for late shipment or on delivering damaged products
- RTO% (Return to the origin) is around 40% for some categories. It is charged when the orders cannot be delivered to the customer or when the products delivered is damaged and has to be shipped back to the warehouse. It can also include returns/fraud returns/customer error etc.
With these factors in mind, you also need to,
- Compete with other sellers in order to make a boost in your sale.
- Compare your rates from competitive websites (like rate comparison between Flipkart and Walmart)
Here is a question on Amazon central from a seller experiencing loss on a product because of their additional charges,
Growing marketplace fees will compel brands to sell at a higher rate. Customers do check multiple websites before buying a product, and when they get the same product at a much lower cost, they will not consider buying at your listed price.
All I can say is to stop selling the products where you end up with loss through these marketplaces and rather choose brands with value to ensure fewer returns. Identifying these opportunities to either increase the price or prune losses by discontinuing those SKUs, is extremely critical. Luckily you don’t have to manually do all this. There are software’s that consider all the factors and gives you a net profitability report. If you are selling online, be sure to subscribe to such software and monitor your profits per SKU, category or even at the brand level if you are selling multiple brands.