On ecommerce platforms such as Pinduoduo in China, you often see promotions selling some items at CNY 9.9 (US$1.4), with free shipping.
“No way they can make money,” you might say. With logistics, marketing and other costs, CNY9.9 is impossible even if the item itself comes at no cost.
Well it is actually quite possible in China – In fact, at Momentum Works sometimes we print our business cards in China. Two boxes of laminated business cards would cost CNY11 including shipping to a different city.
Let’s do some numbers.
With manufacturing – especially of light goods – and agriculture at large scale and in heavy competition, you can actually buy goods from factories at really low cost. For example, a pack of 10 tissue boxes would probably cost you about CNY 5, while 2 kilograms of apples would probably cost you less than CNY4 (if you buy it at the right timing).
Shipping/logistics is largely a volume game, with huge volume you can decrease the unit cost significantly.
For example, from the city of Yiwu in Zhejiang province, where you find one of the largest wholesale markets for consumer products, delivery to anywhere in the country would cost less than CNY2 per package of 0.3 kilograms and below. That is if you ship more than 3000 parcels at once.
During the first half of this year, almost 2.4 billion ecommerce parcels were shipped out of Yiwu. Now imagine the scale.
Packaging & labour
So now you have CNY 6-7 in total cost, the packaging and labour would probably cost another CNY1-1.5. Cost of payment is almost negligible – if you accept via WeChat or Alipay.
Marketing – again the volume
So you would still have CNY9.9 – CNY6-7 – CNY1-1.5 = CNY 2.9-1.4 gross profit. The game is now how do you make massive amount of people be aware of your low prices and actually place orders. KoLs, social sharing, WeChat groups and even MLM schemes are ways to acquire new orders at relatively diminishing costs.
Quality is the key
However, the key here, as always, is the quality. Imagine you have a very thin margin, any product issues that trigger refund or additional customer service costs would make an order loss making.
Especially for goods like fruit, any small mishandling could ruin large quantities, causing big losses.
The same model, though, is hard to replicate in other markets, where the volume in production, logistics and social marketing is not as high.