Marketplace discounts – some secrets, or are they?

If you thought FDI laws are complex, or VAT laws are confusing, you should study the mechanism marketplaces employ to fund the attractive discounts they offer.

The leading ecommerce companies in the country all operate on the marketplace model. That simply means they provide a platform to buyers and sellers to carry out their transactions, and do not indulge directly in buying and selling. This model not only helps in avoiding VAT, but it also works favourably because the Indian government does not allow FDI in ecommerce sites that are involved in direct selling. This also implies that marketplace model prohibits ecommerce sites from exercising price control, or governing how much promotional discount sellers can offer.

However, Amazon, Flipkart, Snapdeal etc. do play a large role in pricing policies. This is because these sites, partially or fully, fund the discounts on listed products. How they go about this is complex, and varies slightly from marketplace to marketplace. Based on information obtained from unidentified, reliable sources, here is a lowdown on how it works.

Amazon recommends optimal pricing to its sellers, after conducting comparison across markets. Sellers can choose to abide by the recommendations or not. Most often, sellers opt to go with Amazon’s recommended price. The deficit that the seller suffers is made up for by Amazon, usually by cheque. In this practice, the seller pays tax on the cost price but the consumer pays tax on the discounted price, which makes the seller eligible to receive a tax refund thereby resulting in reduced revenue to reach the government.

Flipkart recently saw a big sales day on the Big Billion Day. Other than WS Retail, most sellers were reimbursed by Flipkart what they lost by selling on a discounted price. The sources stated that these payments were made through bank transfers. Flipkart’s close relations with WS Retail, which was earlier owned by Flipkart’s founders, may also have been a device that aided in their discount structure.

Snapdeal too refunds its sellers either by cheque or bank transfers, and calls it “promotional expenses”. Recently Snapdeal ran a Buy One Get One Free offer, in which it charged the sellers its commission only on one of the two products but reimbursed the sellers for discounts on both.