THE COST OF FREE | Economics & Sense
$8 off uber rides!
Free delivery and discounts!
Free delivery and returns!
When I first heard that Zara was going online, I was one of the super excited ones that immediately ordered on the day itself. The box it came in was so cool, although my second thought was "How sustainable is it to deliver every parcel in such a pretty package?"
Cost of "Free Delivery" and Delivery
- Labour to pack the parcel
- Labour for the online customer service personnel
- Cost of packaging (Box, paper, sticker, plastic)
- Courier cost
Cost of free returns and delivery
- Cost of courier for return
- Labour/Time for customer service personel process parcel and place inventory back into the system
- Cost of bank transaction to refund amount back to customer
Revenue increases but profits dip. Although this might be a short term thing for Zara and their profit margins can bounce back if they closed down some physical retail stores.
The hidden cost in Revenue
However, the whole talk about revenue always boggled my mind. No one should talk about just revenue when it comes to business. Because if one's expenditure or cost to run the business is more than your revenue (raw sales figure), then it not only means you earn nothing but you are running at a loss.
When a company's fixed cost (the basic expense it needs to continue operations) are more than what they can earn, it means that they are running at a loss and are borrowing money from some other resource to pay their staff. Things are not as simple as they seem on the surface.
A whole month wages...
As a consumer, we may think what is $1 or $10 difference? But the summation of subsidising 200 customers of $10 is literally taking away a monthly salary of one staff. We would be so mad if our boss asked us to work for free just so their customers can get $10 off on their purchase 😅
Black Friday is fun. But recently, admist the black friday sales, Everlane posted this instagram image of how they are not participating because their prices are already fairely priced, not marked up and thus has no room for sales.
For my photography / film company it is the same. Now that we support 2 other staff other than myself, I can't bring myself to go to them every other month and ask that they take a $100 - $600 paycut just so that a customer can get a "good deal".
We don't mark up the prices. The prices are set according to the number of weddings I can take a month to maintain the kind of standard I am proud of, and the income I can live with. I don't live an extravegant lifestyle and there are not much corners to cut. As such discounts or sponsorships are not a part of our business model.
We read the news that says such and such a company has earned a revenue of billions over black Friday. But that is just the revenue. What are the earnings after the parcels have been shipped out? With all the sudden influx of parcels, if the company has to pay extra to expedite all the overwhelming orders, hire more labour, then after the dust has settled, was it at a loss or did they really gain as much as we think they did?
Case Study: PencilPrincess
Let me cite an example. Let's say I'm selling you a pen for $1.50. My profits (earnings) if I sold one pen would be $1.50 minus the cost price from supplier ($0.80) and other miscelleneous cost to run the website that this pen is hosted on ($0.20). Let's say I offer free shipping, which means I absorb the cost for let's say normal mail which is untrackable ($0.30). This brings my grand total of profits, the amount of money I get to keep as income, to $0.20.
That's not the end...let's say Black Friday comes...and we give 10% off. Now I will only earn $0.05. This is bad.
Let's say because of all the backlog at Singpost, my parcel gets delayed or lost and I have to do customer service management where I have to replace the item or give a discount voucher on their next purchase. I will end up with having to fork out another $1.30 to mail out another pen which will bring my total to a - $1.25.
This is what I would have lost. But if the news reported it, it would be that PencilPrincess earned a total of $1.50 over the black friday sale when the truth is that I actually lost $1.25.
Somebody pays the price...
Nothing is free. It may be free for the consumer but some where down the line, there is a someone paying for our "free". If you're wondering, then how come top management people can earn so much and have so much bonuses? That's because the system is whacked.
They have managed to convince the board that their bonuses should be tied to the company's revenue and not profits. This is why the economy crashes. When companies no longer follow the math or common sense and when individuals in the company think only short term and for personal gain or when they try to compete for customers at the expense of their company's long term survival.
As consumers, we have the ability to influence good working environments.
Work life balance, a fair working environment, lack of politics in the workplace, good communciations, good leadership...if we want all these, we also need to learn to be educated consumers. There has to be a fair trade. Nothing is for free.