It seems like the perfect business at first sight. You set up everything necessary before you get started. You know what you are about to sell, who might be your customer, and who will help you with logistics. What can go wrong? Quite a few things, let’s take a look.
The dream is to have it all running almost on its own, with few enlightened managers sitting on top of things, putting out occasional fires and counting the bills. Scale is the name of the game and the sky is the limit, so once you succeed in your own market, why not transcend borders and win some more abroad.
With the right amount of investment, orders and revenue are sure to come. You work hard to build a hearty customer service department to keep your customers happy, with their addresses perfectly covered with established partners in delivery services. Long term curve of website visits available in your web analytics platform keeps on growing and revenues go along with it. Everything seems to go just fine. Or at least until we start connecting the dots, by which I mean data silos in your company.
Just a little data integration is going to show the warning signs very quickly. Seems that you have leaned a bit too much into your marketing campaigns with little thought of optimization for a while, so while your revenues have been on a steady rise, those marketing costs went up as well. Spring sale sure brought in nice orders, so you thought “why not keep slicing prices for a bit longer”. Margin % stays low, or maybe too low? Many other things might have gone south – too many returns, no customer retention, or high warehousing costs to name a few.
All goes well until your accounting period ends and you get your financial results.
You are drowning in a loss. Not just ankles deep or knee-deep, you might be in there all the way up to your ears my friend.
The best friend of an ecommerce business is scalability. Its worst enemy is the margin.
I understand you want to grow, I truly get that. But when you are charting that growth, always ask yourself what is its price. You want to grow and stay even? Or even have something left in the end? Or you are fine with going red for a while to grow faster? If yes that’s fine, but how are you going to cover this “red”?
Luckily, there is good news for you. There is a way out of this trap! It is based on two cornerstones – discipline and data.
Journey to profit :
In the beginning, there is an order and revenue created
The obvious next step is to deduct the cost of goods sold. Let’s say you get to keep 35% of your sales as gross margin
As it goes on the internet, you have to pay to be seen. So let's say you give out 12% of your sales as marketing spend. Math is quite easy. We have 23 % of our revenue left.
Not just yet.
Long way to go before that. Consider the following variable costs which move hand in hand with the scale of your business:
- We still need to deliver. How much do we pay for that? Let’s say we manage our logistic partners very well and it is 7% of our revenue
- We also need to pay for our payment gate providers. Let’s be modest and stay with 1%
- Anything else? Usually yes. Systems we use to optimize our website, packaging and dispatch from our warehouse or handling of returns. We can name these other variable costs and cover them with 5% of our revenue
Altogether we get to keep 10% of our revenue on this level. And still, we did not pay our operating expenses or OPEX. These cover everything from office spaces, team-building events, and most importantly salaries of personnel related to fixed activities as campaign execution, accounting, or management.
You probably get the point by now. If OPEX > 10% of revenue, we are generating a loss.
Quite a lot of layers we peeled from your revenue right? Do you find similarities to your project? The biggest risk with this fact is the timely discovery of your situation. Traditionally, such evaluation has been done on a quarterly or even yearly basis. No way to know if you are on the right track during the period. We can remedy this risk today, with help of clever data integration and reporting. Therefore, you move from looking back once a quarter and hoping for the best to daily evaluation and pace extrapolation towards the end of the period.
How to do this? We like to go along these steps:
- What are your sales channels? What is their share of the total business?
- Brainstorm full sales process, journey to EBIT for each of them. Take your time
- Map data sources and responsibilities for each stage of the sales process
- Integrate, present, and watch closely
- For supercharged intelligence link to detailed business forecasts
Stratodata is here to help.
Stay on track of your progress, fix problems right when they appear, and manage profitability. Very much possible, all you need is data.
The 5 step process described above is covered in the Stratodata Case Audit. Reach out to us to get started today.
