from Peter Höschl
Most online sellers not only sell their products in their own store but also on markets such as Amazon, eBay or Rakuten. When measuring the success of a distribution channel, most businesses only consider the revenue generated on a market and subtract the commissions. However, such a calculation leaves out important cost factors.
Many merchants sell on markets to reach a wider range of customers and to increase their revenue. The competition on these markets is intense and products are often sold below the retail price that is listed in the store. Therefore, discounts are given to procure additional revenue. This means that the margin for each product sold on a market is de facto smaller than for the same product sold in the merchant's own store. In addition, commissions and fees have to be paid to the market. Taking these aspects into consideration, the necessary calculation is more like the following. The merchant needs to take the revenue generated on a market and subtract the cost of goods and all fees paid to the market. This will show how much profit was earned with this particular distribution channel.
Using this formula to rate the success on a market may show some surprising results on the annual balance sheet. Especially if it shows a deficit despite the fact that sales were good. When rating the profitability of a distribution channel, numerous cost factors need to be considered. Unfortunately, most merchants tend to forget factors such as:
Direct costs for each single order
Crucial factors when rating the profitability of a distribution channel are e.g. the number of orders and the average amount spent per purchase. A large number of orders is generally a good thing. However, each order needs to be processed by the merchant and this results in costs.
A shipping label needs to be generated for each order and the product has to be picked from the rack and packed. To calculate the average direct costs of a single order, the costs for equipment and staff need to be broken down and divided between the individual orders.
Subsidies for shipping
A lot of merchants offer free shipping on online markets. Free shipping is either offered on all orders or as soon as a certain minimum order value is reached. The actual shipping costs need to be paid by the merchant. These subsidies also need to be considered when calculating the costs for a single order generated via this distribution channel.
When it comes to returns, customers' behavior can differ from market to market. Therefore, it is very important to analyze how many orders from a market have been returned. The higher the return rate, the higher the average costs that need to be subtracted form the average order profit.
This shows that it is far more difficult to measure the general profitability and profit margins for online markets than most merchants think. For comprehensive cost control, the factors mentioned above as well as several others need to be considered in even more detail.
What these factors are and how merchants set up efficient Marketing Controlling is e.g. explained in the second issue of the online seller magazine shopanbieter to go. The magazine is available online and free of charge, but in German only.
An example in the magazine shows how to accurately compare the profit margins of different distribution channels.
About Peter Höschl
Peter Höschl has been working in online commerce since 1997 and is an E-commerce expert with a lot of practical experience. He is the author of several specialized books and professional articles. He operates the E-commerce portal shopanbieter.de and publishes the magazine shopanbieter to go. The magazine is free of charge and is a hands-on guide for online sellers and E-commerce managers. Furthermore, he is a consultant for start-ups and medium-sized E-commerce companies.