Ever wondered how do websites like Flipkart, Amazon, Snapdeal, Jabong, MakeMyTrip earn money…….??
Well, I hope this blog will clear all your doubts about how these websites always offer you great discounts, gift vouchers, promotions, e-cash, free delivery and more, but still are BILLION DOLLAR COMPANIES.
There is always a question dwelling in our minds that prices of products on e-commerce website are lesser despite the fact those same products are available at a much higher price in same shop offline. Additional services provided by these sites and cost involved in their running are:
- Free delivery
- Very less profit margin, roughly 10% of the total sale
- Additional discounts(nearly half of selling price) on a festival, marketing and advertising
- Maintaining huge severs
- Salary of lakhs of employees working with them at every stage of shipping from maintaining the site to delivering the product to your footsteps.
Main ways of making money are:
1. INVESTMENT: the Main reason that online retail companies have survived so far is Private Equity(PE) funding and exit of these PE investors. For example, assume a company is valued 10000 dollars. We approach an investor and tell him. “Sir, this is my valuation at this particular point, I have around 15000 users and these are my earnings. Will you provide me $1000 to increase my reach and expand? the investor replies,” I will provide you $1000 and in return, I need 5% of your stake and all information on your situation. I will sell my stake after two years”. After two years, the number of users becomes 27000, and the valuation becomes $25000. I tell investor, “Sir, we are in need of $10000 to expand, do you wish to stay as an investor or sell your stake in the company and exit?”. He says,”I want to exit” ow we approach to another richer investor and process go on.
2. FIXED PRICE: Registered seller pay a fixed monthly subscription to the e-commerce company to host their product on the platform(i.e website). In some cases, the company also charges a fixed closing fee like 10 for every sale.
3. COMMISSION: Depending on the product category, the company charges the registered seller a certain percentage commission on the value of the product sold. This commission could range between 5% – 20%.
4. OWN PRODUCTS: Amazon and Flipkart have a range of their own products such as headphones, furniture, kindle reader, amazon echo etc. for which they do not have to pay any commission.
5. DEALS: These websites often make deals with different brands to sell their product exclusively on their platform. This help _s them earn more, a lot more than selling the same product via some third party seller.
6. THIS ONE IS NOT GOOD: every one of us would have experienced ads of the product recently surfed, on other platforms. This happens as there are some companies that earn by selling the user data to third-party companies which further use your buying habits to show you targeted ads and products. Data is definitely worth a lot more than selling a book at a minimal profit.
What really happens in discounting? We always want big discounts and wait for it to come. But do you know who pays the discounted amount to sellers as prices of products cannot drop down in a minute as the sale starts…….its the website or the e-commerce company that bears the discounted price by giving compensation to registered sellers.
Big online retailers like Flipkart, Amazon, SnapDeal and Junglee have cutting edge analytics capabilities and dedicated resources to compare prices of products on different websites and across stores. Based on these prices they suggest the price at which the registered seller should offer their product. This suggested price is where discounting happens.
The seller is not under any obligation to offer his products at these prices but since they get compensated for the discount element by the online retailer, there is hardly a reason for them to not offer their products at the suggested price.
The term BILLION DOLLAR A billion dollar company does not mean that it has a profit of billion dollars or overall turnover. It means that the company has a total market capitalization of a billion dollars. (All stocks x stock price = 1 billion dollars). Also means a company generates billion dollars in revenue.
Are these companies in profit or loss? At Rs 11,754 crore, the combined losses of e-commerce majors Flipkart, Amazon and Snapdeal is almost double the annual budget of the Indian Space Research Organisation (ISRO). To put things in perspective, if ISRO was given the same amount, it would be able to launch about 24 ‘Mangalyaan’ missions to Mars.
Being having the name tag of billion dollar company these companies are actually in losses in a country like INDIA.
These companies mainly seem to be running on investments given by big PEs. Once the big PE funds run out funding for huge discounts could not be made and to survive, will be forced to sell at the original price. Then there are chances of making the profit on sales.
In the current scenario, only the consumers and manufacturers are the real winner. But these are tech companies and can become profitable tomorrow if they wish to show. One cannot shadow how these companies have evolved, they just need a click in their heads.
CONCLUSION: In this whole e-commerce battle only two sets of people seems to be winning. First are the delivery companies and the second, digital marketing companies like Google and Facebook. If brought under lights these big giants (poster boys of Indian startup culture) are actually in losses and may collapse at any time.
“Thank you for reading and giving your precious time to blog………!”
BY PRATEEK SHARMA
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