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.
Each product category and online sales channel behaves differently, and measuring eCommerce profitability helps you to understand them. It quantifies:
With the data you gather, you can make information-driven decisions and adopt measures to improve your business.
Measuring profitability involves mapping invoices from various suppliers to your sales channel data. It typically looks like this:
Your unique ID becomes the source of truth, which you can then use to calculate how much you make per sale across various channels.
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.
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.
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.
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.
We previously outlined how to map invoices to unique IDs and then tie them to respective channel SKUs. Here’s what to do next.
First, determine your sales channels’ expenditures. You can incur them through business activities such as:
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 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.
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.
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.
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:
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.