In short
Applies to: Online sellers reviewing product and channel profitability
- Calculate contribution using net revenue and consistently measured variable costs.
- Reconcile platform settlements, returns and tax credits separately.
- Count fixed expenses only once when calculating break-even.
Sales can grow while profit stays low. Discounts, platform fees, delivery, returns and advertising may consume most of the amount earned from each order.
Start with net sales excluding GST. Subtract the costs caused by those sales. Then check whether the balance covers fixed expenses. A marketplace bank payout is not a profit figure.
Follow one fictional order
Assume this is a retained order: the customer keeps the goods and the sale remains valid. All amounts below use a consistent tax basis: eligible recoverable GST is excluded; non-recoverable taxes remain in the relevant cost.
| Item | Amount |
|---|---|
| Net sales after seller-funded discounts, excluding GST | ₹500 |
| Product’s variable purchase/production cost | ₹250 |
| Packing | ₹20 |
| Platform and payment charges | ₹45 |
| Outbound delivery | ₹40 |
| Attributable variable advertising | ₹35 |
| Expected net return-related cost allowance | ₹10 |
| Total variable/order-related cost | ₹400 |
| Contribution before fixed expenses | ₹100 |
Contribution means the amount left to cover fixed and other remaining expenses. ₹100 ÷ ₹500 = 20% contribution margin. It is not necessarily 20% net profit.
The example assumes fixed production overhead is not hidden in the ₹250 product figure. If you use a full product cost that already contains fixed overhead, adjust the model before subtracting monthly fixed expenses again.
Why the payout is different
A settlement may deduct commission, shipping, refunds, GST , income-tax and temporary reserves. Some are expenses, some are tax credits and some are timing differences.
| Settlement item | What to check |
|---|---|
| Commission and fulfilment | Record the expense once; check recoverable tax |
| Shipping | Avoid counting it again if already in order cost |
| Seller-funded discount | Reduce the appropriate sales amount |
| GST TCS | Reconcile the eligible electronic cash-ledger credit; not automatically a permanent expense |
| Income-tax TDS | Reconcile the applicable tax credit and year; it is distinct from a platform fee |
| Refund | Reverse the relevant sale and inspect stock and remaining costs |
| Reserve or holdback | Determine whether it remains a receivable rather than a loss |
Where Section 52 GST TCS applies, the notified combined rate is 0.5%: 0.25% CGST plus corresponding SGST/UTGST, or 0.5% IGST. The mechanism has conditions; do not apply it indiscriminately to every online transaction. Section 9(5) arrangements require separate analysis. Income-tax provisions also need the correct year and law.
Returns cost more than the refund—but not always the full product cost
Review outward freight that is not refunded, reverse freight, unrecovered fees, damage and handling. Deduct reimbursements and account for saleable stock recovered.
If 100 shipped orders yield 90 retained orders, and the ten returned orders create ₹900 of net losses, an allowance is ₹900 ÷ 90 = ₹10 per retained order. This is an average for that order group, not a charge actually incurred on each retained order.
If returned stock can be sold again, do not write off its entire purchase cost as well as keeping it in inventory. Avoid deducting the same shipping or fee twice.
Check advertising using the right denominator
₹7,000 spent on advertising that produces 200 retained orders gives ₹35 per retained order for that campaign. It is not automatically the cost of acquiring one new customer. Repeat customers, organic orders and the attribution method affect that measure.
Separate campaign-variable advertising from a fixed monthly marketing budget when preparing break-even calculations.
Calculate break-even only after cleaning the costs
Assume monthly fixed expenses are ₹25,000, with no amounts already charged in the ₹400 variable cost pool. At ₹100 contribution per retained order:
Break-even = ₹25,000 ÷ ₹100 = 250 retained orders.
At ₹50 contribution, it becomes 500. At zero or negative contribution, increasing volume does not produce a normal positive break-even under this model. The example assumes a stable product mix and costs within the relevant output range.
Markup, margin and discounts
Adding 20% to ₹400 cost produces ₹480 sales and ₹80 difference. That is a 16.67% margin on sales, not 20%.
To receive ₹500 after a seller-funded 10% discount, the pre-discount price must be ₹500 ÷ 90% = ₹555.56, approximately. This is an ex-GST illustration; real customer prices also depend on tax, marketplace fee bases and promotion terms. Fees linked to price must be recalculated when the price changes.
Track these each month
Net sales, variable cost, contribution, net return losses, fixed expenses and settlement differences. Compare by product and channel. Reconcile orders, credit notes, stock, invoices, settlements, tax credits and bank receipts.
Your practical next step: analyse one product for one month using the table above. Run a promotion case with lower realised price and a stress case with more returns before accepting the campaign.
Sources
- GST Council: Notification 15/2024–Central Tax
- Government explanation of the TCS reduction
- CBIC GST portal — CGST Act Sections 9(5) and 52; read with later amendments
- Income Tax Department — applicable e-commerce deduction and tax-credit guidance for the relevant year
This article is for general information only and does not constitute professional advice. Please consult a qualified professional before acting on it.
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