eCommerce is fueling consumer demand every year. Enterprises & brands have started to leverage this opportunity and are investing significant time & resources on it. Across most consumer brands, eCommerce marketing & sales teams are busy preparing for marketing campaigns - End of Season sales, Holidays and festivals (New year, Black Friday, Ramadan etc.). A lot of effort is put in planning - sale days, discounts percentages, inventory inwards, marketing spends. Everything gets sale focused. And given the extensive planning and aggressive pricing – top line sales numbers often shoot through the roof.
Everyone is celebrating…BUT not the commercial & finance teams. Because, in reality, your net revenue realization is mostly far lower than the expected numbers.
The Leaky Bucket Theory
Most businesses only focus the Selling price, Discount offered & marketplace commission as variables for calculating net revenue. But when you look deeper, there are multiple costs & operational in-efficiencies, which impact your net revenues & profitability, like -
1. Category Commission: This is the most common and known cost that everyone calculates correctly.
2. Shipping fees : Shipping charges depend on multiple factors -
- Destination - How far or remote it is
- Weight and Volume of package
- Type of packaging used
- Mode of transport (Trailer truck, LMV etc.)
These factors make determining the exact shipping complicated. They also have impact on inventory planning and warehouse acquisition
3. Fixed listing fee (or Flat fees): Some marketplaces, like Amazon, apply listing fees either in select or all categories. Flat fee cost might be small, but depending on your Average Selling Price (ASP) its percentage impact varies - Fixed fee is bigger drain for small ASP products.
4. Payment gateway charges: Apart from charging commission some leading market players, like Flipkart, PayTM etc. also deduct PG fees, which could be up to 2.7% of selling price.
5. Cancellation charges: Often ignored cost by consumer brands, this cost can be significant. There are multiple scenarios –
- There is no cancellation fee, only if cancelled by customer before dispatch
- When vendor cancels before shipping due to stock unavailability, it could cost you your commission
- Cancellation after dispatch is an SLA breach, which could cost you your commission and penalty fee
6. Reverse process & logistic charges:
- For customer refusal (non delivery), you might get billed for shipping
- For customer returns, depending on the reason of return (poor quality, defects, wrong size etc.), costs could include any (or all) of these - Commission charges, PG fee, Fixed fee, Forward shipping and Reverse shipping fee.
Averaging across categories & sellers, average rate of returns in range of 30% in emerging markets
7. TCS (Tax collected at source): Not a cost actually, most businesses either don’t account for this or calculate wrongly.
8. SLA breach charges: Every time you breach a Service Level Agreement (SLA), you are inviting significant penalties. These breaches are largely due to the inefficiencies in warehouse operations, inventory planning/updating and delayed dispatches due to holidays, excess orders and manpower shortfall.
9. Returns in Transit: Up to 10% of returned shipments gets stuck in transit and never reach your warehouse. If these are not followed up with marketplace they tend to get non-traceable for multiple reasons and results in significant loss of revenue. You loose revenue and products both.
10. Claims window closed: All marketplaces have defined a claims window for disputes - wrong product received, wrong shipping charges and so on. With operations teams too busy to dispatch new orders, they tend to put claims and new dispute case opening on the back-burner. This leads to most claims getting rejected resulting in increased losses.
Why reconciliation is challenging
- There are complex & custom processes involved, which are driven by market forces and vary by regions, domains etc.
- There are diverse back-end IT systems, which are not always well integrated
- There is lack of operational visibility and easily measurable/trackable metrics availability
What you need to improve your reconciliation process
- Identify the leaking buckets of your business
- Map and align your IT systems & data formats
- Use Workflow tools,visualization, tracking & measurement
- Educate workforce, collaborators, vendors to drive the change
Do not ignore Reconciliation. Plan for it
Reconciliation is as important as sales, marketing & inventory planning. eCommerce transactions need to be settled at a line-level (individual transactions), else you will never get accurate visibility on revenues and profitability.
Iksula's experience of managing eCommerce operations of large brands in the Middle-East, India and South-East Asia has shown that up to 9% of additional revenues can get lost due to above factors. Better auditing processes and Finance Process Automation (FPA) is the way to neutralize these challenges. It’s time for you to audit your eCommerce transactions, process gaps and fix the hidden leakages and become more profitable.