In case you haven't walked into your local UPS store, attempting to ship a product cross-country via next day air, the proposition is not inexpensive. How can this business compete? The following numbers are for illustrative purposes only --- the numbers are not intended to reflect absolute reality at any of the retailers in the example. However, the numbers should be adequate for a directional argument.
Let's assume you are an aspiring woman hoping to purchase the Jessica Simpson Dawson Satchel via an online business. You narrow your choices down to Endless, Zappos and Macy's.
Assuming you live in a state that has a six percent sales tax, the total price for the same item, including tax and shipping, is $248 at Endless, $251.95 at Zappos, and a whopping $281.91 at Macy's. The item will arrive tomorrow from Endless, in three to five days from Zappos, and in five to eleven days from Macy's.
Given these choices, the logical choice is for the customer to purchase the item at Endless.
Can Endless make money doing this? It is possible. At the end of this post, I include a sample profit and loss statement for each company.
The punchline is this: In order for each company to generate the same level of profit from this item, Endless needs to sell 1,000 units, Zappos needs to sell 741 units, and Macy's needs to sell 491 units. If Amazon has efficiencies that make their expense structure cheaper than Zappos or Macy's, the number of units decrease.
Amazon is betting that the Endless business model will cause customers to be 30% more productive than Zappos, and 100% more productive than Macy's, using these assumptions. This gets Endless to a break-even scenario, most likely, on a fixed-cost basis, and generates the same number of dollars of variable profit as Zappos and Macy's.
What do you think? Do you think customers will flock to Endless to take advantage of free next day shipping? Who will be hurt more by this strategy, Zappos, who is directly competing on total price, or Macy's, who has a retail channel that essentially provide "free shipping same day"??
Sample Profit And Loss Statement
| Jessica Simpson Dawson Satchel Price Elasticity And Profitability | |||
| Endless.com | Zappos.com | Macys.com | |
| Item Price | $248.00 | $251.95 | $248.00 |
| Shipping/Handling | $0.00 | $0.00 | $17.95 |
| Salex Tax (6%) | $0.00 | $0.00 | $15.96 |
| Total Cost | $248.00 | $251.95 | $281.91 |
| Delivery Time | 1 Day | 3 - 5 Days | 5 - 11 Days |
| Estimated Units | 1,000 | 741 | 491 |
| Demand | $248,000 | $186,695 | $121,768 |
| Net Fulfilled (90% of Demand) | $223,200 | $168,025 | $109,591 |
| Less Returns (30% of Demand) | ($66,960) | ($50,408) | ($32,877) |
| Net Sales | $156,240 | $117,618 | $76,714 |
| Gross Margin (50% of NS) | $78,120 | $58,809 | $38,357 |
| Less Marketing | ($18,000) | ($18,000) | ($18,000) |
| Less Picking & Packing (20% of NS) | ($31,248) | ($23,524) | ($15,343) |
| Shipping Expense/Item | $17.50 | $8.00 | $5.00 |
| Less Shipping Expense | ($17,500) | ($5,928) | ($2,455) |
| Plus Shipping Income | $0 | $0 | $8,813 |
| Variable Operating Profit | $11,372 | $11,357 | $11,373 |
| Profit as a % of Net Sales | 7.3% | 9.7% | 14.8% |
| Profit per Item Sold | $11.37 | $15.33 | $23.16 |
| Ad to Sales Ratio | 11.5% | 15.3% | 23.5% |
This is really interesting! I don't completely understand how you crunched those numbers...but I am certain people will take advantage of next day shipping.
ReplyDeleteLooking at shipping costs, I'm pretty sure that Amazon going to be taking some big losses early on for this project. Whats your thoughts?
To me, it looks like Endless, as a business unit, will take enormous losses. Endless will leverage the deep pockets of Amazon to fuel the business until they steal enough market share from competitors to achieve a critical mass that allows them to overcome their fixed costs.
ReplyDeleteAmazon leveraged this business model in the mid-late 1990s, when everybody thought they were the classic dot.com that would implode. They didn't.
All that being said, it is HARD WORK to build a handbag and shoe business on free next-day shipping to the size required to overcome fixed costs. It will be interesting to watch their progress.
All these numbers are very interesting. I bet they will give up. I use to follow up in this online shoe business Shoedeals4u.com. They used to have same policiy. Now they have really good prices and free shipping in 4-5 days. Who cares if the shipping arrives in 2 or 5 days how long time is free.
ReplyDeleteWith respect Daniel