The hidden costs of running an online marketplace business
The guide to side hustlers, solopreneur and big brands
What’s this article about?
Deep-dive the external fees and operating costs of an online marketplace business.
In some scenarios, you are unprofitable in spite of high sales.
Always look into profitability instead of sales turnover to evaluate the success.
Online marketplace business has low entry barriers and is quick to success. Is it real?
To get started on an online marketplace, the capital to buy merchandises and a small fee to apply for a seller account are all you need in your financial budget. This is why selling on marketplaces like Amazon an attractive side business.
For established brands with good level of brand awareness, they are likely to reach rocket-high sales in no time.
The sales figures are real, but they could be misleading. While you are celebrating the sales, make sure to look into profitability. Even big brands could be losing money behind an uprising sales trend.
Hidden costs
There are only a few cost items, but the devil is in the details.
Warehouse/ order fulfillment fee
If you use a third-party warehouse (3PL) or marketplace fulfillment service such as Amazon FBA, they charge a fee on every activity to handle your goods. To name a few:
Goods inbound fee per item
Storage fee per m3
Picking fee per item
Packing fee per order
Return processing fee per item and per order
Most warehouses also charge long storage fee, item reconditioning fee, disposal fee, etc. In addition, do not forget the delivery fee to send products from its origin to the warehouse in replenishments; and the delivery fee to return any unsold goods to your property.
The cost of packaging materials per order should not be neglected. Make sure to confirm who bears the packaging cost with your 3PL warehouse.
Last-mile shipping cost
This is the shipping fee charged by your appointed courier to deliver the online orders from the warehouse to end customers, or vice versa in case of customer returns. This fee is based on the delivery distance and the weight of the parcel.
If you are interested in selling abroad, the last-mile delivery fee is an important factor in determining whether you should sell to a particular country.
Courier may also charge documentation fee and custom clearance fee for cross-border delivery.
Marketplace commission
Marketplaces charge sellers a sales commission varied from 7% to 30% based on the product category and the listed selling prices. Pay attention to the following:
Do they charge additional fees e.g. account management fee, per sold item fee, refund handling fee, etc.?
Do they charge the commission on gross sales (before returns) or net sales (after returns)? In other words, do they refund the commission for customer returns?
Do they have multiple tiers in the commission scheme? Do they charge a higher commission for products sold at a high price?
Value-added tax (VAT)
The sales statistics showed on your seller console provided by marketplaces is usually not the amount you will receive. Sellers are obliged to submit VAT to the destined country. For example, Switzerland VAT is 7.7%; German VAT is 19%; Sweden VAT is 25%.
As you can see, VAT takes away a significant part of your revenue and the percentage is very different depends on the country.
Cost of goods
The cost to produce the goods or the price you buy from a wholesaler.
Above are the cost items applied to every seller on online marketplaces. There may be more costs depends on your organization setup, such as:
Do you have an in-house customer service team, or is it outsourced?
Do you upload and publish the product data to marketplaces through an integrator’s platform?
Do you hire externals to create digital content and product descriptions?
Do you partner with a full-service partner to help you with the end-to-end operation?
Never underestimate the variable costs
Variable cost is a fraction of the received revenue. Some people think that if sales is up and the business grows, profits will follow.
This is wrong in our world.
Order returns plays an important role in the online business. While the order is declined, you will have to reimburse the order amount to the customer.
Besides, you will need to pay courier the inbound shipping cost and warehouse the return processing fee. Not to mention the disposal of unsellable items.
The return rate of fashion items is 35-50% on average and as high as 80% varied among marketplaces, countries, and product categories.
If you send out tons of orders and get returns from a lot of them, you will end up losing money after all the hard work.