This Article is about: How does E-commerce make money after offering huge discount? if any one ask Why is the e-commerce industry facing losses in India? answer is very simple, so Let me given example:-
Once IN my childhood….. i was a kid, I bought chocolates from my pocket money but I was having teeth problems so i couldn’t eat them. I couldn’t take them home. I sold at discounted prices to my friends.
Sounds vague right? Why would i do that? You feel similar how can these stores do this?
The answer is investors’ money, they want to grab market share, it comes at a enormous expense, these companies follow discounting model, that once a buyer comes and buys a product or makes a buying he will come again. In this hope these firms do blind discounting..:-
When investor invests money, he wants to recover his money back, there are two habits to it, make profits or find a bigger investor who would capitalize at higher valuations. A bigger investor needs bigger numbers, quicker growth. So what do you do? Create a illusion of growth with large number of users.
That’s why 8/10 companies will fold out… they are making money but currently, it doesn’t actually. but why still How does E-commerce make money after offering huge discount???
How does E-commerce make money after offering huge discount
There are few important things that need to be addressed first if I am to answer this question in proper way:-
- Are we talking about overall profitability of e commerce companies else if we are talking about the profits made by the individual firm.
- Does profitability really matter at this point of stage of their operations?
Let us try to talk these two topics one by one:-
Overall profitability of the seller vs profits made on sale of specific items:-
For sure the seller isn’t overall profitable, because there are a bunch of products that contribute to the overall profitability:
- Personnel expenses– The expenses incurred by the SME(Small mediam enterprises.) in the form of payroll expenses (salaries of employees). Since the firm is known to hire from the top and brightest of the country, the payroll costs turn out to be quite substantial as equalled to other companies. If you look at the overall team of Flipkart, you would find a bunch of ex-entrepreneurs, ex-alums from leading technology and start-up firms in and out of India, a whole set of developers meanwhile the leading technology firms in the country as well as a whole mass of MBA grads from the best b-schools of the nation. (I am not even factoring in the army of delivery personnel they have, because theoretically that is a part of a different business entity altogether, and not the commercial entity we are talking about here) so Result : Huge payroll expense.
How does E-commerce make money after offering huge discount
- Infrastructure expenses– This can be in the method of expenses incurred in running the office spaces across different locations, managing the warehouses and sorting branches in different hubs they manage among other stuffs. (Sure, the server costs and the bandwidth expenditures are also a part of these expenses)
- Marketing expenses– Now this expense is, what typically is in the thoughts of the consumers when they think of the major cost experiencing segments at the end of Flipkart or any other e-commerce company that they think. Be it the cost of acquiring a new shopper or the cost of re-engaging an old customer, or the cost of simply spreading the consciousness about their product and services to the nooks and angles of the country (via TV ads etc), it is all count up to the costs incurred by the company.
- Cost incurred in delivering a product– Packaging costs, delivery costs, cost of re-delivery(In customer absence), return rates (what percentage of the items are eventually returned), costs on each return (costs in delivering the product and back to the original warehouse/seller + if the package that has been returned can be re-sold or if it is no lengthier in a position to be sold) etc.
How does E-commerce make money after offering huge discount
- Cost incurred on each sale made– Payment gateway costs, costs related with collection of cash for COD orders, also affiliate commissions (if any) etc.
There are many more such extra expenses that build up to the expenses incurred by the firm in its day by day operations, and if we have to consider of overall profitability, then all of these will come in-to consideration.
So, short answer – No!! they are not profitable, and I don’t see them in receipt of profitable any time soon.
Does profitability truly matter for them at this stage?
Now this ONE is something that is debatable – few people will say that sure profitability is VERY important, and maybe the e-commerce and their investors are not in the right frame of mind to indulge into costs so much in these categories without having the possibility of profitability in any time in near future. But the fact is that, I really do not blame anyone for their approach. Just think of it from this viewpoint – at this stage, they have been additional involved in scaling up their operations from the position of how far and wide they have been capable to penetrate into their target large consumer base, and spreading their efforts far and wide for future. Sure, there are a bunch of things that they can maybe improve upon in order to reduce their expenses, offer discounting process, and a bunch of other things. But, every single of these act items is an area where they ‘need to optimize‘ their tactic and operations. And the larger scale they are able to realize, every single small bit of improvement causing by optimization of these action items is going to outcome in a substantially sound increase in the overall health ratio. So, yeah – it has been working out pretty well for them, and this is the exact reason why the investors keep on backing them up. Now, all they need to do is enhance.
How does E-commerce make money after offering huge discount
“Actually! None of these sites are making huge money, they all are in race to capture “Customer Base”. This is only the reason, why each of these e-commerce sites are able to provide huge discounts in-spite of not being money-making business also you can say They are working like Jio(Telecom) Strategy.”
According to market analysts, various methods of offering discounts approved by e-commerce firms also supports the need for state governments to issue explanations on e-commerce and come up with a vibrant tax code addressing the nascent – nonetheless fast-growing business.
Now we will elaborate site wise that how’s they providing discounts:-
Some of the methods in which the three e-commerce—Amazon, Flipkart and Snapdeal—fund discounts on their sites.
How does E-commerce make money after offering huge discount
Amazon:-
After comparing costs with other sites, Amazon recommends the volume of discounts to its sellers on products, but doesn’t force them to take on these suggested prices. Sellers, however, end up care these suggested prices because Amazon finances the discounts in offers.
This is how it works: at the end of a assured period, sellers send a debit note to Amazon, titled “promotional funding”. This note covers the amount of discount that the seller gave on clothes, electronics, toys and any other products sold on the site. Then Amazon pays to the seller by cheque and in few cases, also gives additional currency as the seller’s margin. This debit note is over and overhead what Amazon collects from the consumer.
The debit note also includes service tax (GST) that the seller collects from Amazon on the total of the discounts. Seller then pays the service tax or GST to the central government. In effect, the amount of discounts is currently being preserved under central service tax laws rather than state tax laws.
Let understand with example:-
For instance, if a product priced Rs.100 and is sold for Rs.70 by a seller on Amazon, online payment retailer will collect Rs.70 from the customer, keep a cut for itself, and provide the remaining proceeds to the seller. Then, Amazon will also provide the seller an additional amount to account for the discounted offered by the seller. This amount could be Rs.30 or slightly lower.
In the case of e-commerce sites, sales tax is collected on the cost of the products and then on the price at which it is sold out to the final customer. If a product is sold on a site under the cost price—as it happens in some cases—then tax collected from the customer is much lesser than what was paid originally. In this situation, the seller would potentially be eligible to get a tax refund from the worried state tax department.
Flipkart:-
WS Retail Services Pvt. Ltd, a seller on Flipkart site, accounts for more than 75% of the site’s sales. For products sold by WS Retail, Flipkart doesn’t provide discounts. However, with other sellers on Flipkart suggests prices but unlike Amazon doesn’t typically pay the amount of discounts to vendors by cheque. Instead, it forgoes commissions or listing fees that markets usually charge their sellers. During Flipkart’s recent Big Billion Day sale, many of the sellers spaced out from WS Retail were simply promised a certain amount and even discounts were almost entirely funded by Flipkart. Sellers were paid over bank transfer by Flipkart, according to the people cited above.
How does E-commerce make money after offering huge discount
Snapdeal:-
Like Amazon, Snapdeal also finances part or discounts given by most of its suppliers/sellers. Snapdeal pays sellers by Real Time Gross Settlement, a form of online banking, or by cheque. Snapdeal refers to the discounts as in “promotional expenses”.
During Snapdeal’s recent Buy One, Get One promotional offer, sellers/vendor/supplier were paid for both products by Snapdeal, which charged its commission fee on one item.
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How does E-commerce make money after offering huge discount