Running A Profitable Business
Given that today is the alleged day that retailers finally turn a profit, we should spend some time on profitability.
We frequently read about the importance of merchandising, branding, gross margin, marketing, and expense management in driving a profitable online/catalog business. We infrequently read about the importance of managing the mundane details of a business, things like filling orders, minimizing returns, and running and efficient fulfillment center.
In the example below, we have an online/catalog business that is barely profitable.
Profit and Loss Statement / Break-Even | ||
Key | Annual | |
Metrics | Results | |
Total Demand | $40,000,000 | |
Lost Sales Rate | 15.0% | $6,000,000 |
Gross Sales | $34,000,000 | |
Return Rate | 30.0% | $10,200,000 |
Net Sales | $23,800,000 | |
Gross Margin | 45.0% | $10,710,000 |
Marketing Expense | $3,025,000 | |
Fulfillment Expense | 17.0% | $4,046,000 |
G & A Expense | $3,570,000 | |
Earnings Before Taxes | $69,000 | |
EBT / Percent of Net Sales | 0.3% |
Now, let's assume that management improves three key metrics. Assume that the lost sales rate improves from 15% to 10%. Assume that the return rate improves from 30% to 25%. Also assume that fulfillment expense (what it costs to pick, pack and ship and item) improves from 17% to 12%. The profit and loss statement below illustrates the impact of these improvements on profit.
Profit and Loss Statement / Improvement | ||
Key | Annual | |
Metrics | Results | |
Total Demand | $40,000,000 | |
Lost Sales Rate | 10.0% | $4,000,000 |
Gross Sales | $36,000,000 | |
Return Rate | 25.0% | $9,000,000 |
Net Sales | $27,000,000 | |
Gross Margin | 45.0% | $12,150,000 |
Marketing Expense | $3,025,000 | |
Fulfillment Expense | 12.0% | $3,240,000 |
G & A Expense | $4,050,000 | |
Earnings Before Taxes | $1,835,000 | |
EBT / Percent of Net Sales | 6.8% |
In this example, profit dramatically improves, from about break-even, to more than $1.8 million in annual profit.
This is one of the big secrets about profitability. Many management experts look to driving top-line sale, improving gross-margin, driving sales via marketing, or managing general and administrative expenses as the route to business success. However, a relentless focus on filling each order, reducing returns, and improving distribution and contact center efficiency have a significant impact on overall profitability.
Labels: catalog, fundamentals, Loss, management, online, Profit
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