Dealing with P&P costs...

[rayjay01]

I'm having a few problems calculating my profit/loss per unit when adding P&P into the mix.

From doing my own research I can see that P&P is a bit of a nightmare for any new e-commerce business, so I was hoping to find out if anyone knew any tricks of the trade or could offer some advice...

The items I will be selling range in weight and size from 80g up to 15kg, so it's quite difficult to find a one-size-fits-all solution.

I've created a spreadsheet on excel that allows me to see how much profit I would make on each unit through various scenarios. However, when it comes to the awkward heavier items, I seem to face a bit of a dilemma. To give you an example...

I have decided upon a set charge of £3.95 regardless of size etc to keep up with competitors.

One item has a weight of 6kg, a profit of 0.50p per individual unit sold and a P&P cost of £5.28. However, if a customer then decides to purchase 2 of this item, my profit then drops down to 0.16p per unit because of the change in P&P costs.

The total weight of the order then goes up to 12kg, which in turn raises the P&P cost to £7.28.

Obviously because I have a set P&P charge this extra cost isn't covered, so that extra £2 change takes a hit on my profit per unit and I end up losing 0.33p.

Is this type of thing normal? Or should I be looking for a better solution? The worrying thing is, I have played around with various figures and actually found that I end up making a loss on some combinations of items within one order, despite ensuring that I make a minimum of 0.50p profit on each individual unit...

I think it's bothering me because I always see promotions by competitors encouraging customers to purchase 2 of the same item. Yet in the above example, I would end up losing more money than if they just purchased one... So I feel like I must be going wrong somewhere...

Any advice would be greatly appreciated!

 

[deniser]

Your profit margins are tiny. I wouldn't sell any individual item which didn't make a healthy profit otherwise it's not really a business. I certainly wouldn't sell anything which made a loss. I assume when you have calculated your profit margin at 50p per item that you have included things like packing materials, labels, ink etc.

You also need to factor in breakages and returns and the cost of reimbursing the postage cost for those under the Distance Selling Regulations, soon to be replaced by more onerous regulations.

 

[rayjay01]

Hi Deniser,

Yes, all packing material etc is included in the total costs. Not all of the items bring such a low profit, that's just the minimum I allowed for on each unit. As you said, I haven't planned to make a loss on any items, except for the issue I outlined.

I'm not looking to become an overnight success, I am quite happy to bring a small but stable profit to begin with. This is something I have always wanted to do, so I am determined to find a way of making it work one way or another.

In regards to such a low profit per unit, there's not really a lot I can do... The prices are set to atleast RRP in line with competitors and after deducting payment processing costs, P&P and other misc costs, that is the final figure for some items...

The supplier i'm in contact with has placed me on a band 3 which is 1 off the lowest priced option. So I can't imagine any competitors face that much of a greater profit per unit than I have predicted...? Apart from bulk postage discounts.

You do make it sound as though it's mission impossible starting an e-commerce store? I can't imagine all of these people selling on eBay etc make no money at all from doing this? In fact, they face even more charges...

Surely the insurance I recieve on each package would cover me for breakages, losses, etc? My average sale price is roughly £15, so I should be able to get insurance as part of the postage costs?

 

[deniser]

In regards to such a low profit per unit, there's not really a lot I can do

Yes you can find another product with a better profit margin or make sure you charge properly for the actual cost of postage.

 

[deniser]

You do make it sound as though it's mission impossible starting an e-commerce store?

No, it's not impossible at all but you need a profitable product and to cover your costs to make it worthwhile.

If you start off with so little margin then you are eroding the value of the item for everybody and it is not going to be viable in the long term.

 

[deniser]

I can't imagine all of these people selling on eBay etc make no money at all from doing this?

Lots of people on Ebay are busy fools.

 

[deniser]

Surely the insurance I recieve on each package would cover me for breakages, losses, etc? My average sale price is roughly £15, so I should be able to get insurance as part of the postage costs?

I was talking about the legal obligation to refund your customer's postage charges if they return the item or if you accidentally send out something damaged or faulty.

As an example, I had a sale this week where the customer claimed there was a small mark on a garment so she was returning it. As well as refunding her outgoing postage which was courier delivery at £5.27 we also had to refund her return postage of £6.30 because she couldn't pack it as a small parcel yet had to use the post office. This kind of thing can take quite a bite out of your profits.

 

[deniser]

How do you do a multi quote reply btw?!

 

[rayjay01]

No, it's not impossible at all but you need a profitable product to make it worthwhile.

I appreciate that, but I do have a personal interest in the type of products I will be selling. I also think this type of business would be perfect for my current level of experience as it gives me an opportunity to grow with the business.

I don't think I will face the same kind of issues you do, as the products I intend to sell are pretty much 'as it says on the tin'. The only damage that can prove an issue would occur during postage, in which case I would file for compensation. I wouldn't send out an item without inspecting it first...

With that in mind, and in line with competitors, I would charge a return carriage fee for items that customers no longer want or change their mind etc. All of this would be included in the terms & conditions?

As for multi-quote, I have no idea, sorry!

 

[Chris Ashdown]

You talk of 1 unit, Do you sell in one units or are there many units to a order (i.e. a box of ten pens each one unit)

Working on your numbers would you be able to draw the minimum wage out of the company in say three months time

Are you talking sweets and if so then the market leaders are buying a very large quantities to get the best prices and even then new players are knocking the price down to unsustainable levels

Their is a sweet section on this forum

 

[rayjay01]

Hi Chris,

I would be selling a wide range of products, I just gave that one as an example. My profit per unit can go up to £10 on certain items.

As I said, I am quite new to all of this, and I don't know how competitors deal with new start-ups, that's the only reason I haven't stated what type of products. Maybe I am being a bit paranoid, I just don't want that to be my first mistake...

To be honest, I'm not looking to become a billionaire from this project. If anything, I am doing this to test myself and see if I am capable of doing it. Starting a business is something I have wanted to do since I was a child... I could never find a starting point though...

This is something that is practical for me to achieve at the moment, and I hope it will help me learn a lot as I go along.

There is a fair amount of competition in this area, but having checked my sale prices against competitors etc, I still think I can turnover a good enough profit to live from, providing I get the sales I intend... As with any business, it's all a risk I guess...

Surely it's the brand, and how well you sell that? I haven't just thrown together a few products and stuck them on a page. I have tried to create a brand image, something people will hopefully warm to.

The type of customer who purchases products such as these, are also quite unique, it's not exactly luxury items, but at the same time, it's products people are quite happy to pay out for.

 

[rayjay01]

Sorry, I should have said - potential customers can purchase single items, or multiple. They're not part of a set, as such. There's no requirement to purchase more than one thing in one order. Although I do intend to offer discounts for multiple purchases in one order etc.

 

[JMRidley]

I'm with Deniser - your profit margins are far too small. Customers return products for all sorts of reasons and even a small number of returns is going to impact you hugely. For example, if you are only making 50p on an item, you could lose the equivalent on profit on 10 of those items just by having one return. Did wonder, however, if you are calculating your profit correctly. You say that you are pricing at about RRP. That being the case, if you are making 50p profit, it suggests you are selling an item for a £1 or so and expecting someone to pay £3.95 postage which doesn't sound right. Can you give us an example of your figures for one product?

 

[deniser]

I have been wracking my brains trying to think which 6kg item someone would buy for £1.20 and have posted for £3.95. All I can come up with is a bag of sand

 

[rayjay01]

Hi JM,

Not all of the products have such a low return. I have just tried to make at least that amount on products that I would have made a loss on otherwise. In other words, I don't want to miss out on sales because I don't stock certain items that my competitors do.

Sure here's the full example for the one provided above...

Unit Purchase Expense (As Listed) £5.16
Payment Processing Fee £0.60
Postage Expense per Unit £5.28
Packaging Cost per Unit £0.24
Total Costs £11.28

RRP £5.75
Increase / Decrease £ £2.08
End Unit Sale Price £7.83
P&P Charge £3.95
Unit Sale Price (TOTAL inc P&P) £11.78

Profit £0.50

Why is everyone getting a total of £1 / 1.20? I don't understand? haha

Also.. in regards to returns etc. From what I have read about the distance selling regulation, it says I can charge for postage costs on items returned. The only reason I would have to payout for return fees is if it is not clearly stated in T&Cs? (obviously providing I am not at fault and sent out damaged products of course...)

 

[rayjay01]

I have been wracking my brains trying to think which 6kg item someone would buy for £1.20 and have posted for £3.95. All I can come up with is a bag of sand

Hmmm, sand, I may have to try that one!

 

[deniser]

Why is everyone getting a total of £1 / 1.20? I don't understand? haha

Also.. in regards to returns etc. From what I have read about the distance selling regulation, it says I can charge for postage costs on items returned. The only reason I would have to payout for return fees is if it is not clearly stated in T&Cs? (obviously providing I am not at fault and sent out damaged products of course...)

Because a typical retail markup is double plus the VAT

No, you can specify that the customer returns the item at their cost but you still have to refund the cost of the postage of getting it to them in the first place.

 

[rayjay01]

Ah see, that's something I wasn't aware of.

As I said, not all of my items have such a low markup. Is it normal to have a few items that are quite below this though?

Also, if that is the case, does that mean my supplier is probably charging me a lot more than they would others? From the figures provided, would you say there are savings that could be easily made?

 

[Stewart Lyons]

Hi
I have read your item with interest you are correct about return postage but I have found do not give anybody cause for bad feedback. Who reads the small print?? I am with a lot of your replies looking at your cost etc a 0.50 profit on an item costing £11 plus will not make you enough to cover any problems along the line unless you are selling loads. It takes some years to discover all the ins & outs of internet selling but keep at it if you do make a profit. If you don't try some other product I have tried 4 different types of items but have now been selling my present goods for 3 years and are just now making a good profit. Good Luck

Stewart

 

[rayjay01]

Thanks for the advice, Stewart.

That's what I'm hoping to do. I know it won't be easy, but it's all I really want to do in life. I'm determined to at least give it a try and adapt where possible!

I get the feeling that people may think that i'm being too naive or something similar, but you only live once, at least I can say I have tried

 

[Chris Ashdown]

Surely it's the brand, and how well you sell that? I haven't just thrown together a few products and stuck them on a page. I have tried to create a brand image, something people will hopefully warm to.

The type of customer who purchases products such as these, are also quite unique, it's not exactly luxury items, but at the same time, it's products people are quite happy to pay out for.

Brands take many years normally before they mean anything to most people with possibly the exception of fashion wear

Putting a few products together is not a brand in itself, just normal trading practice

If you just follow other traders you will spend all your time following them into look alike stores and probably end up in a price war

I would suggest that most stores make 80% of their profit from 20% of there stock so my advice is drop the ones that will never pay a decent return and concentrate on the more profitable lines whilst also searching out new products which will make your store stand out

Use the best images you can, good descriptions and smart colour display, remember these are the only things that the potential customer sees,

At the end of the Day most companies need to make at least 30% markup on what they sell to make a profit, in retail fashion clothing its often many hundreds of percent which is why they can have a sale at end of season and still make a massive profit

Suggest basically you go up market

 

[rayjay01]

Thanks Chris,

Definitely some things to consider there. I'll try and adapt things accordingly.