Costing, margins and pricing is one of the most complex logic calculations in our systems – and it is running around the clock on our servers to continually update prices, based upon the latest cost-data, to provide the most efficient and sustainable value for both brands and consumers.
There are many variables in these calculations – but from millions of transactions on many platforms, for goods in the £5-£100 range – we can help give you an idea of the general budget calculations based on our accounting analysis, client feedback, and partner experiences.
Disclaimer! These are all very broad averages taken from thousands of products – and the item-by-item calculations will often vary by large amounts depending on category, weights, volumes, delicacy, shelf-life, duty & tax rates, costs of materials, competition and economies of scale.
Generally in order, from left to right, are the cheapest to most expensive routes from brand manufacturers to customers, in our humble experience:
| Average Total Costs of Operations (Fixed Costs) |
Direct to Consumer | Online Ads | Affiliates | Press | Ebay & Paypal | Amazon FBM | Social Media | Amazon FBA | Wholesale, Resellers & Retail Stores | Amazon Retail |
| Sales Taxes | 0% to 20% | 0% to 20% | 0% to 20% | 0% to 20% | 0% to 20% | 0%to 20% | 0% to 20% | 0% to 20% | 0% to 20% | 0% to 20% |
| Net Revenue | 80 to 100% | 80 to 100% | 80 to 100% | 80 to 100% | 80% to 100% | 80% to 100% | 80% to 100% | 80% to 100% | 80% to 100% | 80% to 100% |
| Payment Processing Fees | 1% to 3% | 1% to 3% | 1% to 3% | 1% to 3% | 1% to 3% | 0% | 1% to 3% | 0% | 0% | 0% |
| Commissions | 0% | 0% | 10% | 0% | 10% | 15% | 0% | 15% | 0% | 0% |
| Marketing | 5% | 10% | 1% | 20% | 5% | 5% | 20% | 5% | 10% | 10% |
| Losses & Damages | 0.5% | 0.5% | 0.5% | 0.5% | 1% | 1% | 1% | 1% | 1% | 1.5% |
| Discounts, Promotions, Multi-Buy Offers & Free Shipping | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% |
| Margin Share | 0% | 0% | 0% | 0% | 0% | 0% | 0% | 0% | 30% | 20% |
| Delivery | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 15% | 0% | 5% |
| Shipping, Logistics & Returns | 3% | 3% | 3% | 3% | 3% | 3% | 3% | 6% | 6% | 6% |
| Duties | 0% to 5% | 0% to 5% | 0% to 5% | 0% to 5% | 0% to 5% | 0% to 5% | 0% to 5% | 0% to 5% | 0% to 5% | 0%to 5% |
| Cost of Goods (Wholesale Price) | 20% | 20% | 20% | 20% | 20% | 20% | 20% | 20% | 20% | 20% |
| Total Variable Costs | 48.5% to 76.5% | 52.5% to 81.5% | 55.5% to 82.5% | 64.5% to 91.5% | 60% to 93% | 64% to 95% | 65% to 91% | 72% to 93% | 78% to 112% |
82.5% to 108.5% |
| Distribution Gross Margin from Gross Revenue | 51.5% to 23.5% | 47.5% to 18.5% | 44.5% to 17.5% | 45.5% to 8.5% | 40% to 7% | 36% to 5% | 35% to 9% | 28% to 7% | 22% to -12% | 17.5% to -8.5% |
| Manufacturer Gross Profit Margin |
7% | 7% | 7% | 7% | 7% | 7% | 7% | 7% | 7% | 7% |
| Average Total Costs of Operations (Fixed Costs) |
Direct to Consumer | Online Ads | Affiliates | Press | Ebay & Paypal | Amazon FBM |
Social Media | Amazon FBA | Wholesale, Resellers & Retail Stores | Amazon Retail |
| Customer Services | 2% | 2% | 2% | 2% | 2% | 2% | 2% | 2% | 1% | 1% |
| Inventory & Logistics Planning & Compliance | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 0.5% | 0.5% |
| Warehouse Management | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 0.5% | 0.5% |
| Product Management & Compliance | 3% | 3% | 3% | 3% | 3% | 3% | 3% | 3% | 1.5% | 1.5% |
| Marketing Services & Compliance | 3% | 3% | 3% | 3% | 3% | 3% | 3% | 3% | 1.5% | 1.5% |
| Channel Software | 2% | 2% | 2% | 2% | 2% | 2% | 2% | 2% | 1% | 1% |
| Accounts, Analytics & Reporting | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 0.5% | 0.5% |
| Hosting & Software | 2% | 2% | 2% | 2% | 2% | 2% | 2% | 2% | 1% | 1% |
| Total Fixed Costs | 15% | 15% | 15% | 15% | 15% | 15% | 15% | 15% | 7.5% | 7.5% |
| Distributor Net Profit Potential | 36.5% to 8.5% | 32.5% to 3.5% | 29.5% to 2.5% | 30.5% to -6.5% | 35% to -7% | 21% to -10% | 20% to -6% | 13% to -8% | 14.5% to -19.5% | 10% to -15.5% |
| Manufacturer Distributed Net Profit Potential | 43.5% to 15.5% | 39.5% to 10.5% | 36.5% to 9.5% | 37.5% to 0.5% | 42% to 0% | 28% to -3% | 27% to 1% | 20% to -1% | 21.5% to -12.5% | 17% to 0.5% |
| Corporation Taxes | 11% to 0% | 11% to 0% | 10% to 0% | 10% to 0% | 11% to 0% | 7% to 0% | 6% to 0% | 4% to 0% | 4% to 0% | 3% to 0% |
| Average Total Costs of Operations (Fixed Costs) |
Direct to Consumer | Online Ads | Affiliates | Press | Ebay & Paypal | Amazon FBM |
Social Media | Amazon FBA | Wholesale, Resellers & Retail Stores | Amazon Retail |
| Research, Development & Growth Investments | 43.5% to 8.5% | 39.5% to 3.5% | 36.5% to 2.5% | 37.5% to 0% | 35% to 0% | 28% to 0% | 27% to 0% | 20% to 0% | 21.5% to 0% | 17% to 0% |
When time-permits, we’ll make this into an interactive tool for various countries, product types and budget expectations.
Assumptions
We have assumed 50% of fixed costs for wholesaling to resellers, retail stores and mass-market retail outlets as a generous reduction of cost budgets in return for assumed economies of scale, although in reality all the same staffing needs to be in place for all channels, so higher margin channels are required to make the lower margin channels possible with existing infrastructure.
Retail margins are an average for long shelf-life products and may vary greatly by negotiations, usually based on existing demand or marketing support.
Observations
As you will see, often the largest cost and beneficiary per transaction can be the local government – considering; duties, sales taxes, income taxes on each of the employees in the supply-chain, and overall profits taxes too – the economic activity generated by a transaction from all tax-payers in the supply-chain could generate a 30%-50% return for tax revenue.
You can be pretty sure your government knows this, so it is good to bear in mind when negotiating things like local government support through resources, training schemes, trade-show sponsorships and subsidies for growth initiatives, especially when the whole supply-chain is within a country or seeking export growth.
Generally the revenue-share, apportioned by percentage, then goes to; the retailer, manufacturer, advertisers, marketing platform, delivery, shipping and logistics – all before any of the teams offering and servicing sales.
The payment processor, although generally highly-automated, low-cost to maintain and benefiting from great economies of scale, is also taking a proportion of costs somewhere equivalent to an entire department’s role in servicing sales.
Similarly, nowadays the hosting and software provider costs are increasing too, becoming closer to or exceeding the cost of physical buildings rent and maintenance.
Nowadays, we are seeing that the cost of delivery to consumers is equating to approximately the same as the overheads of providing and staffing physical retail outlets, with cost-savings from customer collection, lower fraud and logistics losses, resulting in similar pricing online and offline – depending of course on the location of the outlet for convenience, duty-free or premium experience.
Generally, you need to be the manufacturer to make sufficient margin to justify servicing large-scale retail outlets.
The less touch-points on the goods, the lower the overall costs from manufacturer to consumer, so efficient planning and calculations should enable achieving above average margins for each channel.
Channels requiring multiple distribution centres will add costs for touch-points and preparation for delivery.
Conclusions
Cost-control in your channel strategies and choices is absolutely essential because the general worst-case scenario for all channels with maximum average costs is continual losses.
Most businesses would expect to average out somewhere in the middle but this will not happen by accident – it requires understanding and pricing calculation to factor in all variable costs – which can often result in having to charge higher prices on many indirect channels to ensure all costs are covered and the channel is sustainable. Some channels can command a small premium from their customer-inertia generally from multi-brand basket filling, and some channels are much more price-sensitive than others.
Both the largest margin opportunity, and pricing efficiency to the consumer, comes from enabling a direct-to-consumer and bulk-buying sales – whereby the reduced marketing costs for loyal customers can be instead invested back into the loyalty and value for the customer with points, promotions, discounts, bonuses and lower pricing for repeat customers.
Often the lowest cost for marketing is on existing customer loyalty and referrals – and is also the most satisfying to share between brands and customers.
The Brandlight Alternative
To provide the best value, brand loyalty and customer experience, we built Brandlight to make it as easy and cost-efficient as possible to make a direct relationship preferable for customers, brands and partners.
We use technology to create economies of scale, resulting in a platform where no single brand has to cover the overall costs of the many teams that have created, evolved and manage all the many tools and skills necessary in modern ecommerce.
It is worth comparing our full-service ecommerce offering to the costs of every brand trying to recreate and manage all of this in-house, and requiring many more developers, third-party platforms, integrations, and resellers.
Our overall aim is to provide a customer experience comparable to any online marketplace for features, speed and security – then generally exceed them for the quality of specialist information and a direct brand relationship for communications.
All channels are valid, and each will always have their own loyal customers too, so to give brands presence, and customers access to great products, wherever they need them to be, we provide tools and integrations for all major channels and routes to market.
Brandlight Targets
- Enabling direct to consumer sales through organic, paid search and affiliate traffic.
- Getting average payment processing costs below 1%.
- Fraud checks on all orders to eliminate losses from chargebacks and negotiate minimal payment processing fees.
- Minimising stock losses, damages, expiry and returns though efficient and automated inventory planning.
- Optimising marketing spend within budgets for the maximum sales, and therefore economies of scale.
- Shipping service optimisations to enable pricing with free worldwide shipping, and additional premium services for time-sensitive customers.
- Maximising positive product and brand reviews through a personal services, prompt and human communications, measured automated feedback requests, and thorough satisfaction assurances.
- Consistent and empowered communications on all channels, platforms and mediums – to be available whenever and wherever your customers may be.
- Enabling all channel options, for cross-pollination and brand-awareness growth on all preferred channels.
- Prioritising and protecting sustainable-margins and positive-cashflow routes-to-market, to afford profitable multi-channel distribution.
Investment Strategy
It is clear to us that having an affordable and comparable direct-to-consumer option is an essential need for all brand’s cost-efficiency, risk-management and necessary brand-building investment.
With all channels having significant costs to service, the choice as to which to prioritise can be made with a view to optimising each before adding further costs on launching the next, or delays from trying to do everything at once.
As an aside, if you are in the market for shares in other companies, the Payment Processors, Software and Hosting Providers would seem to us like a clearly profitable, predictable and investable business model once they reach their critical mass.
Investing in shares in the marketplace channels could be a sector that has already peaked, since the high margins they have enjoyed become viewed as high costs too, and brands realise the value of their content and product, and then pursuing more cost-efficient direct-to-consumer alternatives to recover margins for product development.
Shipping companies and warehouse logistics companies would all seem to be on the rise, and it could be that the retail property sector has already over-shot the bottom of its value, so could rise again, given that their cost-efficiencies, social-activity and service experiences are still very difficult to replace with online-only strategies.
These are of course all the opinions of your author based on our own experiences, studies and data-analytics.
You should always seek qualified and experienced advice for all financial decisions when forming business plans that are beyond your risk-affordability or comfort-levels, due to the complexity of product-level calculations and analysis nowadays being best-suited to the programmers that also write the logic to implement them.
