The Value Density Litmus Test

For every great eCommerce business model we see, there is another that never stands a chance of success. The reason is often value density.

Consider the disparate cases - we’ve seen both - for jewelry and beverages.

Jewelry, particularly fine jewelry, is an excellent eCommerce item. Sure, there are challenges on the marketing end, as some people want to touch and feel it before buying. But once the sale is made, jewelry is light, compact and inexpensive to ship, even with optional shipping insurance added. 

Consider a $500 ring, which even fully packed weighs just a few ounces. A merchant could ship this ring to a customer, fully-insured, for about $10. The value density, retail value divided by shipping cost, is 50, leaving the merchant with $490 in net proceeds to cover the cost of the product and its marketing. This seems to be a promising business calculus.

Now let’s consider beer, flavored water, or energy drinks. We’ve seen proposals for all 3, but have never been able to make the math work to support a viable B2C distribution model. The problem is value density. These products will often be sold in six-packs, either in cans or bottles, which a consumer might buy for $10 to $20. 

A six pack of cans weighs 5 pounds, with bottles nearly double that. Further, bottled products require special packaging to survive shipping, adding more cost. The good news is that the standard $100 of included shipping insurance for most shipping services covers the value of the product, negating the need for additional insurance. However, the average cost to ship this item is closer to $11 to $15, for an average value density of less than 1.2, leaving no room for other costs or profit.

In fact, it is a challenge making any eCommerce model profitable if the average sale value is lower than $50, with a $100 average sale being a better target.

This is why most consumer beverages are distributed via the 3-tier model of manufacturer, wholesaler and retailer. It is simply less costly to transport beverages in cases on trucks, with the consumer providing the final mile of transport.

We are happy to discuss any business model with potential clients. We can work through the details of your program and provide you with the information you will need to ensure that you can be profitable. This discussion costs you nothing, and can save you thousands.