The business of selling below cost Chaklader, Barnali. Businessline; Chennai [Chennai]15 July 2016. How can e-tailers sell for less than cost price? There is probably some sound underlying logic How can e-tailers sell for less than cost price? There is probably some sound underlying logic Major players of the long established offline sector are complaining loudly about the low cost strategy of the online sector. Offline retailers are accusing e-tailers of selling products below cost. Online retail is being financed by private equity in a major way. If we think logically, private equity players will never invest in a business model that will result in losses. There is no doubt they want a decent return on equity. This forces us to wonder why these etailers are selling products below total cost. People’s lifestyle has changed over the years and more so with technological innovations. A Comscore report says that three out of five internet users are shopping online. The survey also says that the number of online shoppers in India is expected to rise to 56 billion by 2023. Online shopping’s rapid growth and popularity is due to heavy discounts, convenience of shopping, growing traffic and parking problems in the metropolitan cities. Offline retailers have understood that e-commerce is going to give them tough competition. Fewer overheadsOnline retailers have a low overhead cost. Their fixed costs are fewer as compared to offline sellers as they do not have to maintain the shop with different levels of interior decoration depending on the customer segment they target to serve. Offline retailers have to bear the cost of holding inventory in the warehouses and shops, as a ‘just in time’ technique would not work in this type of business model. E-tailers take orders online and have tie-ups with the vendors who deliver the products directly to the customers. Online retailers incur huge cost on advertisements, offer huge discounts, cash on delivery and the cost of returning the products by the customers within a stipulated time period or even at the time of delivery of the product. Many bear huge infrastructure costs for maintaining back-end warehouse services. As per the theory of cost-volume-profit analysis, in the short run, fixed cost is considered to be irrelevant for decision-making as it is incurred even if there is no sale. Employees have to be paid, so does rent, and the firm has to bear many other fixed expenses. If the selling price per unit of the product is more than the variable cost per unit of the product then there is a positive contribution margin per unit of product. The seller tries to maximise the total contribution by increasing the volume of products.

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