Unleashing the Power of Order-Level Profitability in eCommerce Strategy
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In the fast-paced world of eCommerce, understanding the nitty-gritty of profitability is paramount. It isn't simply about subtracting product cost from the selling price. Variable costs like shipping costs, third-party logistics, transaction fees, and discounts significantly affect your bottom line. This is where the concept of order-level profitability proves invaluable.
The Real Picture of Profitability
Consider this scenario: You buy a product for €20 and sell it for €80. It appears you've netted a €60 profit. However, this overlooks the array of associated costs. When you factor in a 23% VAT (€14.96), free shipping costs (€5), third-party logistics costs (€3.75), transaction fees (€2.10), and a 10% discount (€8), the profit margin shrinks considerably. The actual Contribution Margin 2 (CM2)—the profit after all these variable costs before marketing—stands at a much lesser €34.19. This scenario illustrates how perceived profitability can vastly differ from the actual profitability when all costs are accounted for.
The Importance of Understanding Order-Level Profitability
Insight into order-level profitability is vital for several strategic decisions in your eCommerce business. It not only impacts pricing, shipping, and marketing strategies but also holds significant implications for how you merchandise your store.
In the world of eCommerce, merchandising - often falls victim to guesswork rather than strategic thinking. Many business owners overlook the crucial interplay between merchandising and profit margins, often leading to unnecessarily poorer margins.
Effective merchandising should not be a matter of intuition but a strategic approach driven by data. This is where a thorough understanding of order-level profitability becomes critical. It allows you to strategically place high-margin products in prominent spots, enticing customers to add these profitable items to their carts.
In today's data-driven world, there is a growing suite of tools, such as StoreHero, designed to transform site merchandising from an art based on intuition into a science rooted in data. By leveraging these tools, eCommerce businesses can take the guesswork out of merchandising and ensure their stores are optimized for profit margins.
Modern site merchandising tools can analyze sales data, customer behaviour, and profit margins, offering valuable insights that can inform your merchandising strategy. For instance, these tools might highlight high-margin items that are not getting enough visibility and suggest changes to improve their prominence. Similarly, they can flag low-margin items that are selling well but contributing little to the bottom line, helping you strategize ways to increase their price or limit their visibility.
Lastly, understanding order-level profitability also influences decisions about third-party logistics and transaction fees. If these costs are taking too large a bite out of your profit margins, you might consider renegotiating terms with your vendors or exploring alternatives.
The importance of understanding order-level profitability goes beyond simply knowing how much you're earning per sale. It has far-reaching implications for pricing, shipping, discounting, marketing, and merchandising strategies. By using the latest AI-powered tools like Storehero and Shopbox, and keeping a sharp eye on order-level profitability, you can optimise all facets of your eCommerce strategy and set your business up for success.
Thomas Gleeson is co-founder of Storehero, the profit platform for eCommerce brands to centralise their eCommerce, marketing and finance data. StoreHero helps eCommerce businesses get a true sense of their margins, profitability and unit economics.