Unit economics and a returns problem in a small home-furnishing online brand
A textile graduate starts 'Hisar Home', selling cushion covers and table runners from a rented 300 sq ft unit. In the first month she gets 120 orders at an average order value of Rs 480, averaging two pieces per order. Instagram ads cost Rs 8,000; the marketplace charges 12% commission; packaging and forward shipping cost Rs 60 per order; fabric costs Rs 90/m and one metre yields four 40×40 cm cushion covers; stitching is outsourced at Rs 25 per piece. Returns are 18%, and the stated reasons are 'colour looks different from the photo' (60% of returns) and 'smaller than expected' (30%). Each return costs Rs 120 in two-way freight and about a third of returned pieces cannot be resold. She has Rs 40,000 of working capital left and is considering three options: raise prices by 15%, switch to only water-based dyes, or scrap free returns.
1. Calculate the contribution per order and per piece, and identify which cost line does the most damage to profit.
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Per piece: fabric Rs 90 ÷ 4 = Rs 22.50; stitching Rs 25.00; total Rs 47.50. Per order (2 pieces): revenue Rs 480; product Rs 95; commission 12% = Rs 57.60; shipping Rs 60; returns provision = 0.18 × (Rs 120 freight + one-third of Rs 95 unsellable = Rs 31.67) = 0.18 × 151.67 = Rs 27.30. Total variable cost Rs 239.90, so contribution is Rs 240.10 per order, about 50%. Fixed ads Rs 8,000 split over 120 orders = Rs 66.70 per order, leaving a profit of roughly Rs 20,800 for the month. The most damaging line is the returns bundle, not the ads. Advertising buys growth and can be scaled; returns destroy revenue, freight and product at the same time, and 18% is far above the 5–8% typical for well-described home textiles. Fixing returns is cheaper than fixing any other line.
2. Diagnose the returns from a marketing and product-information angle, and state the specific listing and photography changes you would make.
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Both reasons are information failures, not product failures. Colour: 60% of returns say the colour differs from the photo. That points to warm indoor lighting, a phone camera's automatic white balance, and screens that shift hue. Shoot in 5000–5500 K daylight, include a neutral grey card in the frame, show a close-up of the weave, name colours precisely ('mustard, not golden yellow'), and add a short note that screens vary slightly. Size: 30% say smaller than expected. A 40×40 cm cover looks different on a bare white background than on a cushion. Photograph it on a standard 40×40 cm insert, add a dimensioned line drawing, and state plainly: 'cover measures 39×39 cm unstretched; fits a 40×40 cm insert'. Add a size and care chart and two customer photos. Fixing the listing costs almost nothing, is fully within her control, and attacks the largest leak in the business before any price change.
3. Choose between the three options and justify your choice with numbers.
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Raise price 15%: revenue becomes Rs 552 and contribution Rs 312 per order. If volume holds, profit rises by 120 × 72 = Rs 8,640 - but on a new brand with 18% returns, a 15% rise may cut conversion by 20% or more; at 96 orders profit is 96 × 312 − 8,000 = Rs 21,952, barely better than today. Water-based dyes: a good long-term move for compliance and marketing, but it does not touch the stated return reasons and adds cost now, when working capital is only Rs 40,000. Scrap free returns: saves the Rs 27 provision but usually cuts conversion sharply and pushes customers to competitors. Recommended sequence: first fix the listing and photography - if returns fall from 18% to 8%, she saves about 0.10 × Rs 151.67 = Rs 15 per order, roughly Rs 1,800 a month, and gains reviews. Keep free returns only for colour or size mismatch supported by a photo, then test a 5–8% price rise, not 15%.