What it means
An electronic retailer is still a retailer, buying or making goods and selling them at a margin. What changes is the cost structure, because the store rent and shop staff of traditional retail are replaced by paid advertising, warehousing, packing, carriage and a returns operation.
The commercial reason this matters is that online margins are far more sensitive to two numbers most shop owners never had to think about: conversion rate and return rate. A site that converts 2.5% of visits into orders earns 25% more revenue from the same traffic than one converting 2.0%, and a returns rate that drifts from 10% to 15% can wipe out the entire net profit on a fashion range.
In practice the revenue model is built from a simple chain: traffic multiplied by conversion rate gives orders, orders multiplied by average order value gives gross revenue, and returns are then subtracted to give net revenue. Marketing teams manage the first two variables, merchandising manages the third, and the operations team manages the fourth.
The nuance that catches people out is customer acquisition cost. Early growth often comes from cheap paid traffic, but as a retailer scales it has to bid for less interested audiences, so the cost of each incremental order rises even while total revenue grows.
Sustainable e-tailers therefore watch repeat purchase rate closely, because a returning customer costs almost nothing to acquire. The main variants are worth distinguishing.
Owned-site retailing gives full control of pricing, data and branding but requires the retailer to buy its own traffic; marketplace selling brings ready-made demand in exchange for a commission of roughly 8% to 15% and very little customer data; and dropshipping avoids inventory risk entirely at the cost of thin margins and weak control over delivery.
In practice
Real-world examples.
Example
A speciality coffee roaster shifts from wholesale into direct online sales, building a subscription site where customers choose a grind and a delivery frequency. Because subscribers reorder automatically, the roaster's acquisition cost is spread across an average of nine deliveries rather than one.
Example
A footwear brand lists on a large marketplace to reach shoppers it could not afford to buy traffic for, accepting a 12% commission. It keeps its own site for new releases so it retains the customer email list and full margin on the highest demand products.
Example
A garden equipment retailer discovers that free returns on bulky items are destroying its margin, since each returned mower costs $46 in collection and refurbishment. It introduces a paid return option on items above 15 kilograms and adds better sizing and specification detail to the product pages.
Formula
Calculation
Net online revenue = (Sessions x Conversion rate x Average order value) - Returns. Gross profit = Net revenue x Product margin.
An online homeware retailer records 400,000 sessions in a quarter with a conversion rate of 2.5%, giving 400,000 x 0.025 = 10,000 orders. At an average order value of $68, gross revenue is 10,000 x $68 = $680,000. Returns run at 12% of gross revenue, which is $680,000 x 0.12 = $81,600, so net revenue is $680,000 - $81,600 = $598,400. With a product margin of 42%, gross profit is $598,400 x 0.42 = $251,328. After $120,000 of paid media, the quarter contributes $251,328 - $120,000 = $131,328 towards fulfilment, platform fees and overheads.Case study
Seen in the real world.
Northbeam Kitchenware is a fictional company used here as an illustrative example. It grew from $2m to $9m of online sales in three years, then discovered that its operating profit had actually fallen. Growth had come entirely from paid search, and the cost of acquiring each new order had climbed from $9 to $27 as the brand exhausted its most obvious audiences.
The management team rebuilt reporting around contribution per order after delivery, returns and media, rather than around revenue. That single change revealed that a large ceramic range was loss-making at scale because of breakage in transit, while a much smaller utensils range was funding the whole business.
Northbeam cut the ceramic range, redesigned the packaging for what remained, and moved budget into email and loyalty. Revenue fell to $8m the following year, but contribution rose by roughly a third, which is the outcome the illustrative example is meant to make vivid.
Watch out
Common mistakes.
- Judging an online store on revenue growth alone and ignoring contribution per order, which hides the fact that acquisition costs usually rise as a retailer scales.
- Recording refunds as an expense instead of as a deduction from revenue, which overstates both the top line and the apparent gross margin.
- Assuming a marketplace listing and an owned website are interchangeable, when they differ completely in commission, data ownership and pricing control.
Questions
People also ask.
What is a healthy conversion rate for an online shop?
It depends heavily on the category, but general retail commonly sits between 1% and 3%, while subscription and repeat-purchase businesses run higher.
Should delivery cost sit in cost of sales or in operating expenses?
Most retailers put outbound delivery in cost of sales so that gross margin reflects the true cost of getting the product to the customer.
Does electronic retailing include selling to other businesses?
Strictly the term describes consumer selling; equivalent business-to-business trade is normally called e-commerce or digital wholesale.
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