How Profitable is E-Commerce for Smaller Retailers and Brand
The advantages of online retail are widely recognised. With the ability to reduce operating and labour costs, coupled with the ease of access to customers, many store based retailers have adopted e-commerce as a fundamental element of their business.
A significant portion of the costs associated with the use of e-commerce remains misunderstood and is often inadequately considered when evaluating the profitability of an online retailer. This includes expenses such as marketing, the true cost of returns, logistic costs and fees paid to third-party marketplaces and platforms.
However, large retailers are better equipped to ameliorate the numerous costs incurred when utilising online retail. In addition the low barriers to entry have firstly led to brands no longer needing physical outlets to sell products directly and secondly created a plethora of new brands.
Smaller retailers lack the negotiation leverage held by larger retail brands, which enables them to influence commission rates and pricing on third party platforms. Consequently, effective negotiations with third party platform partners and a comprehensive understanding of their marketing strategy are needed for smaller retailers to establish a profitable online business.
Below is an actual situation from a retailer we have restructured.
£000’s
Sales 4,014
COGS 2,609
Gross Margin 1,405
Direct Costs
Freight/Duty 130
Couriers 87
Advertising & Marketing 535
Platform fees 380
Platform costs 122
Rent cost 341
Labour Cost 414
Logistics cost 85
Total costs 2,697
This yielded a net loss of 1,292
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