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E-commerce Start-up Business Plan

Strategy and Implementation Summary

The company will utilize a dual-pricing approach to ensure a recurring revenue model. Online retailers will be charged a flat annual or quarterly program fee based on their sales volume, product categories, and specific return conditions ("no-questions-asked" or prior authorizations required, etc.). The company will also collect payments in a form of a fixed percentage charge on all items claimed for return through its website.

Before getting into details about pricing, an important perception issue needs to be discussed. Presently, only few online retailers offer free shipping with purchases. For the returned merchandise, in most cases the retailers reimburse shipping costs only if an incorrect or defective item was delivered. (Sephora, a retailer of beauty products, offers free returns on all online purchases regardless.) In many instances shipping and handling costs represent a large percentage of the selling price. Most retailers therefore may not see free shipping of returned merchandise economically possible. However, it is financially feasible to offer free returned merchandise shipping to consumers at a nominal cost to retailers. The following table displays four sample companies in different product categories that differentiate in average price per unit sold and average shipping cost.


Total Sales $10 million $10 million $10 million $10 million
Avg Price/Item $12$35$180$1,000
Items Sold 833,333285,71455,55610,000
Returned Item Rate 9%9%9%9%
Items Returned 75,00025,7145,000900
Avg Shipping Cost $4.50$6.00$15.00$60.00
Total Shipping Cost* $337,500$154,286$75,000$54,000
TSC as % of Sales 3.38%1.54%.75%.54%
Markup Per Item $.40$.54$1.35$5.40

*Total Shipping Cost (TSC)

The amount of total sales is set at $10 million for each company and any change in the amount would not influence the important percentage and absolute figures. The average price per unit is based on general observations and is a simple representation of various prices in an increasing order. The average shipping cost is the actual UPS ground rate for the corresponding product category on average.

According to the previous table, for online retailers that sell books, CDs and videos to cover shipping costs of all returned merchandise will only cost 3.38% of their total sales. For a toy company, the cost will only be 1.54%. Companies such as and eToys were recently spending over 80% of total revenues on sales and marketing programs alone. Even if most of the marketing budget is dedicated to customer acquisition, a customer satisfaction and retention program can still be easily allocated for. Even if an online toy merchant decides not to allocate any of the marketing budget money to this program, to fully cover the shipping costs it will only have to raise the average price of an item by 54 cents. An online computer retailer with an average unit price of $1,000 will only have to add $5.40 to the list price. Or it only has to allocate an equivalent of 0.54% of total sales to cover the total shipping costs. In the majority of cases the retailers will have to reimburse the shipping costs to consumers anyway. According to a study conducted by PC Data Online, 30% of all returns were due to the item being broken, 28% because of an incorrect item was shipped, and only 22% because the customer did not want the item.

8.1 Pricing

The following table presents the proposed allocations to cover the shipping costs so that consumers could enjoy free returned merchandise shipping.

Average Price Per Item (API) $12$35$180$1,000
Average Shipping Cost (ASC) $4.50$6$15$60
Merchant's Share of ASC, 65%  $2.93$3.90$9.75$39
Shipping Company's Share of ASC, 20% $.90$1.20$3$12
Credit Card Company's Share of ASC, 5%$.23$.30$.75$3
Total Shares of ASC, 90%  $4.05$5.04$13.50$54 Rebate, 4% of API$.48$1.40$7.20$40
Total Allocations$4.53$6.80$20.70$94
ASC Coverage Ratio 101%113%138%157% will strive to eliminate the shipping costs to consumers by means of strategic agreements with online merchants, shipping companies, and credit card companies. As stated in the last quote, 58% of all product returns were due to merchants' faults, hence merchants will have to reimburse shipping costs to consumers in those cases. therefore proposes that 65% of a given shipping cost should be allocated to corresponding merchants. Due to demand aggregation, the company will be able to negotiate a shipping rate discount with companies such as UPS or FedEx. Hence 20% of shipping costs should be allocated to shipping companies in a form of a discount. Credit card issuers such as Chase and BancOne currently offer a 5% rebate to consumers on purchases with selected online merchants. It is therefore feasible to arrange an agreement with credit card companies and/or issuers to include a 5% shipping cost rebate on all returned merchandise. Since product returns are only 9% of all purchases, it will not represent a large cost to credit card companies to add this differentiating feature to their products. These allocations in total will cover 90% of the shipping cost. The remaining 10% will be absorbed by via a special "instant rebate." will charge merchants a program fee that will average only 0.5% of a given merchant's total sales. Also, the company will charge a low per-claim fee of 12% of each item's listed price (each item that has been claimed through the company's website). However, of the 12% charged per item, up to 4% will be instantly given back to merchants to cover the remaining portion of the shipping cost. The previous table indicates that the 4% rebate is sufficient to cover the remainder of the shipping cost in the first product category. It is actually far more than sufficient in other product categories (refer to ASC Coverage Ratio). can then decide whether to offer merchants a reimbursement of the remaining portion of shipping costs only or a flat 4% "instant rebate" regardless of shipping costs. For the purpose of this business plan and financial projections, a flat 4% "instant rebate" was used thus reducing the per-claim fee from 12% to 8% across the board.

As it was stated in a prior chapter, retailers should see an average sales increase of at least 15% due to the service offered by the company. On the other hand, based on the proposed pricing structure the service should not cost merchants more than 1.5% of their total revenues. The cost-benefit ratio of 10 will be a strong promotional point for

While it is a possibility to charge merchants commissions on all sales made through the company's website (when consumers claim their returns), it would not capture all sales stimulated by the company. The program will increase consumer satisfaction and loyalty. However, when consumers start buying more due to the program's effect but dealing directly with the merchant, the company will not receive any commissions and will in effect be giving its services away for free. Hence both fees charged should fully reflect the benefits of the easy-return procedure, early information on all returning items, restored customer satisfaction, selling opportunities created during the claim process, and all repeat sales thereafter.

The company also plans to draw revenues from advertising on its website, but for the purpose of this business plan advertising revenues will be considered negligible. A fee/rebate agreement may be arranged with such companies as UPS and Mail Boxes Etc. for bringing customers to them for shipping needs. Other revenue generating activities such as affiliate programs with VISA, American Express, or Citibank can be arranged to promote certain credit cards as a preferred method of payment online. Those revenues will also be omitted in the financial projections. Once the company has generated a sufficient customer database, it may also market information to retailers and other organizations for a fee. Any fees and payments could generate from consulting activities in the field of product returns will not be included in the financial projections either.

8.2 Sales Forecast

The table and chart below outline the company's projected sales volume in FY2000-2002.

  • 1st Program Revenues: represent the flat program fee assessed on annual or quarterly basis. The average fee charged by the company is 0.5% of a given merchant's total sales. The program is estimated to increase merchandise sales by at least 15% for a given merchant. The dollar figure in this line is based on the conservative estimates of total online sales provided by National Retail Federation (one third of the most optimistic current estimates provided by and the market share gained by the company. From 2002 to 2004, the growth of total online merchandise sales is estimated at 145% annually, which is in line with the growth figure for 1999.
  • 2nd Program Revenues: represent the per-claim charges of 8% (net of 12% charged less the 4% "instant rebate") of each item's listed price (each item claimed by consumers through the company's website).

The company plans to make its services available just prior to Thanksgiving 2000. The programs will be offered to the online merchants for free for the remainder of 2000, therefore, we will not generate any revenue from sales for the year 2000.

Sales Forecast
Year 1 Year 2 Year 3
1st Program Revenues $0 $7,800,000 $24,360,000
2nd Program Revenues $0 $11,232,000 $35,078,400
Total Sales $0 $19,032,000 $59,438,400
Direct Cost of Sales Year 1 Year 2 Year 3
1st Program Revenues $0 $0 $0
2nd Program Revenues $0 $0 $0
Subtotal Direct Cost of Sales $0 $0 $0

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