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Why some products are losing you money

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When it comes to financial reporting, there is often a fine balance to be made between looking at the big picture, and not being able to see the wood for the trees. Unfortunately too many businesses get it wrong and as a result waste a lot of time and money; something that can make a big difference in the world of mulit-channel eCommerce.

Beyond the bottom line

Let’s face it, for most of us accounting isn’t fun, nor is it easy especially when you sell so many items. Eventually we get forced to do it (or we push it towards our accountants) and eventually we get back some numbers that tell us how well we did that month. Most of us are happy if we’re making money, but simply making money doesn’t mean your making profits where you should be.

  • Do you have a slow moving product that’s quite bulky? How much profit do you make on these compared to the average storage cost of each one?
  • Do you have any easily damaged products? For every one you sell, how much do you spend on damages and returns? And including your costs to resend them?
  • Do you have any products that are under £1-2? When you factor in overheads, do you make enough money on each sale to cover the cost of fulfilment for these products?
  • Do you have any products that get returned frequently? What’s the average cost of this per product actually sold?

Many businesses find that while they are making good margins overall, several products are actually losing them money but are fooled by wrongly apportioning overheads equally. Generally you’ll find that 20% of your products account for 80% of your returns, and likewise, 20% of your products take up around 80% of your storage space. If products in one of these categories aren’t working hard enough, then you either need to:

  • prove these loss leaders are important for driving other sales
  • reduce the cost of selling them if possible e.g. by reducing returns
  • stop selling them

Lost in the detail

Another common mistake is to take the above to the extreme and analyse every single possible sale in detail. While arguably this would give you the most complete information on which to base your decisions, optimising a small business to this degree simply isn’t possible and you need to accept that it never will be. Such is the fast pace of eCommerce, that by the time you have finished creating pages and pages of complex spreadsheets, something will have changed and you’ll have to start again – only you’ll have spent so long analysing every detail that you’ll  be 3 steps behind the competition.

Apple wasn't successful because they could analyse their margins better than any other company – they were successful because they took the time to understand the market and brought people what they desired (I don’t even think their products are that good, but it can’t be argued they’re popular). That’s not to say that they didn’t check their margins throughout products – that would be foolish – but they were concentrating on the next step all the time, not trying to optimise the previous step.

How outsourcing can help

Outsourcing fulfilment to a 3PL can be a great way to free up your time to advance your business; trim off the fat and run leaner and faster. It will also highlight some of the areas above very quickly. While you might not notice the cost of packing a single order when you take a company wide view on costs - being able to quickly and accurately know the exact cost of packing each product will soon highlight what's not making you money. You might even save a few pounds on materials and postage costs to boot.

August 12th, 2011 by Hannah Newman

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