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Volo Know Your Data Series – Margin Analysis
In our monthly series Know your data series, penned by Scott Bagnall, Head of Product at Volo we are looking at how you can use data to grow your business. Detailed in a webinar earlier this year, if you’re a Volo customer then the reports are all available to you in the Vision reporting and analytics module, but for non-Volo users you should still be considering the same factors in order to scale and grow your business. We are collating all of the articles here so if you missed one you can find them all in one place.
Margin Analysis Report
So far in this series we’ve covered data insights you can get from your best sellers, your product sales velocity and your slow and dead stock. This month we’re going to look at perhaps the most important data topic of all, namely margin analysis. How much are you really making from your sales?
They say that sales are vanity, profit is sanity and cash flow is reality. They also talk about the busy fool who says “I know I lose 50p on every sale, but don’t worry, I make it up in volume.’ But do you really know how much money you’re making or losing on each sale, and is that even possible? Let’s explore this a little further before we get into what is not only possible, but desirable when it comes to margin analysis.
Order fulfilment margin
Nothing happens until somebody sells something and you start generating revenues. At a simplified level your income statement is the account of your sales minus your cost of goods sold – what you paid for them – giving you your gross margin. From that gross margin comes a host of other costs of doing business, unfortunately, which leaves you with your net margin, your net profit before tax.
Some of those costs are across the business and are very difficult to apportion to an individual sale. They include overheads like building loans or rent, utilities, salaries, other employment costs, interest repayments and depreciation and amortisation of your capital assets. It’s really hard, and possibly not worth your time for example, to calculate the warehousing cost of each specific item, as well as the cost of the time it takes an employee to pick and assemble each order. It’s better to apply those as blanket costs and look at how you can reduce them by increasing your operational efficiencies.
There are, though, a bunch of things you can measure and report on at an order level which will give you a much clearer picture of what we might call your ‘order fulfilment margin’ down to an order and/or product level.
Elements eroding your order fulfilment margin
Here’s a fairly extensive but probably not exhaustive list of some of the costs you can factor into your margin analysis:
- Manufacturing cost, if you’re making your own products, and separate from the cost of the raw materials themselves
- Product cost, what you paid for the product (if you’re not making it yourself)
- Marketing cost, what you invested in pay per click, remarketing or other promotions to attract the buyer to your product
- The sales tax on the product, where applicable
- Localisation cost of rendering the listing information in the language of your buyer
- Currency exchange, arbitrage and mitigation services cost
- Payment gateway cost
- Channel or marketplace costs, such as final value fees
- Third party ecommerce and /or ERP platform cost
- Third party warehousing cost
- Third party fulfilment costs like Amazon FBA, 3PLs and so on
- Packaging cost
- Labelling and shipping costs with carriers and/or shipping aggregators
- Refund and return cost
- Customer service cost
Phew, that’s a lot of slices potentially coming out of your profit pie. No wonder it can be hard to make decent margin in ecommerce. Where to start with all this stuff?
Balancing investment over return
The key with margin analysis in our experience is to get the balance right between the level of investment required and the benefit you stand to gain from the insight into true margin performance. Areas like shipping can get very complicated when it comes to modelling the costs, because there are so many factors like carrier, carrier service, package dimensions and weights.
Then there’s the question of whether you do this work yourself or invest in reporting and analysis software that can automate some or all of it for you. We’ve found that the majority of companies use some combination of third party technologies, which can come with their own rules engines that allow you to customise the cost categories to suit your business, and which talk to other data providers like Amazon, eBay, PayPal and so on, and their own ‘crunching’ to get the insights they want.
Regardless of which way you go on this, here are some approaches we suggest you focus on:
- Define which order-based margin costs you will track and set up rules for these so your system can calculate the relevant charges and record them against each order as the order is received
- Create reports which show actual margin and margin percentages to identify your most profitable channels, marketplaces, stores, regions and suppliers
- Create margin detail or breakdown reports which see how much each cost element contributes to your remaining margin picture
- Analyse your margin performance at a product level too, so you can understand for both parent SKUs and any child SKUs the revenues, order volumes, margins and margin breakdowns
- Track performance comparing different time periods to understand how margins might change over time and with seasonality
- Finally, set up dashboards which allow you to toggle between your sales figures and your margin figures, so that you have the information on where you’re making money – or not – at your fingertips. Set up automated emails at a frequency that suits your requirements, so you can see your sales and margin performance daily, weekly, monthly or quarterly.
Check back in August for the next article in the Volo Know Your Data series on refund analysis.