eCommerce profit margins from sales can be calculated by the price you sell your product for minus your Landed Cost, your Cost per Acquisition and your Cost of Shipping. The figure you have left is your per item profit which can be multiplied by your total amount of sales (or projected sales) to get your overall eCommerce profit.
Starting an eCommerce business comes with many things to think about. Of course, there are the startup costs which simply cannot be ignored but the truth is, many people looking to embark on a new eCommerce venture don’t focus on the initial startup costs and instead look forward towards the cash flow generated further down the line. In this article, I’ll help you work out just how to calculate your profit from your online sales.
It is true when they say that you have to speculate to accumulate and that is something that you will need to bear in mind as it stands true for e-commerce. You first speculate on buying your products, to later accumulate income from sales. Simple right?
Hold on, before you even begin an online store, one of the things you will need to understand is how to calculate your all-important profit. You will always need to ask “is my e-commerce business making me money?” and set your S.M.A.R.T goals to realign your strategy to make sure you get and remain profitable in the long term. This is vital because focusing on the raw turnover with no understanding of what net margins you are making could be a recipe for financial difficulty.
So, if you want to know how to work out profit from your sales or find out if you are making money, then you need to understand a few things first.
The Landed Cost
Your per unit landed cost is made up of all the costs associated with sourcing your products and getting them into your fulfilment warehouse, and you should work it out on a per product basis, and even better on a per unit basis.
Things to consider:
- How much did you pay in total for your stock holding?
- Make sure you add on all applicable shipping costs from the manufacturer to your warehouse.
- Don’t forget any taxes you paid during the shipping process.
- What about any warehouse processing fees to get your products ready to be sold e.g barcodes or bundling
Do you have a figure? Now divide that by the number of products you purchased.
Effectively, it is the per item cost of getting your products primed and ready to be sold and later on, we’ll use this figure in our profit margin calculation.
Cost of Acquisition
The next part of understanding whether your business is making a profit is to determine your cost of acquisition, often reduced to the acronym CPA – Cost per Acquisition. More often than not, this is your advertising costs which to be truly successful is something you will need to spend money on to reach the right audience. So let’s add it up…
Things to consider:
- What is your Google Ads and social media paid for advertising spend?
- Is your business being supercharged by an eCommerce digital marketing agency?
- Are you paying for referral traffic or miscellaneous advertising opportunities?
- A more advanced concept is the cost of doing organic advertising yourself vs the cost of hiring the experts
Once you have your acquisition costs identified, you need to divide that cost by your number of conversions. This will then give you a true reflection of the cost vs success of your marketing and advertising efforts. Some of this information can be acquired from your Google Ads and social media reports and it’s important to note that unlike your landed cost, this value is not static. It will regularly shift and move, and more sales equal a lower CPA.
Cost of Shipping
Cost of shipping definitely needs to be factored in if your business absorbs some or all of the cost of shipping your goods to your customers by offering free shipping at checkout. If you charge your customer for this you may still need to double back and check whether or not there are any misc costs escaping under the radar.
Things to consider:
- Does your warehouse and fulfilment service charge a picking fee?
- Often overlooked is the cost of packaging your products to make them postal service ready, think the outer packaging you stick the address label on.
- You may charge different shipping values based on the speed of delivery, make sure to take an average making sure to account for the most selected option that your customers make at checkout.
Choosing to absorb the cost of shipping yourself is one way to entice customers to spend money with you and reduce checkout friction but you will have to consider it when calculating your profits.
Warehousing & Fulfilment Costs
If you are using an e-commerce fulfilment service such as Xune, then you are going to have to factor in the cost of warehousing your items and the cost associated with order fulfilment. Unless you want to be a full-time postie, making regular drop-offs at your local post office I would suggest you use a fulfilment service.
A popular choice is Amazon FBA (Fulfilment by Amazon) who warehouse and store your products and automatically fulfil these items once sales are made on Amazon shopping. FBA is perfect for merchants who only sell on Amazon, but starts to be self-limiting when trying to increase profit margins by selling via your own website.
Whichever service you use, calculate the storage costs and divide by the total amount of units stored in order to get your per unit warehouse costs. To make the final calculation simpler add this into either your landed costs or your shipping costs.
So, let’s put it all together
If you’ve followed along properly you should have all the information required, we just apply a bit of simple maths…
SP – (LC + CPA + (CoS + WFC)) x TuS = Profit…!?
Haha, ok ok. The simple maths when written long form is:
Your sell price minus your Landed Cost then minus your Cost per Acquisition finally minus your Cost of Shipping, making sure you’ve included your applicable warehousing costs. The money left over, well that’s your per item profit. This figure can simply be multiplied by the total amount of sales (or projected sales) to get your overall eCommerce profit.
If this is a positive figure then high fives all round! If it’s negative, or not high enough then get in touch with us here at Xune and we’ll help you make a forward-thinking plan to turn it around before it’s too late.
As a guide, I would recommend aiming for between one third to one half of the sale price being pure profit for your eCommerce business. Start to get your head around this way of thinking you will be able to understand how your business can absorb these costs mentioned above as well as general taxes, other running costs and even conversion fees from other currencies.
So what are your next steps? If you haven’t already, bookmark this page and share it with people you do business with. Work out your profit per item and once you do this, it will be easy to multiply by your sales to give you a clear idea of what your profits are or will be going forward and it will show you just how profitable an e-commerce business really is.