Selling well means earning more money?
Amazon, the eCommerce giant’s Q2 2020 numbers ended up totaling $88.9 billion, marking 40% year-over-year growth. Believe it or not, there are more than 20 million sellers in 2020 worldwide. And by the year 2021, eCommerce is expected to generate $4.5 trillion in sales per year. If you’re thinking the future looks bright for those selling products online, it is a great opportunity, right?
Furthermore, you may have already been motivated by watching many successful Amazon seller cases on YouTube, who confidently saying that their store only takes few months, to achieve gross merchandise volume over one million dollars monthly. Exciting number right? If you just believe the sales number, that might be you are losing more, when you’re selling more.
Why variable cost matters in an online store
COVID-19 indeed has massively accelerated the growth of e-commerce, however selling more doesn’t mean earning money, likely there’s no doubt that with lower pricing items, the conversion rate must be higher. The sales are profitable or not rather than we are only excited about the sales number and ignore the cash flow issue coming up.
What I’m saying is the profit margin. Profit margin is a challenging world. It’s easy to get lost trying to figure out profit margin ratios between competitive pricing and selling costs, net profit versus growth, etc. It can be tricky to overcome this overloaded information. And particularly without the right profit calculator, it can be very difficult to maintain and increase profit for your business,
We normally investigate the potential opportunity from the product sourcing cost, fixed costs such as operational and manpower costs that might matter, and competitor pricing in the target market before starting a business. I would say congrats if you’ve successfully found a niche product to sell that has great market viability, competitive advantage, active target audience, and fits within legal requirements. And I would say congrats again if you’ve got a reliable supplier, who is willing to offer you better MOQ and constantly support the production and shipping arrangement to destinations.
However, most of the sellers ignore what variable costs would take place per transaction, and underestimate the impact of over variable cost in the profit margin, particularly as the Variable cost occurs and increases with the sales going up.
So today in this article, I’m going to tell you there’re eCommerce 7 variable costs that can impact the profit margin per transaction at the end, for the purpose to avoid selling more, losing more. Coming up.
- Fulfillment Fee
- Commission Fee
- Advertising Cost per Sale
- Payment Processing Fee
- Refund Cost
1. Fulfillment Fee
Order fulfillment is a vital part of every e-commerce company’s supply chain. You could be selling the most amazing product in the world and appeal to customers by offering free shipping, but if you don’t accurately calculate your product fulfillment cost by each SKU, your business could be in trouble. Take Amazon FBA as an example.
Unlike many fulfillment service pricing models that charge for picking, packing, and shipping as separate line items, FBA fulfillment fees include every step of the fulfillment process. The fulfillment fee varies depending on the product size and shipping weight of the item being shipped. There are two main categories of item size: standard size and oversize.
- Standard-size: A packaged unit that weighs 12 kg or less, measures 45 cm or less on its longest side, 34 cm or less on its median side, and 26 cm or less on its shortest side.
- Oversize: A packaged unit that exceeds any of the following measurements is oversize: 12 kg, 45 cm on its longest side, 34 cm on its median side, or 26 cm on its shortest side
Whatever the fees change due to Amazon FBA or product variation, as you can see here, $1 more or less can be quite different.
Obviously, the SKU max variable cost is US$21.2 by using the original FBA fees if we aim to achieve a 10% profit margin. Due to FBA fees going by US$1, this SKU can’t reach the targeted profit. Although it is still profitable (US$6), it reminds us variable costs can impact the final result. If FBA suddenly stops and we have to execute fulfill by merchants (FBM), it might lose money.
Thus, I would suggest creating a table that includes all SKUs weight and size to calculate the fulfillment fees, so you can directly Vlookup the SKU and see the profit margin change in the profit calculator by using different fulfillment methods.
2. Commission Fee
If you’re like most online sellers today, then Amazon, eBay, and other marketplaces are likely on your radar. When one-third of buyers now start their online journey on marketplaces, it’s hard to ignore the potential opportunity of selling on multi-marketplaces.
However, it’s equally important to understand the cost of doing business in each marketplace. The commission fees across Amazon, eBay, Bestbuy, Lowes, Walmart Marketplace, and Jet.com are different and typically vary by product category, although the commission basically is calculated from the total sales and payout is transferred from the marketplace to the merchant bank account in a fixed schedule window, rather than immediately.
Previously, I introduced 5 free resources from Google Merchant Center, and one of the programs is now the 0% commission fee offered by Google Shopping Action. If we try to plug into our profit calculator, when comparing with Amazon referral fees, for example, 15% that we need to pay US$10.5 per transaction. However, when it’s the 0% commission fee, we could earn more US$10.5 by selling on Google shopping action or lower the retail pricing(US$59.99) to generate more sales with earning the same amount of profit. Again, that’s why we call “Lunch for free”.
3. Advertising Cost Per Sale
From my perspective in a way, advertising might be not a must when you are extremely well leveraging organic traffic, social media, and own high amount of first-party PII data. However, advertising must faster increase new customers, grow the market shares, and build brand awareness than any other approach.
When considering to launch campaigns in whichever channels (Google Shopping, Facebook dynamic ads, Amazon PPC, etc), we need to understand the SKU’s Max. unit Variable Cost. For example, the SKU, in this case, sold out an order max. unit variable cost is US$21.31 when aiming to earn US$7 profit per transaction. We tried to minus all other variable costs(commission, fulfillment, refund cost, etc), cost per sale can be equal to or less than US$4. Regardless of the max. Variable cost change after sales number scale-up as you can see from the table, greater than US$4 tells us one order earns less than US$7. When a CPA is greater than US$11, it’s losing money.
What are your Google SEM CPC, Amazon PPC CPC, and Facebook dynamic ads avg CPC? If I assume avg. CPC is US$1, which means 1 transaction is out of 11 clicks the conversion rate is 9.09%. I’m not about to go into details regarding digital marketing strategy in this article. If you are interested in learning more details, please check out this article
4. Payment Processing Fee
More sellers create and activate the web store, for the purpose to reduce reliance on marketplace stores, eliminate additional fees, and own the customer first-party data assets. In competing with Amazon, Google, and Facebook respectively add more e-Commerce marketing products appealing to more sellers to drive traffic and sales through their channels
But running a web store would be more complex, and first of all, it must be regarding customers check out and how merchants receive the money, which means the payment gateway, This is a key part to build brand trusty, and also is about payment security and customer shopping experience on the online purchase journey.
Take Shopify payment as an example. The basic plan of online credit card processing fees per order is 2.9% + 30 cents. So we plug these fees on the same SKU table, it charges US$2.3 per transaction. What you need to be aware of is when you offer customers multi-methods to pay, please make sure whichever customer select to pay, your business will not lose money.
5. Refund Cost
Last year, I talked about “why Zozosuite failed“, it tells us that the refund rate is dealing with category consumer behavior, product quality, fulfillment time, and other customer experience, etc, we could forecast the cost in a more efficient and manageable way.
Take Amazon selling as an example. Amazon doesn’t refund fulfillment fees to the seller, although Amazon refund 80% of referral fees from the refunded order. Also, the fact is that once a refund occurs, basically it’s difficult to repack the product and put online to sell as a new product again. If I assume the refund rate is 2%, I would suggest calculating, and forecasting the refund cost by using this formula and add these variable costs to the profit margin calculator. This result can tell us the worse case of refund cost amount, in which we can’t put the product online and sell as a new condition again.
Refund Cost = 2%*product cost (or landed cost) + 2%*(fulfillment cost + 2%*referral fee)+ 2%*payment processing fee.
You might be doing quite successfully in the Webstore by selling high price items, and it is always a dark side in the business world that successful business owners are very likely to be a target from tricky customers.
What I’m saying are the Fraudsters. Fraudsters take advantage of the big number of order volumes and values to trick merchants and fraudulent orders by using a stolen credit card to check out. The payment gateway provider charges back to the bank and cardholder, after they detect high-risk activities, or receive the credit card bank claim it’s illegal. Once the product has already been shipped, it might have the risk of losing the product as well.
Take the Shopify Web Store as an example. I assume the chargeback rate is 1%, I would suggest calculating, and forecasting the refund cost by using this formula and add to the profit margin calculator.
Chargeback Cost = 1%*selling pricing + 1%*product costs (or landed cost) + 1%*fulfillment cost + 1%*payment processing fees.
Online sellers like to leverage discounts to appeal to new customers or upsell/cross-sell existing customers or retain users. If you appeal to new customers to subscribe, for example, 5% off your first order in the business as usual period, you need to look at all SKU carefully, otherwise, your business might be losing money.
As you can see from this table, US$69.99 has a 10% profit margin after subtracting the variable cost of US$21.31. However, the transaction loses money after the customer checks out by redeeming a 5% discount code.
I would suggest separating the business as usual product profit margin calculator and promotional product profit margin. It might be better to check if the promotional products are profitable or not when plugging the discount % in.
Key Take-away Bullet Points
- Build up the product profit margin calculator that is plugged in variable cost (fulfillment, commission, advertising cost per sale, payment processing fee, refund cost, chargeback cost, discount, etc) that reflects the situation in your business sector.
- Separate always-on (BAU) and product promotion profit margin calculator.
- Make sure whichever customer select to pay, your business will not lose money.
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