It’s a cliché I know, but I find the following a useful reminder when we get stuck in the operational weeds: revenue is vanity, profit is sanity, cashflow is reality. But how do we know how sane we are, how much profit we’re making on the products we’re selling and the orders we’re fulfilling? It’s a conversation we have a lot with our customers who tell us how critical it is for them to understand their true costs and who work with us to improve our Vision reporting module.
Knowing your business is one of the key takeaways of this Tamebay white paper on how to successfully scale your growth. And while we might get a general feeling month-to-month of how we’re doing, we have to wait until after the quarter or the year end to know exactly what profit we made, or didn’t make, and that’s at a business level, not a product or order level. By that time it’s too late to do something about it.
Furthermore, some of the products we make or buy in have a higher gross margin than others, but that tells us little about the net margin on a particular order once we’ve delivered it. That would be great to know early on so that we can make quick improvements while we still have stock left.
But is it even possible to do that, easily and accurately? Let’s break the problem down into pieces and see what we have. Consider the following groups of costs that impact the net margin on a specific order.
- Cost of goods sold
What you paid for the product, including getting it to you (or to a third party doing your logistics)
Goods in, putting away, storing in the warehouse
- Listing your product
All of the imagery and data associated with optimising the listing for sale
- Promoting your product
The amount you pay to advertise the listing
- Selling your product
Hurray, you’ve made an order! The marketplace fees, web store platform and multichannel management platform fees and other fees like payment gateways that made the sale possible
- Picking and packing
Assembling the order, packing, addressing and labelling the package ready for dispatch
Getting the package to your buyer, including duties and taxes (if your buyer isn’t paying for shipping)
- Customer service
Smoothing the order fulfilment experience for your buyers, including returns, credits and refunds
- Other associated costs
Like staffing, offices, IT systems, channel subscription fees, equipment, fleet, finance/accounting, insurance, legal – this can often feel like an unending list
Our cost of goods sold and shipping costs should be easy enough to know and record for order-based margin calculations. And when we look at the list above we see that quite a few of the cost groupings are variable. They’re a percentage of GMV, so if we know the order value and we know the percentage we get closer to understanding order margin.
Promotional and selling fees are often variable, although I acknowledge that they can sometimes be a fixed fee arrangement too. But this only tells part of the margin story, before we get onto a slightly stickier wicket.
Fixed costs – by month?
Fixed costs need to be accounted for but they’re really hard to apply on an order basis, so that you can say, ‘I made X net margin on that order and I made Y on that order.’ The fixed cost headings may include, but not be limited to:
- Advertising, PR
- Bank charges
- Vehicle maintenance
- Vehicle insurance
- General insurance
- IT, communications
- Hiring, training
- Buildings, rent
- Salaries, other staffing costs
But what about totalling up your fixed costs and arriving at a monthly fixed costs figure? Then you can take that amount and divide it by your total number of orders for the previous month – or a more indicative month – to get to a realistic fixed cost figure that you can apply to each order. When added to the variable costs, this will give you the truest order net margin figure you’ll get. What’s more, you can get it pretty easily so that you can react quickly and re-price your products accordingly, and with each passing month you’ll get better at coming up with a fixed cost per order.
Approaching your net margin calculations in this way will give you a much better feel for your Earnings Before Interest, Tax, Depreciation and Amortisation (helpfully lumped as EBITDA) on each order.
Of course, although profit is critically important to the growing business, the work you need to do to know it is an effort-reward balancing act. For this reason, you need to get to a situation where you record once your different cost elements and then automate the order analysis, letting computing power do the sums for you on a per order basis and give you the intel you need to react quickly. Again, it’s critical enough for our customers to push us to automate this net margin calculation and reporting for them.
To talk to Volo about net margin, and how you can know it for your orders, please get in touch.