What does Cost Structure of an Ecommerce Product Mean?
A product cost structure encompasses all costs that make up a retail price. This includes; cost of goods sold, marketing, platform/marketplace fees, payment gateway charges, shipping charges, and profit. The end price of the product is what can be broken down as the cost structure. Now, let’s discuss the breakdown:
1. Cost of Goods Sold (COGS) – 40%
COGS is the cost of a finished product, ready to be sold. In simpler terms, it is the cost to creat or manufacture a product. For a general cost structure, the COGS should be nothing more than 40% of the retail price.
2. Marketing – 15%
There are many factors that influence marketing expenditure. However the average advisable amount to spend on marketing is about 15% of retail pricing. It can be reduced or increased based on organic reach (sales made without marketing expenditure), or other factors like the industry, company size, competition, etc.
3. Platform or Marketplace Fee – 12%
First off, knowing the difference between a platform and a marketplace. A platform is presented as the retailer’s own website or online store that is powered by an ecommerce company, where retailers can sell their products, add contents, and customize. An example of a popular ecommerce platform is Shopify. A marketplace is an online market that provides space for retailers to rent and sell their products, like Amazon and eBay. Platforms and marketplaces’ fees vary and may range anywhere between 10%-15%, but on average it is about 12%. The fees may be reduced based on the business relationship of the retailer and provider.
4. Payment Gateway – 3%
Payment gateway is a service of authorizing payments either through credit/debit cards or online transfer between retailers and consumers. This service is provided by independent merchant and each platform or marketplace usually has their preferred merchant. An example of a payment gateway merchant is Payoneer. Payoneer handles transactions on the retailer’s end. Merchants like PayPal handle both ends of the transaction. On average, merchants charge 3% to retailers.
5. Shipping – 10%
Shipping costs include packaging, labour, pick-up, and delivery to the customer. Allocate about 10% of your retail price to cover these costs. There is a lot to think about when calculating shipping costs, but it is important that you don’t compromise on the quality of your shipping. Choose a suitable merchant that will help you achieve customer satisfaction.
6. Profit – 20%
Profit is well, profit. Based on this simplified cost structure, an ecommerce retailer will end up with an average of about 20% profit from the retail price. This is of course only a general structure, and profits can be increased or reduced based on the type of product; whether it is a high-end or low-end product, volume of sales, competition, and many other factors.
7. Other Potential Costs
There are other potential costs that are not included in the basic cost structure, and among them are:
- Warehousing – Inventory come with cost. Whether it is your own warehouse, or a warehouse that belongs to a platform or marketplace, there will be costs incurred.
- Product Returns – One of the most overlooked challenges in ecommerce is product returns. For most marketplaces, returned products turn into cost for the retailer.
- Free Shipping – Customers love free shipping. Free shipping can be incorporated into marketing, or used as a separate promotion. During luckier times, the marketplace sometimes gives out free shipping to help build sales and brand image for retailers.
- Other Promotions – Other promotions include vouchers, flash sales, etc.. Some marketplaces give out vouchers and promotions at their own cost, and some retailers have their own promotion strategies. The latter of course, registers as an additional cost.
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