How to Measure Profitability Across Channels

In 2021, almost 20% of global retail sales came from eCommerce, and that figure is expected to grow to nearly 25% by 2025. This highlights the major role that eCommerce plays in business.

However, its profitability poses a challenge: 70% of surveyed businesses said they took a hit trying to boost their eCommerce elements during the pandemic (and were unable to do so optimally).

To help you stay in the black, we’ll discuss how to measure eCommerce profitability across your different sales channels and why it’s crucial to your company’s success.

What Does eCommerce Profitability Measure?

Each product category and online sales channel behaves differently, and measuring eCommerce profitability helps you to understand them. It quantifies:

  • How well do certain products sell on specific channels
  • How each eCommerce channel behaves
  • How expenses for selling, marketing, and fulfillment affect their profitability

With the data you gather, you can make information-driven decisions and adopt measures to improve your business.

Why You Need to Measure Sales Channel Profitability

Tie Everything to Unique Sources of Truth

Measuring profitability involves mapping invoices from various suppliers to your sales channel data. It typically looks like this:

  1. You have to reconcile all of the invoices you receive from suppliers and manufacturers.
  2. You need to tie each manufacturer/supplier SKU to your own internal identifier, which should be a unique ID.
  3. Lastly, you connect that unique ID to a respective sales channel SKU (which could be an ASIN, UPC, ISBN, or EAN).

Your unique ID becomes the source of truth, which you can then use to calculate how much you make per sale across various channels.

Gain a More Detailed Look at Your Business

Finding the profitability of each channel lets you understand not just the bigger picture, but also how each channel performs relative to one another. You can thoroughly compare and analyze their behaviors to determine which channels perform better and which deserve more of your attention.

Control Your Costs

With a detailed examination of your business, you can allocate your expenditures correctly. For instance, identifying poorly performing items on a channel allows you to distribute them strategically and control your inventory costs.

Additionally, if you see items aren’t selling well despite a high ad spend, you can cut back on expenses.

Assist With Creating Targeted Initiatives

Calculating profitability also helps you develop and implement corrective measures. Let’s say you pinpointed an underperforming channel—you could then decide to shut it down or conduct more research on its consumers’ behaviors.

As a marketing example, imagine you learn specific items sell better on Walmart as you advertise. Increasing your ad spend should then be your focus. Leverage your profitability data to hone initiatives that’ll improve business operations.

Identify the eCommerce Sales Channels Worth Scaling

Profitability also indicates which online channels deserve further investment. Note that, depending on your products’ categories, your initial margins may seem slim, but that can be improved through scale.

Online, some consumer packaged goods are more profitable than others. Factors like a retailer’s strategy can affect the performance of certain products. By scaling, however, your margins can increase proportionally.

How to Measure eCommerce Profitability

We previously outlined how to map invoices to unique IDs and then tie them to respective channel SKUs. Here’s what to do next.

Step 1: Identify Your Functional Expenses

First, determine your sales channels’ expenditures. You can incur them through business activities such as:

  • Selling, marketing, and advertising
  • Packing and distribution
  • Billing and collection

After recognizing where money is spent, you should categorize them correctly. For instance, if you spent X amount on a certain ad campaign or used X dollars for the fulfillment, list each expense accordingly.

You should also map out your employees’ salaries according to their functions. If your advertising manager took care of an Amazon campaign, their pay should be categorized under ad spend.

Step 2: Assign your expenses to the appropriate channel

Next, properly identify which channel the categorized expenses belong to. By accurately tracking each channel’s costs, you can compute its averages. For instance, if you sell on Amazon, you can compare your fulfillment costs to the number of orders you’ve received.

For marketing, meanwhile, simply set your total number of ads and ad spend side by side, then calculate the average amount you spent.

Step 3: Prepare profit-and-loss (P&L) statements for each channel

P&L statement lets you concretely measure every sales channel’s financial performance. When putting them together, remember to allocate your expenses proportionally.

For instance, your cost of goods should be distributed based on your channel’s total sales. Let’s say you sell on Amazon and Walmart. If 70% of your sales are from Amazon while the remaining 30% is from Walmart, you should assign the cost of goods accordingly.

Doing that shows you your gross margin. Next, deduct the proper share of functional costs from each channel to find your net profit. Your net profit shows you each channel’s true performance, which means a high gross margin doesn’t indicate actual profitability.

Step 4: Formulate proper corrective actions

After seeing your channels’ profitability, you can then develop strategies and appropriate measures to counteract any underperformance.

You may discover that specific products aren’t selling on certain channels due to a lack of marketing. You could even find you’re overspending on advertising without improvements in sales. Then, you can consider dropping such channels or initiatives.

For productive channels, meanwhile, you can choose to grow them further. But before making a decision, don’t forget to consider different factors like:

  • Consumer behaviors
  • Market trends
  • Sales strategies

Wrapping up — Measure profitability across channels to determine your best business strategy

Simply put, eCommerce has become paramount to any business’s success, but achieving real profitability is challenging. Also, remember that every product and online sales channel will act uniquely.

By properly measuring profitability, you can get a better grasp of those behaviors and adapt accordingly. Just remember what we’ve discussed and you’ll be good to go.