The keywords in Indian online retail 2016 have been new government regulation and end of steep discounts. When the new FDI guidelines were announced, they caused a stir in the online marketplace community. Sales (aka steep discounts) were put on hold while they supposedly required time to realign their strategies.
Just when we thought online sales would no longer be the same, they started happening one after the other again. Myntra just concluded its two-day ‘End of Reason Sale’ (If anyone accesses the site, even now the discounts are still on albeit the official EORS tag).
When seller VB’s (Name withheld on request) mail reached us, his thoughts seemed to answer a couple of questions running through the minds of many others.
“I have been an online seller for 2 years now, selling on all the marketplaces. Recently I have seen marketplaces come up with a new technique of giving discounts, which is kind of dodgy, and may or may not completely go with the government guidelines, and may even be a loophole.”
Here’s what he had to say.
Marketplaces have found a loophole in the Government regulations
Marketplaces have been struggling to increase their sales by providing discounts; however the new government regulations prevent them from giving direct discounts. But four of the marketplaces (Snapdeal, Shopclues, Flipkart and Paytm) have been able to find a workaround. They can still subsidize the products from their own end to make the over all price of the product upto Rs 150 less compared to small online retailers, who cannot do the same as they do not have the same amount of funds available. The marketplaces are actually trying to make the offline retailers go out of business, as they can provide the same products at a cheaper rate, delivered free to customers at their homes.
How does it work?
Marketplaces have started working around with a concept called “TRANSFER PRICE”. It is a very creative term, and government does not have a clue about its meaning or existence.
What is transfer price?
For marketplaces, transfer price is simply the amount marketplace would transfer to its seller, for the sale of the product. So it works in a way that they contact specific big sellers, and ask them to provide products at the minimum possible transfer price. With transfer price, seller does not have to worry about any of the costs such as Shipping Charges, COD collection charges, Fixed Fee, Marketplace commission. The seller only has to worry about what he wants for the products.
Marketplaces give transfer pricing to sellers who are ready to work with less than 4% profit margin.
Lets see an example.
Without transfer pricing
Suppose a seller procures a T-shirt for Rs 200 and decides to sell it on a marketplace. He sets his profit margin to 20% of procurement price, ie. Rs 40. Normally cost of selling T-shirt would be around 18% commission including service tax, Rs 25 Collection charge, Rs 52 Shipping, Rs 50 COD Charges, and a fixed fee if applicable (with some marketplaces).
So the Minimum selling price would be:
Rs 200 (cost) + Rs 25 (collection charge) + Rs 52 (shipping) + Rs 50 (COD Charge) + Rs 40 (Profit) + Rs 66 (approximate Marketplace commission, as this would actually depend/change on selling price) = Total approximate selling price Rs 433.
We have not included the packaging cost, manpower, or any other fixed or variable costs. So the customer would get the product at Rs 433.
With transfer pricing
Seller procures a T-shirt for Rs 200. Marketplace asks it to set a minimum profit margin without worrying about any other costs. Seller is promised that the item would be promoted by the marketplace and would be sold in volumes. Seller agrees to set a profit margin of 4% over the procurement cost. So now the selling price would be:
Rs 200 (Procurement cost) + Rs 8 (Profit Margin) = Rs 208 (Amount which will be transferred to Seller)
The customers would get the product at just Rs 208 instead of Rs 433.
So indirectly marketplace absorbed all the costs, potentially funded from the VC money, and was still able to provide the discount.
It is definitely beneficial to the customers, as they would get products at a very cheap price, but finally it is in a way unethical, and is predatory for small businesses, who cannot work on such pricing models, due to low sales volumes, higher fixed costs, and unavailability of funding to compete with competition.
I read an article on IOS about how “Shopclues” is the true wholesale. If you see Shopclues, it uses the same Transfer pricing model working with Big sellers. It sells the products at utterly cheap prices, sometimes at prices starting Rs 20 when it is impossible to sell a product below Rs 100 because for a COD order Shipping and COD collection cost would be Rs 100 (RS 50 Shipping + Rs 50 COD collection charge). And the sellers would have definitely spent some money to procure the product. It makes sense for the marketplaces to forgo their commission, as it is in their control and rights to do so.
But them absorbing definite costs, and that too just for a few sellers, is not fair to other sellers on the marketplace who cannot provide products to customers at same price and thus lose on sales.
The reason marketplace does it is just to show their investors, that they have sales, thousands of orders a day, where in fact, with every order they are losing money, at least Rs 100, just so that they can fool investors and trick them into giving them more money.
Well all this money can actually be used to improve on processes and technology, which would actually make the company strong and profitable in the long run. Rather than making sales by giving discounts which lasts only for a while, and no money or value is actually being created for the company or its investors.
Disclaimer: Views/opinions expressed in this article are solely of the online seller.