The e-commerce landscape is littered with the graves of businesses that failed to thrive, each a warning and beacon to the next set of entrepreneurs and business owners. The truth is, most e-commerce businesses start with a high supply of passion, but not a lot of actionable data. There’s an old saying that, “you can’t manage what you can’t measure.” When it comes to e-commerce, success or failure ultimately depends on what you know about your business, including what’s working and what isn’t, and which products or services are profitable.
At the outset, the question can seem pretty straightforward. Is my product or service bringing in revenue? If the answer is “yes,” then it seems that all must be well. But the truth is a little more complicated, especially when you are selling several products or services simultaneously. When starting out, you probably knew your product or service could solve a meaningful problem or fill a gap not served by your competitors. Maybe you kept on eye on trends or understood the margins that would allow you to sell a product online for a reasonable median gross margin. It could be as simple as monetizing an interest or niche or seeing the opportunity to capitalize on a subscription or recurring sales model.
Once a product or service is created, it cannot be unleashed on the marketplace with no oversight. You need to have accurate and timely data about the sales that are generated. Equally important is data on resources: how much time and data are used to create your product or service? Finally, the cost of getting your product or service to your customer needs to be carefully tallied and managed. How much are you spending on sales and marketing? What about recurring costs like hosting your website or payroll and administrative expenses?
Ultimately, what we are describing is a profitability analysis, and it is the key to discovering which of your products or services is the most profitable. A profitability analysis begins by assessing your product or service:
- True Cost: What does it cost, and what resources are necessary to create your product? This can include raw materials, facilities, financing, wages, inventory, third-party logistics, and more.
- Devaluation: Factors that can devalue your product: shortages, inventory damages, theft, discounts, markdowns, etc.
- Accessing the marketplace: How do you get your merchandise from Point A to Point B? This can be shopping and freight costs, web hosting fees, banking, and transactional costs, and more.
Additionally, a profitability analysis includes e-commerce research.
- What are customers paying for similar products or services?
- What features or benefits are being highlighted by your competitors?
- What is the chatter in the marketplace (blogs, social media, Google analytics)?
This market research allows you to gauge where you stand in the marketplace and can put a realistic spin on the true profit potential for your e-commerce business.
Finally, you need to compare your costs to your price to determine not only if your business can survive, but if it can thrive. You want to find a pricing model that attracts the right customers but also generates enough revenue to maintain your business. You want to have room to grow, to increase your pricing, expand your services, or even switch to a different revenue model (i.e., subscription-based or value-added pricing).
Ultimately, a bookkeeper can help you make sense of all the numbers and recalibrate your data into an accurate reflection of your business’s financial health and growth potential. But not every bookkeeper is experienced with e-commerce and not every bookkeeping firm may be able to keep up with it as your business grows. One of the advantages of working with AIS Solutions is you are working with a team, not an individual, and we can be your entire outsourced Accounting team.
To learn more about how a bookkeeper can help you grow your business. Read this case study: https://aissolutions.ca/case-study-ecommerce/.