eCommerce profitability

How to maximize profits for eCommerce: Best practices and tips

An eCommerce specialist and CEO and Founder, Perspective Management Consulting, Samir Dahotre tells us how eCommerce startups and large enterprises can maximize margins for their eCommerce business. Through the experience of running his own eCommerce venture, Samir offers us deep insights into product strategy, reducing costs and maximizing margins for profitability -- a goal that is out of reach for most eCommerce firms
Samir Dahotre

Samir Dahotre

The world is watching with keen interest, India’s booming and fast growing eCommerce economy; currently estimated at about $15 billion and rapidly growing at 30- 50% YoY; expected to touch $70 billion by 2020. In terms of investor confidence, the country attracted $2 Billion (2014) in terms of Private Equity, Venture Funding & Angel Investors with a couple of IPO’s thrown in; over 800 companies were funded. Several seed stage companies received VC funding to the tune of $1M.

At the same stage, there are thousands of Internet startups including yours trying to achieve scale and grow your business; and keep growing with or without funding. Or you might be a large automobile brand and your boss has set you the herculean task of setting up your digital business – in terms of online brand or online sales. Whatever be the case; the key point for start-ups are to have a clear idea on being profitable from day 1; or as much profitable as possible.

As a startup you would say “I have already spent $5000 or Rs. 3 lacs on setting up my site; getting first few hires, building a few products to sell, a bit of digital marketing etc. and now my consumers are coming in; so I am in negative Rs 3 lacs, so what profits are you talking about?”

As an entrepreneur, I am publishing some insights learnt by virtue of my foray into the eCommerce business through my own eCommerce venture www.artbugs.in (Artistic Home Decor) and my role as a strategic advisor to other eCommerce companies and large enterprises.

Through this article, I am trying to guide both eCommerce startups and large enterprises on how they can maximize margins for their eCommerce business. While the article covers India profit/ taxation norms; the terms can be applied anywhere globally. Various aspects are also covered like product strategy, how to reduce costs and maximize margins etc.

Marketplace Model

Firstly; let us try to understand what you do and where do plan to go. For example, say your company’s site is www.example.com, and you sell home decor products like table lamps, coasters, wall clocks etc.

For this discussion, we are assuming a market place model (Same as Amazon & Flipkart) i.e. Example.com will contact various Home Decorative Suppliers and list their products on their site by simply taking their product images i.e. zero inventory. And whenever there is an online order you will contact the supplier and fulfill the transaction.

How much margin is a good margin?

Usually a successful eCommerce company is generally considered to be with thousands of visitors and many orders every day. Sure you want to be that also; but how do you get off the ground today? There are a host of digital marketing initiatives you can do to get those thousand visitors which can convert to a few orders per day. However what should be your initial product margin strategy?

Here are the options:-

Low Margin: If your margins are low then you will make less profit. However lowest margin = least price = maximum sale. This logic holds good if you are selling commodity product like mobile phones e.g. you are selling a Samsung Galaxy II (Established brand, defined need, buyer searching for your specific product).

However, most of us will not be selling mobile phones but a niche product or service. There will be lesser demand for e.g. for your home decor product like Tea Light. Hence you might as well increase your margin because the product is niche hence you should be able to generate demand albeit to a smaller market. However maybe also you are selling a “Branded Tea Light” widely available at multiple e-com stores so you can still keep lower margins to beat the competition. What is low margin? Anything upto 10%. Hence if you buy a phone for Rs. 10,000 and add a 5% margin which is Rs. 500 its still a good income as the demand for phones is huge

Medium Margin: This is a margin amount between 10 to 25%. For this discussion we are assuming margin on cost. (Meaning Cost= Rs. 100. Hence for 25% Margin on Cost the sale price is Rs. 125. Note your CA (Accountant) will tell you margin is to be done on Sale price i.e. 25/125= 20%)

A mid margin strategy is best for you to grow your business as:-

* Your products or collection of products and your overall site or your services are unique enough (and you have clearly studied the competition and know this) – hence a medium margin is good because you are competitively priced hence doing justice to your company as well as the consumer. You will create good demand
* You are slowly covering up your initial investment of Rs. 3 lacs or $5000 and slowly building up your sales and growing the company
*By seeing some demand in the market you are immediately able to gauge what products are selling, which are being viewed, which are being bought

If you have decent funding you can consider a zero margin strategy for the first six months; garner business and then increase your margin up to 20-25%

High margin can be anywhere between 50% to 100% on Cost. This can be employed only if you offer some extremely exclusive products which are also expensive e.g. Rare Deep Sea Russian Caviar!

Product Strategy & Range

Ensure that your product strategy is clear and the range supports the product strategy. E.g. If you have Home Decor as a prime category; you will accordingly set its sub categories. In each sub category you will ensure you have enough products to ensure consumer has adequate choice before making a decision on your product or a product at a another website. It is also important if you have Home Decor than you have to ensure other top categories are related to home decor. Remember you cannot be a flipkart or amazon which sells every conceivable product. Find your niche and build from there. Of course there are thousands of other things in product strategy which we will cover in a separate piece

Back to your CA – Which accounting model do you follow?

A marketplace model (explained earlier where you are listing products from other suppliers) means that your site is a sort of “broker” between the supplier and the consumer buyer. Hence accordingly you buy at 100, sell at Rs. 120. Plus you will add 14% Service tax on the Rs. 120 as you are providing a service of connecting buyer and seller. However the Indian Govt. has raised a huge hue and cry on this practice as foul play; as some very large sites’ suppliers are their sister concerns. However the biggies have legal armies to speak with the govt. which you don’t. Hence it is best to avoid the Service Tax Route and follow the Trader/ Reseller Model

Trader/ Re-seller Model

Here you are following hundreds of years of Business Practice in India; which is Trader/ Reseller model. In this you buy product from Supplier at Rs. 100. Add 20% margin to arrive at sale price Rs. 120. Now consider this: You have bought something from someone and sold it to a consumer; hence you act as Trader/ Reseller. Hence you need to apply VAT (Value Added Tax)… Hence for e.g. if it is a Home Decor usually it is 5% VAT; hence end user price becomes Rs. 120 + 5% = Rs. 126. This is the total consumer price which I recommend you display to the consumer rather than showing Rs. 120 and then consumer discovers additional VAT; and might get disappointed and cancel her decision to buy.

The invoice you will generate will be titled “Retail Invoice” and you will need to mention your VAT Number (For Maharashtra based companies it is MVAT… Maharashtra VAT), and CST Number. Also you will need to specify a descriptive paragraph as required by the VAT Department of the Govt (Sales Tax Dept). On a lighter note; don’t write the disclaimer “Goods once sold cannot be taken back” ; your neighbourhood store can do that but you cannot; as in case of defective goods or goods broken during shipment you can always provide a replacement; but some products are single piece/ irreplaceable or not in stock with supplier. Plus you are a startup; not a shop established before our independence!

Please note these are my views, but please speak to your CA or your Accounting Expert friend as to following VAT Trader or ST Services model

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