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.