All companies start from a specific goal. For most people, this is profit.
Even in the non -profit organization -or when the main driving force of an enterprise is personal goals, such as working or spending more time to work with the family -income is almost always available. Continuous development is necessary.
Entrepreneur spirit can fulfill the freedom it promises, but successfully needs to actively understand the financial status of the enterprise -firstly, What to measure .
As the management consultant Peter Drucker said, \”What is measured is managed.\” – So there are four key indicators of the profitability of e -commerce.
1. gross profit margin
The gross profit margin is \”a financial indicator for evaluating the company’s financial status and business model. It reveals the remaining remaining income after considering the sales cost (COGS). The ratio of funds. \”
The gross profit margin is very important because it can immediately let you understand how the current income serves your other business, as well as whether it is profitable or losing money. This has a profound impact on your strategy and tactical choice of business.
Considering: You only have 10% gross margin and $ 100,000 monthly month income. This essentially means that you can only earn $ 10,000 from sales products every month, and that is before you pay any other fees (or pay your salary).
Compare it with a 50% situation with your gross profit margin -you only need to sell products worth $ 20,000 to get the same gross profit. This business model does not rely on the same high sales to generate profits. You may find that compared with 100,000 US dollars, the time and other costs needed for $ 20,000 for companies.
This also shows that obsession with income rather than profitability may damage your business. I don’t deny that you have a good business that you have a 6 -digit, 7 -digit or 8 -digit business of income. But maybe you work for 80 hours a week to achieve this goal, but it is not even so favorable, or pays your market value salary.
Obsence of income rather than profitability may damage your business.
There are some techniques here to help you better understand and understand your gross profit margin:
Investment in your inventory tracking.
- Your inventory cost is the main driver of your COGS, you can use it to calculate your gross profit margin. If you do not have a reliable information about your inventory cost and what it has to do with your sales, then you start with an unstable foundation.
- Refined as much as possible
- 2. Customer acquisition cost (CAC)
. Find all the variable costs directly related to the sales and include it in your calculation. If possible, please include all your freight, import and manufacturing costs, as well as packaging and transportation costs. The more accurate the COGS you calculate, the better your insight.
Your customer acquisition cost is the average amount of dollars you spent to get new customers (that is, attract them and persuade them to buy it from you To.
This is the easiest way to calculate the CAC:
- Just like calculating your gross profit margin, calculating your CAC means to carefully check your costs and find all marketing costs. Here are some more common costs generated by most e -commerce companies:
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paid advertisements on Facebook ADS or Google Adwords, as well as any offline advertising expenditure.
Software, such as your email marketing solution and your pop -up/potential customer capture tool. If it involves identification and capture new customers in some way, please include costs here. Geam members specializing in marketing -when calculating CAC, you can allocate all their salary or part of their salary based on the time they spend on marketing. Assuming your total marketing expenditure this month is $ 5,000, and you get 500 new customers with this expenditure. This means that your CAC is $ 10.
Now let us expand it through some other indicators. Suppose your average order value (AOV) is $ 100 and your gross profit margin is 20%, which means that your average new customer is worth $ 20 for youEssence In this case -CAD $ 10 -you are getting new customers in a favorable way, and you have a solid foundation to encourage them to repeat the purchase over time (this will increase them will increase them The value of life cycle and profitability to you). Generally, the company found that their CAC was out of control and exceeded their gross profit margin. For some products, you can use a loss -making leader strategy in the short term, but long -term losing sales products may make your business risk. This is what happened on the demand food startup Bento, and the company’s income increased well. But the more their income grows, the more money they lose. Their business did not become more powerful, but walked towards the cliff at a very fast speed, because they had neither gross profit margin nor CAC.
Listening to the story of Bento on Startup
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123] Once you have a good understanding of the average appearance of CAC, there are two ways to further expand your monitoring and insight:
Calculate each marketing /CAC of the channel.
This comparison reveals where you can find more qualified customers, which can help you give priority to where to use marketing funds for. To this end, the total expenditure is separated, and the customers you get can calculate the CAC of each marketing channel. Suppose you perform this operation for Facebook ADS and Google Adwords and determine that their CACs are $ 5 and $ 20, respectively. Stopping more expensive Google Adwords and investing more funds at Facebook advertising activities may be meaningful.
Similar things to specific products or product series. If your product has a wide range of gross profit margins, this is particularly interesting because you may decide to spend more money to obtain customers with higher value products or products with high profit margins. This calculation is also helpful in implementing a loss leader strategy. In this strategy, you will actually suffer losses when selling certain products to attract customers and then sell them with higher profits. 3. Your discount strategy
gross profit margin and CAC are the cornerstone of creating a good discount strategy. Many times, I see an active and important discount strategy for e -commerce companies -but zero understanding of this relationship with their gross profit and CAC.
Consider this situation:
Your average order value (AOV) is $ 100.
30% of the gross profit margin allowed you to get a gross profit of $ 30 on the average order.
- Your CAC is about $ 15, which means that you can earn $ 15 (or about 15%) per 100 US dollars.
- If the discount is more than 15%, the business may lose money in the sales.
Losing losses in certain sales may not be a problem; when you use it as a loss leader strategy, it may be very beneficial. However, only by understanding your discount strategy compared to your gross profit margin and CAC, you can know that you are in a safe space.
In order to help you better evaluate this, you can do a few things:
View your maximum discount amount or percentage, and determine it with your gross profit margin and your gross profit margin and your gross profit margin and your gross margin and CAC relationship. In the above example, the maximum discount threshold should be about 15%. Any activities or promotional activities that require more than 15% of discounts should be investigated and re -evaluated because they are the biggest risks (in terms of unsustainable loss). Know your discount in the form of percentage. According to the exact activity you are running, fixed discounts (that is, $ 20 discount) may be more meaningful than percentage discounts. When using a fixed amount discount, you should still determine the percentage of AOV. Therefore, if your AOV is $ 100, the discount of $ 20 is 20% effective discount. In the above example, this actually exceeds 15% of the threshold, which should promote stricter review of activities you planned to run.
If you understand your discount strategy relative to your gross profit margin and CAC, you are in a safe space.
4. Free cash flow
Many companies died because of cash after use. – Even those companies that show accounting profits. All the above indicators will affect your financial profitability: If you only monitor these indicators and improve it over time, you should see that your profitability increases well. But to conduct a comprehensive and complete analysis, you should still weigh the growth of profitability and cash availability in business.
First, let’s take a look at the definition of free cash flow:
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SelfCash flow is the cash generated by the company through its operations to reduce the cost of asset expenditure. In other words, free cash flow or FCF is the company’s remaining cash after paying its operating expenses and capital expenditures . \” The common situation of free cash flow hindering the business is: the payment plan for most of the payment processors to handle the payment plan for you. Therefore, even if you deal with $ 1,000 today It may only transfer these funds to you after 7 or 14 days. In this regard, your payment processor is your debtor.
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When you order new inventory from the supplier, they want to pay before the inventory is delivered. To do this, you need cash reserves. If you cannot pay the inventory, you may be you might be It will lose the upcoming sales because there is no available inventory.
This is why it is important why you know how much cash flow and flow out of your business every month; then, you can plan accordingly and retain the appropriate level. Cash is available from time to time. This will help you maintain safe profits in emergency situations, and ensure that you always have funds to be used to invest in your growth.
The first step towards financial freedom [
The first step towards financial freedom [ 123] If you do n’t really understand these indicators, it is difficult to establish a successful company. At the beginning, you should always be better tracking and monitoring. If you do n’t know any of these indicators and just start tracking them, then the absolute number will be Not so important. What’s more important is that you have started this process, which will help you make improvements over time.
In addition to getting better reports, I hope I have planted the seeds that can build your business, which will give you greater freedom. Contrary to intuition, adopt a modification discount on a modification discount. Steps such as strategy -and reduce income in the process -it may be that you finally get more profits (and less work!).
These four key indicators will provide you with more Choose more to understand how to use and adjust things in the business to finally achieve its purpose: to achieve your goals set for yourself.
