Can Online Retailers Keep Lower Prices?

There exists a common belief that online retailers can afford to offer lower prices because they operate with fewer overheads. At first glance, an e-commerce platform doesn't have to worry about leasing or maintaining a physical store, hiring staff, refurbishing interiors, or procuring equipment. But is it indeed the case that the costs of maintaining an e-commerce business are significantly lower than running a brick-and-mortar store? Let's delve into this.

Numerous studies conducted by various companies have identified identical key motivators for online shopping:

• Competitive pricing
• Convenience
• Comprehensive product information

When shopping online, 85% of consumers anticipate that the prices will be lower than those in physical stores. This belief has even earned a specific term - Expectation of Lower Prices Online (ELPO). Consumers expect that online prices will be 8-10% cheaper than those of offline retailers.

Why do the majority of consumers hope to find lower prices online? The primary reason is that they presume online retailers to have lower overhead costs.

However, beyond the direct cost of purchasing goods from suppliers, an online retailer bears numerous indirect costs, such as transportation, courier services, and so on. These expenses are categorized as overheads, essentially costs a business incurs in the routine course of doing business.

Let's examine some costs that offline stores don't bear, but which are indispensable for online stores.

The 'last mile' refers to the delivery of goods from the penultimate link in the supply chain to the final destination. This stage of delivery can be quite costly for online retailers:

• The delivery address could be anywhere, including remote areas
• Traffic congestion can extend delivery times, meaning additional paid hours and fuel wastage
• The customer might not be present at the delivery location, necessitating a redelivery
• The courier needs to be equipped to accept payments
• Ideally, the courier should be dressed in promotional attire to strengthen a positive impression of the brand

In offline retail, there is no 'last mile.'

Fast order assembly requires the following:
• Organizing a specific assembly area in the warehouse
• Creating assembly instructions for different types of goods
• Hiring and training assembly staff
• Procuring necessary packaging material
• Accounting for the costs of reshipment and other errors during assembly
• Compensating for a significant number of returns
Customers often return goods they have chosen based on pictures instead of seeing them in person. The main reasons for returns are unsuitable color/size, failure to meet quality expectations, etc.

In offline retail, assembling the shopping cart is the customer's responsibility.

The IT component is a significant expenditure in e-commerce. The online store needs to ensure the smooth operation of:

• The showcase where the goods will be displayed and orders will be received i.e., the online store itself
• The system for processing product content (PIM)
• The system for processing orders (OMS)
• Services for advertising support: online marketing, newsletters, and customer communications (CRM, messengers, chatbots, etc.)

And this is just the bare minimum of functions requiring support.

In offline retail, the store itself serves as the showcase, product content is only needed for accounting, and order processing is done at the cash register.

When selecting a product online, the customer cannot see or touch it. All interaction happens on a screen. To make a choice, the buyer:

• Reads the product description and studies its features
• Looks at photos and watches videos
• Reads reviews

The quality of this information directly affects the conversion rate of the online showcase. However, to create high-quality content for product listings, highly qualified specialists are needed. Encouraging customers to leave positive reviews also requires professionals in customer service who will spend considerable time and effort on this task.

In offline retail, the customer personally examines the product on the shelf, relying on its appearance and the description on the package.

Without efforts to attract traffic to the site, there will be no store visits, and consequently no sales. Traffic is more expensive today than ever. A brick-and-mortar store in a busy location can automatically generate visitor traffic without any cost.

You can only save on online channels at the start if you organize the sale of a small assortment of unique goods on marketplaces. But even marketplaces are starting to "tighten the screws," significantly reducing sellers' profit margins.

Speaking of selling a large assortment, the costs of online trading may turn out to be no less than those of brick-and-mortar stores, and the potential for price reduction may be so insignificant that it would be hardly possible to compete with offline stores based on price difference.