Every festive season, it pours discounts and deals across newspapers, hoardings and social media. There are few questions that are bound to arise in everyone’s mind. How do e-commerce sites work? Do they make any profits after giving out such heavy discounts? Here is how they work.
First Types: The different kinds of eCommerce sites
The first one would be Market Places like Amazon, eBay, Flipkart, Snapdeal, etc. and the others are independent eCommerce platforms like Nike.com, Apple.com etc.
A market place is nothing but a virtual mall, which has different sellers, the sellers take care of the inventory and the market place providers (Amazon, Flipkart) take care of infrastructure like technology, sales and delivery capabilities.
Independent e-commerce sites:
The second type those who have a dedicated eCommerce website like nike.com (just like exclusive Company showroom). In this case, either Nike has to setup a dedicated IT team to manage its website or outsource to another vendor where they will manage activities like: hosting the site, setting up a CMS (Content Management System), getting payment gateway in place and setting up return-exchange-refund business rules. Now Nike also needs to make sure that they run sufficient advertising campaigns to make sure consumer traffic is been diverted to their site and they in turn generate some revenue as they now have a dedicated eCommerce website as well.
What difference does it make from the sellers and consumers point of view?
In the first case, the biggest challenge is bringing traffic to the site and it is the market place provider’s responsibility. They can do it by running social media campaigns, making products exclusively available on their sites, running season sale campaigns, providing surety of genuine products and after sales services.
- So even though a consumer visits a market place providers site for an exclusive product deal, it so happens that while going through product details, reviews, specifications etc., consumer also glances at other products available in the same price range, colors, technology, discounts range etc.
- Therefore, this indirectly diverts traffic towards other products as well, which is impossible to happen on a dedicated product website, this is one side of the coin.
- However, on the other side, it gives rise to immense competition, which keeps the sellers on toes to offer genuine products, best deals and in turn gives a premium feel to the buyers, who will definitely come back to same site to buy another product.
Deciding to go for a dedicated product website can be a costly affair and will depend on the brand value of your product. Let’s take example of Apple store and a dedicated product site:
- Consumer can locate an Apple store in the city and visit it to buy the latest products
- Another aspect to keep in mind is, Apple has excellent marketing strategies as well as dedicated budget for such activities
- For local products, a better option would be to offer the same product on a market place site, which will eradicate all the above infrastructural issues, and product owner can divert their initial capital to maintain inventory as well as concentrate on improving the product quality
Next question, which remained unanswered, for sellers of a product there are margins associated with the products that is why they are selling it over a market place site. However, how about a market place provider, how do they make profits after taking care of so much uncertain activities, running heavy discount offers etc.?
Or rather the question should be do they make profit? Well the obvious answer is YES. Reason being if that there are so many market places shooting up they must be getting the much needed ‘m’ vitamin.
- A market place provider enters into this segment with a long-term vision and not immediate profits
- When they enter a market, their immediate goals are to increase their market spread and consumer base
- When they realize the above goals been met initially, market place providers or eCommerce sites will increase their investments on infrastructural side like better and more warehousing facilities, investing in artificial intelligence, adapting to the latest delivery mechanisms like drones for faster deliveries etc
In reference to the Indian market, these market place providers are still in their infant stage and have entered the battlefield with who will be the last provider standing and with a winner-takes-it-all approach.
These Market place providers work on different revenue models like Commission/Percentage on transactions, Volume or Weight based charges, others charge ‘payment gateway fees’ for using their payment gateways like eBay, etc.
Then there is also a concept of OS/DS (Own Shipping/Drop Shipping) where you sign up with a market place as a seller. Under a Drop-ship subscription, the seller quotes his price, the market place provider will add/deduct a price on top of it and then sell it.
However having understood the above revenue model for a market place provider, in most of the cases a market place provider heavily invests back most of its profits into its business in the hope to be the largest market place provider in near future