Online marketplaces have often got many varied objectives for brands – sales growth, brand awareness, incremental sales, testing new markets etc… but rarely does this come without a caveat on the amount of profit required.
I have worked on many marketplace P&L’s and profitability reviews over the years and I think it is important that brands/sellers understand the key nuances of marketplaces. When you are coming at this with experience in other channels, there can be some blind spots and misconceptions, so here are some thoughts on the main drivers of profit on marketplaces and costs to consider:
"Rarely does this come without a caveat on the amount of profit required"
1. What a difference a basket can make
The key difference between your own B2C ecommerce site and a marketplace from a profitability perspective is NOT commission, contrary to popular belief.
For your own website to work you need to attract an audience to your site, meaning digital marketing has an increasing cost for you to be able to acquire customers, which can often be comparable to the commission (marketplace commission is generally between 10-20%).
No – the real difference between ecommerce and marketplace P&L’s is Units Per Transaction (UPT) or basket size. On your own website you might be getting 2.5-3 UPT as a general rule of thumb. On marketplaces the average is 1.1 UPT, which I have seen as high as 1.5 in some categories. Through effective range selection cross selling and upselling can still work, but in competitive categories (the vast majority) this will often be a competitor item being offered in addition to yours. What this basically means is that your fixed costs are much higher as a % of the sale. The commission stays fixed as a % though generally, so what are the elements that make a material difference for profitability?
2. Dispatching your margin
When it comes to logistics, you have a range of options on marketplaces – using your existing DC/3PL, using an in-market 3PL when dispatching to new markets or even using marketplace logistics, where available – Amazon notoriously has the market leading Fulfilment by Amazon (FBA scheme), but CDiscount, Zalando and others offer equivalents.
Obviously SLA’s in market (tracking and delivery times) are key, but from a profitability perspective, the competitiveness of these fees are critical. Many do cross border dispatch from their domestic warehouse, which is the most stock efficient option. But without the right courier rates, this proves a challenge to find the balance between enabling a compelling customer proposition and profitability… particularly in new markets with minimal volume to use to negotiate with.
So when looking at profitability it is important to compare cross border rates, with both cross border and in market 3PL’s and marketplace 3PL’s where relevant/possible to get the full picture on potential profitability.
"It is about finding the illusive balance between profitability and sales volume"
3. Pricing to succeed
Alongside your logistics rate and UPT, the other critical element is your Average Selling Price (ASP). To contra the effects of a reduced UPT, it is important to protect and enhance your Average Selling Price. This can be done in a mixture of ways, such as selecting a range over a certain ASP, bundling product into more quantity variants etc. As marketplaces are so competitive, it is very rare that inflating pricing itself is a sensible strategy in isolation as this will have a huge bearing on your competitiveness on site, so again it is about finding the illusive balance between profitability and sales volume.
4. Returning to fashion
Depending on the category, another major lever for profitability is returns. Some of our clients have a 1% returns rates and others closer to 60% plus, so this fluctuates between being immaterial and crucial! For fashion brands in particular, this is a critical element to making the numbers work. Brands need to work out what makes sense for them.
- Should they offer free returns, or not?
- What is the cost of offering this?
- What is the potential sales upside?
- What is the cost of not offering this?
Often many are requirements for marketplaces e.g. Amazon fashion through FBA (30 day policy) or Zalando (100 day policy). Others have more of a brand led viewpoint, such as Ebay, where it is encouraged, but not as commonplace for fashion or La Redoute, where you have to offer EITHER free delivery OR free returns as a minimum (but not both). We would always advocate free delivery as a minimum, and do the maths on returns, dependant on the marketplace and requirements. Getting a good returns partner to offer in market returns can be good practice too.
"Know when you should expect return so you don't pull the plug prematurely"
5. Ads to add value
Another key decider of success and profitability on marketplaces is marketing. Amazon notoriously has the Amazon Ads suite, which enables you to push your product/brand in front of customer services. Ebay also have Promoted Listings and many others are bringing in PPC (like CDiscount or Walmart) or similar elements to increase platform revenue and the ability for ambitious brands to accelerate their growth on the platform.
Whilst this creates revenue opportunities and accelerated growth, this clearly needs careful thinking to ensure the objectives from a profit perspective are not left in tatters. We generally suggest a phased approach, which often starts off aggressive and then reduced to a more sustainable level over time, but again – something to consider.
6. Buying time
The final major thing to bear in mind in the search for a profitable and sustainable channel is time… Marketplaces are very competitive by their nature, and unless you are blessed with the perfect proposition in a wide open category niche with significant latent demand, you should give the channel the time it deserves.
Year one generally is best case small profit / break even, but more often will not be profitable with the overhead investments often needed to get you live, such as technology, personnel and initial channel marketing and marketplace algorithms take time to reward you for building history with visibility plus it takes time to refine your sales and marketing ‘formula’.
So be sure to have a realistic plan and know when you should expect the return (usually year 2/3) so you don’t pull the plug prematurely.
Other things to consider
On top of this, the other things to consider when reviewing marketplace profit and loss include:
- Marketplace commission rate
- Listing management system costs
- Channel resource costs – internal and/or external
- Customer service costs
- Tax and duty in new markets
- Bulk shipment costs (is using a 3PL/FBA type option)
- Repackaging costs (if relevant)
To conclude
To make the most of this channel, which now represents over half of all global ecommerce sales, it is critical to put in the planning and find the balance between sales proposition for the customer and brand profitability, taking into account the key levers of basket size, courier costs, selling price, returns and marketing.
There is no silver bullet, but through ensuring you have a compelling commercial proposition alongside an efficient operational setup, you should be able to gain a mix of both growth and profitability.
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