These days starting an e-commerce business is quite easy. Creating your own e-commerce store is quite easy with Shopify-like platforms. Even, you are doing it through e-commerce platforms like Amazon, Flipkart, Meesho that is also quite easy. You just need a few documents and you can easily list your product on these platforms. No matter which product you are going to launch on your e-commerce store or marketplaces. You should know about some basic unit economics. Else, you will not be able to sustain long-term and will lose money instead of making.
So yes, before buying or manufacturing any product in bulk, you should know about how to Calculate the Real Profit of an E-commerce Product. Because, if a product is selling for ₹499 doesn’t mean you made ₹499 − product cost. There are various fees, taxes and things you need to include in the 500 price.
And, after adding all things, only a little bit of margin will be left. However, it doesn’t mean you cannot make money from e-commerce business. E-commerce businesses make money when your product starts selling faster in larger qty, and you get repeat customers.
Calculate the Real Profit of an E-commerce Product
Product/manufacturing cost
So, this is the only cost in e-commerce business that you can control. If you are a manufacturer, then yes this is in your hand. And, you should focus on creating products at minimum to minimum cost. I am not asking you to use cheap material, because in the long-term cheap products attract negative reviews.
If you are starting a white labelling business, or simple trading business, then you should reach out to every other manufacturer who makes or provides the same product. And, always contact a manufacturer rather than a trader.
Yes, if you have a limited budget then you might not be able to buy larger inventory, so you will not benefit from getting a cheaper product. But, it doesn’t mean you buy a product at a higher cost initially. And, think when later products will work you buy in bulk cheaper. Trust me this is not gonna work in the e-commerce business. Because, if you buy a product from a manufacturer at 100 then chances are next time he is going to charge you 110-120.
Ok, so here is a golden rule that I learned from doing e-commerce for years. If a product is already selling at 499. And, you are getting it for half price 250. Then, simply avoid the product. You will definitely lose money. Always keep 4x to 5x margin in e-commerce products. If you are getting a product at 250, do proper research of the market, whether you can sell it for 799-999 or not.
Similarly, if a product is selling for 499, try to get it for 50-80. One more thing I learned in my journey. Don’t get into cheap products below 499, because there will always be a race to the bottom in pricing. And, this is for an e-commerce platform. And, if you are going to sell on shopify stores, then don’t sell products below 999. Else, you will not be able to cover your meta ads cost. Better start with an e-commerce platform, don’t get into building your own store, if you are new into online business.
Packaging
Every founder, who started their first business thinks, they will provide the best possible packaging. And, yes packaging makes customer experience better. But, do focus on packaging more when you are going to sell on your own shopify store. Because their customer experience matters.
However, in an e-commerce platform, your main focus should be on product. Because, that’s what the customer is going to use at the end. And, no matter how good your packaging is, if your product is bad. Then, you will see a higher return rate.
Ok, so now the question arises, how much should you spend on packaging?.
Do spend maximum 10% of product cost and UPTO 20 INR.
e.g. – if your product cost is 200 and you are going to sell at 899-999. Then, 10-20 should be your product cost.
Tip: In starting when you contact the manufacturer to create custom boxes or polybags with your brand name. They will ask you to place 1000-5000 MOQ. Which is not viable for a startup with limited budget. In that scenario, buy plain corrugated boxes or polybags and go with stickers.
Packaging selection is also related to Shipping Cost. Because, you need to understand volumetric weight. So, read the next section to understand it better.
Shipping
When you are calculating profit for an e-commerce product shipping play a very vital role. See, there is not any fixed shipping cost. Shipping cost depends on the courier service you are going to use. So, you can check the shipping service calculator available online to find out actual shipping cost. One important thing is, shipping of a product depends on two things.
- Package Dimension
- Package Weight
Every shipping service gives volumetric weight priority. No matter your product weight is under 500g. If your volumetric weight is above 500g, then the shipping service will charge you for 500g-1kg slab.
Alternatively, if your volumetric weight is under 500g. But, the actual weight of the product is 700g. Then, the shipping charge will be based on weight.
So, for you I am here providing a basic formula to calculate volumetric weight.
The Formula (Centimeters and Kilograms)
Volumetric Weight (kg) = = Length (cm) x width (cm) x height (cm) / Divisor
Usually the Standard Divisor is 5000.
So, do check official documentation of the shipping service you are going to use. And, most services provide calculators where you can enter dimension and weight to find out shipping service. Shipping charge also varies on local, regional and national. Means, your product is going in the same city, same state or different state.
Marketplace fee
If you are going to sell on Amazon, Flipkart, Meesho, Myntra or any other marketplaces. Then, yes you have to pay a marketplace fee on every order. This fee isn’t the same that amazon or flipkart charges 5 to it’s customers. This fee is different and varies on product category, product price
See, there are two types of marketplace fee.
Referral Fee
Closing Fee
However, from this year, amazon and flipkart marketplaces have stopped charging Referral Fee from sellers for products below 1000. But yes, you still have to pay the closing fee. Well, roughly for under 1000 products amazon charges 27 closing fees.
And, if you sell above 1000 INR products then amazon charges. Then the closing fee doubles. And, Referral Fee can be 150-200, based on product selling price. Yes, listing your products on Marketplaces is free, but you have to calculate these fees.
GST/taxes
Yes, GST also gets included in product selling price. GST percentage can vary on the product HSN Code and Category. So, first look for the latest hsn code & GST Rate of it. You will find a suitable HSN Code and tax rate for your product category. And, that you have to use in marketplaces to charge from customers.
Or, what you can do is use the same HSN Code and Tax Rate that your supplier is using. Check the tax invoice which you got from the supplier.
E.g. – If your product selling price is 699, and comes under 18% tax rate. Then, here’s how you will calculate the GST.
GST = ₹699 × 18 ÷ 118 = ₹106.63
Base price before GST = ₹592.37
GST amount = ₹106.63
So overall, before finding out the real profit from E-commerce product. First, find out the relevant tax rate and then subtract it from the selling price. Because, whatever tax percentage and amount you will charge from customers you have to pay that back to the government next month. Will Create a separate article for GST Filing, so that you will understand it better.
Advertising
This is something we cannot calculate in the initial year of business. See, if you are selling from your own website, then you have to run meta ads to do the marketing. And, for meta ads you need good creatives(reel). For good creatives you need to give either product to influencers or you can promote the product by yourself. But, for all that you need a good amount of budget. So, if you are funded then yes you can go for meta ads.
However, if you just want to sell on marketplaces then still you have to run PPC Ads. Because, getting organic orders is quite rare. In PPC Ads, you have to pay for the click. Means, when a customer clicks on the sponsored product, then you will pay the amount. So basically, in PPC Ads you run ads on certain product related keywords and set a bid. When a customer clicks on the ad, the bid amount you need to pay.
See, on average you have to pay at least 100 to get an order. And, that only when your ad is perfectly optimized and your listing is near to perfect.
Tip: Ad can make your business profitable or you can lose money. So, before getting into e-commerce business. First, do learn how to run PPC ads. Or, meta ads, if you are going to sell from your own website. Also, i will suggest starting with amazon, amazon does offer 10,000 additional bonus when you recharge your amazon ads wallet with 10,000.
Returns/refunds
No matter how good your product is, you will get returns. Most of the time, customers will reject the COD Orders, and due to that you will have to bear shipping fees. So, if you are selling on a website, try to push Prepaid order only. However on marketplaces cod options get enabled by default.
Most marketplaces offer a 10 days return/replacement policy due to that, sometimes customers return products after using it. And, then you have to provide a refund. So, while creating profit make sure you calculate some amount of percentage of refund. However, there is no fixed percentage, since it varies from product to product.
Discounts
It doesn’t matter if you are selling on a website or marketplace, you have to provide a discount. And, if you are in the marketplaces then you have to participate in sales and deals. So, in that scenario your selling price can be lower compared to initial sale price. Due to that, your real profit can vary. At least keep a 50-100 INR margin for sales.
Tip: Don’t try to compete with big brands in pricing. Else, it will be a race to the bottom. Make your product better and unique and do marketing so customers can pay extra happily.
Storage/fulfillment
If you want to scale on platforms like Amazon. Then, you have to send your product to FBA, meaning amazon warehouse. And yes, to store products on Amazon you have to pay a storage fee. But, I suggest you start with Easy Ship, so you can avoid this fee initially. Because, if you choose fba, then labelling, shipping and many other costs add up.
If you store products in your own warehouse, then you should also add rent as well in product costing. e.g. – if your warehouse rent is 10,000 with electricity bill, and you sell 1000 units per month then 10 INR will get added to the product.
Payment gateway fees
If you’ve decided to sell through a website, then you have to integrate a payment gateway. It can be PayU, Razorpay or any other. And, there is a fixed fee percentage that you need to pay to these Payment gateway services. So, do check their official fee structure.
Summing-up.
So, before you select a product or decide its selling price. You have to add these things in the selling price. And, after that, what remains will be your profit. See, no one can guess actual profit in business without doing it. Once you start doing things, you understand so many things and costs. And, for e-commerce, you have to do reconciliation in each two months to understand the actual profit business is making. Although, I have covered all the fee and cost that you need to include in the selling price. But yes there can be many other operating costs, then i might not have included. So, first calculate these things then you can move on with product pricing.