Is it profitable to sell on marketplaces?

We are told how easy it is to sell goods on marketplaces and how profitable it is. Many services claim that everything is simple, automatically configured, and synchronized. All you need is an AI-generated description and high-quality pictures, and sales will grow like an avalanche.

But let's look at this from the other side and estimate the main costs that SMB sellers face when selling goods online.

Let's look at the example of EU countries, which may differ from working in the US market.

What is a marketplace?

A general definition can be given as a place where a seller and a buyer meet and where a transaction takes place with the technical assistance of some script represented by a company.

More and more retail chains, which we are used to seeing in offline retail, are offering their platforms for selling goods from third-party sellers and manufacturers. This is beneficial, as they relieve themselves of operational support for sales, communication with clients, and logistics services, and switch to earning commission income.

How many marketplaces are there in Europe?

I have not seen a detailed analysis of the marketplace market but working with marketplaces for the last 4 years, we have analyzed approximately 300 sites that can be considered for work and, most importantly, which have at least some flow of visitors. Currently, we are working with 37 sites and we can add no more than 25-45 sites. According to our estimate, the entire EU market can be estimated at 500 more or less large players.

It is clear that this is mostly an assumption, but if we consider the 27 EU countries, then on average there are 20 markets per country from such an estimate. Considering that there can be a big player in each country and with a large number of product categories, even this estimate becomes very insignificant.

How do marketplaces make money?

If we consider the methods of monetization of marketplaces, it is obvious that the main share (80%) of income comes from commissions for selling physical products, and the remaining (20%) can be evenly distributed among freemium, subscription, commission+subscription, and other ways of monetization.

The sale of the physical product is a simple one-time purchase that ends with the item being picked up or shipped to the buyer. Unless goods are consumables, people rarely need repeat deliveries. Therefore, marketplaces are interested in maximizing commission income for each one-time purchase. And obviously, all of this maximized commission profit is passed on and charged to the sellers. Further, understanding that the profitability of e-commerce for sellers is always decreasing, then all commission fees from marketplaces are very significant compared to the cost of goods, so sellers will shift all costs to the buyer.?

So what do we have in terms of commission expenses?

1. Fixed fee

Almost every marketplace charges a monthly subscription fee of approximately 30€-40€ per month from each seller, or approximately 1€-2€ per sale, depending on sales volumes or terms of agreements.

It’s not entirely clear what meaning it carries for the site. Maybe this is additional income for infrastructure, salary for onboarding employees, and compliance. But in any case, be prepared to pay.

We would like to point out that all subsequent commissions and payments may seem insignificant and small but you should understand that the average check on marketplaces is also relatively low and if it is 50€, then 1€ is already 2%. This is a lot, and if you consider that your purchase price of the goods is initially lower than 50€, then this may already be 2% - 4% and even more!

But let's assume that this is 2% of the cost of 50€!

2. Management fee

Sometimes marketplaces may charge a management(handling) fee in addition to each sale. This can be analogous to acquiring settlements when a fixed commission is added to the commission payment. Perhaps it is to pay off these expenses that a similar commission of 0.25€-0.35€ is charged.

From an average check of 50€, this is 0.5% - 0.7%

3. Refund/cancellation fee

The percentage for canceling a transaction and(or) for a refund differs depending on the marketplace. Some platforms fully refund sales commissions, but there is a cancellation fee, which on average should cover the marketplace’s acquiring costs when the client pays for the purchase and when returning funds.

Typically this is 2%-3.5% of the transaction amount.

Some "greedy" marketplaces take the entire commission for a canceled transaction. This is explained by the fact that the sale was completed and the fact that you were unable to complete it is your problem with the client, not the marketplace. It is difficult to prove who canceled the deal and why. Maybe it’s your fault, if, for example, your scripts did not work correctly when updating product availability or there was an error in price parsing or the automatic calculation of the cost of your goods. This is your mistake! There was a fact of sale, which means the marketplace did its job and you have to pay.

This is probably correct, but sometimes marketplaces can impose onerous conditions for canceling a transaction, which must be initiated by the buyer, and usually in the first 24 hours, but there is no direct link to canceling the transaction and the client needs to contact the marketplace support service and request cancellation. And if the sale occurs on weekends, this is generally impossible to realize All these are your risks, which you must understand and be able to calculate and evaluate.

In any case, 2%-3.5% for cancellation is a very average estimate and closer to the minimum. You can factor it into your cost estimate. For example, Amazon can charge 2.9 euros for a refund. With our sales of 50€, this is already 5.8%!

There may be a remark here that the percentage of returns is so small and that everyone is focusing on 3% of cancellations or returns, and there are also complete misunderstandings who claim that they have 99.99% of successful sales. But believe me, this is not true and the share of returns is very significant, especially in Amazon!

But in any case, let's "believe" that the probability of returns is 3%, so 0.05% - 0.1% will be added to our 50€.

4. Order’s fee

Payment for the transaction! This is one of the most predatory ways of making money. The market average is 15%, depending on the product category. It seems like a little! BUT!

? 15% is usually taken for the fact of the transaction itself. And this is a commission on the entire order amount including delivery and VAT. This is important and consumable because your purchase or production cost is lower.

? Another point related to commissions is that they are usually not subject to VAT and do not reduce your tax base, i.e. ultimately increase the amount of tax deductions.

And now imagine you sold a product for 50€. Of these 50€ you will pay VAT (usually marketplaces like it to be included in the price and the client sees only the final amount since no one understands what taxes and commissions he pays).

On average for the EU we can assume that this is 21% (somewhere 19%, and somewhere 25%).

VAT of 21% included in 50€ is 8.68€ / Commission of 15% of 50€ is 7.50€.

Thus, on each sale you already pay 32.3% commissions.

5. Hold period

Marketplaces will never pay you money for a purchase on the same day or at least within the next 3 days. This usually takes from 1 to 2.5 months. This is explained by good intentions, that the client may refuse or return the goods and needs monetary security for this, or an even more stupid explanation that these are risks from fraudulent transactions in cases of payment by cards and the marketplace bears the risks that the acquiring will cancel the transaction and the marketplace will not receive money from the client. In any case, this is complete nonsense, since in the end, the seller will pay for everything!

But the most important thing is that in life, SMB can't afford to have money in its accounts for 1-2.5 months without moving.

Of course, this is the liquidity of the marketplace, which it receives for free, and you, as a seller, are forced to pay for it!

For you to continue operating when you are waiting several months for funds to arrive for your sale, you must get funds from somewhere. And this is a loan!

With the current Eurobor at 3.6% and inflation in Spain at 3.4%, it is unrealistic to take collateral for a company below 8%. But for a small company, this percentage will be much higher and more difficult, since they are not clients of banks, they do not have any collateral, and banks will not finance turnover or warehouse balances.

Even with an 8% loan for 1.5 months to cover the holding period of the marketplace, this is an additional 1% commission on each of your sales. This is a pure interest rate without the bank's transaction fees for opening a line of credit.

6. Tax agent

Another marketplace trick is to act as a tax agent and use your funds. This is when a service is provided to you and deductions are made for you, for example, VAT in OSS on sales within the EU.

You can independently deduct these funds once a quarter, and the marketplaces freeze them immediately and can use them. And you again pay for maintaining liquidity. Yes, a little less, since this is usually the VAT amount on sales volume (on average 21%), but this can already be calculated as a loan for 3 months, so it is only an average of 0.5% per sale.

7. Conversion fees

Another favorite technique of many services, including marketplaces is a conversion fee. There are a lot of colorful "presentations" and “studies” that display prices in the buyer’s currency greatly increasing the level of sales by almost 30-70%!

I have not seen confirmed and substantiated studies on this topic. As a rule, they are provided by the services themselves, supposedly based on their experience and statistics, but this is not verifiable!

How do marketplaces convert currencies, at what rate, how do they display currencies in your transaction, and how do you check this? I hope you understand that everything displayed in your personal B2B account may not be entirely correct. So you can judge how fair this is.

But in any case, the commission for such a service is usually up to 2.5%!

8. Commissions on ecology, recycling, and packaging

A similar way to earn money for marketplaces is with the example of a tax agent. Recently, states have been trying to increase tax contributions, but not directly through increasing IVA, but in more hidden ways, introducing additional commissions and payments for certificates and compliance with certain standards. These can be environmental certificates, energy certificates, and recycling certificates. Payments are not entirely significant and can be estimated within 1% of turnover, but marketplaces take advantage of this and again offer the service to pay and track everything for you, thereby not only using your funds but also receiving a commission for this service!

Again, be ready to pay a fixed price depending on the amount, weight, or material of your product, but additionally 0.5% -1% you can be charged!

These are perhaps the main points that are inherent in most marketplaces and which you should explicitly take into account when assessing the profitability of your sales.

On average, for 50€ sale, the summary commission will be at least 40%!

This is only the first part of the costs of working with marketplaces, associated with commissions without taking into account the costs of sellers for support infrastructure, support costs, additional services in the form of advertising campaigns, fulfillment, and deliveries, as well as the risks and limited access to information from marketplaces, which makes sales on them very expensive and increases the requirements for detailed assessment of sales volumes and financial forecasting.

In the second part, we will look at the infrastructure and operational costs of working with marketplaces.

Stay tuned for updates!