Why Selling Online is Expensive?
In many countries across the world, small retailers are against e-commerce websites. This is because they believe that these websites use unfair trade practices like predatory pricing in order to put them out of business. However, e-commerce websites refute this charge. They often encourage small retailers to sell on their websites. After all, in theory e-commerce websites are marketplaces which are open to all retailers. These e-commerce websites often project themselves as a free market where the best and the most efficient retailers can grow their business since it is no longer limited by geographical limitations.
However, the reality is very different. Selling on e-commerce websites is seldom profitable for small retailers. There are multiple charges that these websites take in order to enable the sale. At the end of the day, the sellers margin is drastically compromised and the website ends up making all the money.
In this article, we will have a closer look at the various charges which are incurred by small retailers who try to sell their merchandise online.
Cost #1: Commission
Commissions are the most important expense that small sellers pay to e-commerce websites. Depending upon the bargaining power of the website, this could range as high as 50%. This commission is made up of two parts.
Firstly, e-commerce websites charge a wide variety of fixed rate commissions. E-commerce websites charge money to list every product on their website. Many websites keep increasing the commission structure if more products are listed. This component is fixed in the sense that it has to be paid regardless of whether any sale is made or not.
There are certain other components which are fixed but have to be paid with every sale. This means that the amount if fixed regardless of the sales value. Some of these charges are difficult to understand. For instance, the ubiquitous tech fee charged by most e-commerce companies. Then there are other charges such as packing fee, cataloguing fee as well as delivery fee which are also more or less fixed.
Apart from the above mentioned fixed fees, there are a variety of variable fees as well. For instance, companies like Amazon charge a payment gateway fee if the money is received electronically. If they collect cash on delivery, they charge a cash handling fee. Commissions based on sales amount and marketing costs are also often charged.
Cost #2: Returns
E-commerce websites offer their customers the convenience of being able to return any product without having any questions asked. However, for the retailers, return is a very expensive proposition. The retailers are often made to pay the cost of reverse logistics when consumers decide to return the product. This is the case even if nothing is wrong with the product. Also, many websites charge penalties to sellers if their returns exceed a certain percentage. This could be due to consumers returning the products due to frivolous reasons or it could also be due to damage incurred during transportation which may be beyond the control of the seller.
The costs of returns tend to be substantial and eat up into suppliers margins. Suppliers tend to price their products assuming a certain percentage of returns. This is why Amazon has introduced a voluntary no return policy. If consumers buy goods under this policy, they will not be able to return it. However, they will get a discounted rate for the goods purchased.
Cost #3: SLA Adherence
E-commerce also companies promise their customers lightning fast deliveries. However, this also means that their sellers have to be efficient enough to be on schedule. These companies tend to chare penalties in case sellers fail to adhere to any SLAs. Sellers therefore need to ensure that the availability status of their products is accurately listed on these e-commerce websites.
Cost #4: Accounting and Settlement
The payment cycles which are followed by e-commerce firms are quite complex. For instance, invoices are drawn before goods are sent. However, payments are made once a month for orders which have their status as order delivered. Hence, if an order is delivered on the first of a month, the seller will receive the payment in the next month that too if that product hasnt been returned.
There are two different charges that sellers incur in this case. Firstly, sellers have to deal with increased complexity regarding their billing and payments process. Often, they need to buy software of hire specialized people which increases the costs. Secondly, e-commerce websites tend to hold money for a long period of time. Hence, sellers lose interest on the receivables which again adds up to the cost of selling online.
Cost #5: Visibility Costs
Lastly, e-commerce websites charge their sellers in order to make their product appear prominently on their website. There are no sales commitments from e-commerce websites. However, they are quick to deduct increased marketing expenditure from the seller.
The bottom line is that many of these websites gain at the expense of the seller. This is why prominent brands like Zara and H&M only sell on their websites. If all these costs of selling online are added to a product, it ends up becoming almost as expensive as brick and mortar stores. The difference in the price is pocketed by e-commerce firms such as Amazon, which is why they are growing at a remarkable rate.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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