27 Feb 2016

How E-commerce Results in Lower Prices

Many things are cheaper on Amazon or Flipkart than in physical shops. Some of this is due to unsustainable discounting, but I think a big part of it is due to the efficiency of e-commerce.

To begin with, e-commerce results in less inventory. When I ordered a Macbook Pro, it was shipped from Bombay. That meant that Amazon didn’t keep to keep one in stock in Bangalore, reducing their costs. For a costly product, this can easily result in many millions of dollars saved.

E-commerce shops also have other economies of scale — a single warehouse that serves many users costs far less to construct than a plethora of shops, each of which has its own costs with real estate, staffing, electricity, security, and so on.

Bangalore probably has a hundred supermarkets, which it doesn’t need. It would be much cheaper to have say, ten, serving the entire city. Shops also need to be located on main roads, where real estate is very costly, while e-commerce warehouses can be located off the main road, or in an area with low rents.

An e-commerce store may also stock cheaper products. I wanted to buy an emergency light, and the cheapest one at the local supermarket cost ₹900, while the cheapest one I found on Amazon with great reviews cost just ₹390 (including delivery charge). Maybe the physical supermarket refused to stock the cheaper emergency lights to increase their profit margins? Or maybe they didn’t have the volume needed to make it profitable to stock more models?

E-commerce sites also let me buy cheap products from unknown brands, thanks to the reviews. In a physical shop, I skip them because they may not work properly. And I can’t return them, while I can on an e-commerce site. When I go to a physical shop, I end up buying costlier products since I don’t want know whether cheaper ones work well (due to lack of reviews) and I don’t want to take the risk (due to lack of returns).

E-commerce sites also stocks products from more brands, letting you find a cheaper one. I recently ordered a washing machine on Flipkart, and I saw ones from LG, Samsung, IFB, Bosch, Whirlpool, Siemens, Hitachi, Godrej, Kelvinator, Haier, Panasonic, Electrolux, Onida, Midea and Sharp. That’s 15 brands! No physical shop I have been to offers so many choices. I can buy the cheapest machine that meets my requirements. This turned out to be a Hitachi. Few physical shops I’ve been to stock Hitachi washing machines.

Flipkart also gave me tools to, for example, ask for the cheapest washing machine with at least a 7kg capacity. In a physical shop, it’s harder to find the cheapest product with a certain feature or capacity. Salespeople are clueless, and often lie to me when I ask them to show me the cheapest one. They show me some other product, presumably to make money at my cost.

I also tend to compare prices more on an e-commerce site, in the comfort of my house than In a shop, when I’m in a hurry, the air is stuffy, there are people all around me, there’s a queue at the counter, and it’s late for lunch so I’m hungry.

I think that if you add all these up, e-commerce results in a huge and sustainable savings over physical shops. Everyone benefits from them.

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