Hi, I’m Marcus, I am ecommerce merchant who runs a few ecommerce stores in Australia. In this post I’m going to show you how and why we use Gross Profit as our main metric, and how we increase GP for our business.
In this post I’ll cover:
- What GP is and its formula
- How you can increase your GP
- The unique aspects of the Australian market that impact our GP (hear shipping)
- How we minimise the impact of the impact of distance (shipping cost) within Australia
- What we do when shipping to whoop whoop
- How we empower our shippers to use the best shipping method
- How we minimise errors when shipping (barcodes, colour coding, capturing weights)
- How we eliminated shipping fees and overages
- How we minimise returns
- How we check if an address is residential or commercial
- How we track gross profit with COGs
- How we keep our COGs up to date
This is a long post, so feel free to jump down to what you need.
Introduction
Tracking key performance indicators (KPIs) is important for ecommerce merchants because it helps them to understand how their business is performing, identify areas for improvement, and make informed decisions about how to grow and scale their business. Some examples of key performance indicators that may be relevant for ecommerce merchants include gross profit, customer acquisition cost, average order value, and customer lifetime value.
By regularly reviewing these and other relevant KPIs, ecommerce merchants can get a better understanding of the health of their business, identify trends and patterns, and make data-driven decisions to drive growth and profitability. Additionally, tracking KPIs can help ecommerce merchants to identify and prioritise areas for optimization, such as improving their website’s user experience, increasing their marketing efforts, or reducing costs.
But today we’re going to focus on what I think is the most important metric ecommerce merchants should track, and that is: gross profit.
Gross profit is particularly useful for ecommerce merchants because it provides a clear view of the profitability of individual products or product lines, is more stable and less affected by external factors, and can help identify opportunities for cost-cutting and margin improvement.
On our main dashboard, we make gross profit the main metric, and show it to the whole team.
We also show Gross Profit on a per order basis. Our team can see on the bottom of each order page the GP of each order.
What is a North Star metric?
A North Star Metric is a key performance indicator (KPI) that represents the primary goal or focus of a business. It is called a “North Star” because it serves as a guiding principle and helps to align the efforts of the business towards a shared goal.
For example, for an ecommerce business, the North Star Metric might be gross profit, as it represents the core profitability of the business and can inform strategic decisions about which products to carry, how to price products, and how to optimise operations. Other businesses might use different metrics as their North Star, depending on their specific goals and objectives.
The idea behind a North Star Metric is to have a clear, overarching goal that serves as the guiding principle for all business decisions and efforts. By focusing on a single, critical metric, businesses can align their efforts and resources towards achieving that goal and drive long-term growth and success.
Definition of Gross Profit
Gross profit is the difference between a company’s revenue and the cost of goods sold, and it is calculated by subtracting the cost of goods sold from the company’s total revenue.
The formula for gross profit is:
Gross Profit = Total Revenue - Cost of Goods Sold
For example, if a company has total revenue of $100,000 and the cost of goods sold is $50,000, the gross profit would be calculated as follows:
Gross Profit = $100,000 - $50,000
= $50,000
Therefore, in this example, the company’s gross profit is $50,000.
Gross profit is the difference between a company’s revenue and the cost of goods sold, while net profit is the difference between a company’s revenue and all of its expenses. This means that net profit includes not only the cost of goods sold, but also operating expenses such as marketing, advertising, salaries, rent, and other overhead costs.
Here is the formula for net profit:
Net Profit = Total Revenue - All Expenses
For example, if a company has total revenue of $100,000, cost of goods sold of $50,000, and operating expenses of $30,000, the net profit would be calculated as follows:
Net Profit = $100,000 - $50,000 - $30,000
= $20,000
Therefore, in this example, the company’s net profit is $20,000.
It’s important to understand the difference between gross profit and net profit because gross profit provides a clearer view of the profitability of individual products or product lines, while net profit includes a wider range of expenses and may be affected by external factors such as changes in marketing or advertising spend. By regularly tracking both gross profit and net profit, ecommerce merchants can get a comprehensive view of their business performance and identify opportunities for improvement.
Gross profit is the difference between a company’s revenue and the cost of goods sold, while net profit is the difference between a company’s revenue and all of its expenses. This means that net profit includes not only the cost of goods sold, but also operating expenses such as marketing, advertising, salaries, rent, and other overhead costs.
Why Gross Profit should be the North Star Metric for Ecommerce Merchants
There are several reasons why gross profit is the North Star Metric for ecommerce merchants:
- Gross profit provides a clearer view of the profitability of individual products or product lines: By tracking gross profit, ecommerce merchants can get a better understanding of which products are the most profitable and which may be dragging down overall profitability. This can help merchants make informed decisions about which products to continue carrying, which to discount or discontinue, and which to invest more in.
- Gross profit is more stable and less affected by external factors: Gross profit is less affected by external factors such as changes in marketing and advertising expenses, which can fluctuate significantly from month to month. This makes gross profit a more stable metric to track and can provide a more accurate view of a company’s underlying profitability.
- Gross profit can help identify opportunities for cost-cutting and margin improvement: By tracking gross profit over time, ecommerce merchants can identify opportunities to cut costs and improve margins. This can involve negotiating better deals with suppliers, finding ways to streamline operations, or identifying opportunities to upsell or cross-sell to customers.
Overall, tracking gross profit can provide valuable insights and help ecommerce merchants make data-driven decisions to drive growth and profitability.
Increasing your Ecommerce Business’ Gross Profit
Now that we have established that gross profit is an important north star metric, how can you (an ecom merchant) increase their gross profit?
There are several ways that you can increase their gross profit:
- Increase pricing: One way to increase gross profit is to increase the price of products. This can be especially effective if a merchant is able to differentiate their products in some way (e.g., through higher quality or unique features) and can justify a higher price point to customers.
- Reduce costs: Another way to increase gross profit is to reduce the cost of goods sold (COGS). This could involve negotiating better deals with suppliers, streamlining production processes, or finding ways to reduce waste and inefficiencies.
- Upsell and cross-sell: Offering related or complementary products to customers can increase the average order value and boost gross profit. For example, a merchant selling outdoor gear might upsell customers on items like water bottles or backpacks, or cross-sell them on items like hiking boots or camping tents.
- Increase average order value: There are several ways to increase the average order value, including offering discounts or promotions for larger orders, bundling products together, or providing incentives for customers to add more items to their cart.
- Focus on high-margin products: By focusing on products with higher margins, ecommerce merchants can increase their overall gross profit. This might involve discontinuing low-margin products or investing more in marketing and advertising efforts for higher-margin products.
Overall, there are many strategies that ecommerce merchants can use to increase their gross profit. By regularly tracking and analyzing gross profit data, merchants can identify opportunities for improvement and make informed decisions about how to drive growth and profitability.
Unique aspects of the Australian market that can impact gross profit
There are some unique aspects of the Australian market that can impact gross profit for ecommerce merchants, but the one you should first focus on dealing with “Distance from major markets”.
Australia is geographically isolated from many major markets, which can impact shipping costs and delivery times. This can affect both the cost of goods sold and the prices that customers are willing to pay.
Minimising the impact of distance (shipping cost) within Australia
Yup, it all comes down to shipping.
There are several ways that Australian ecommerce merchants can minimise the cost of shipping (driven by the distance of major markets) on gross profit, including:
- Use the right carrier for the job (Domestic vs International, City vs Regions).
- Minimise shipping errors
- Minimise returns
- Eliminated Fees and Overages
Using the right carrier for the job
According to data from the Australian Bureau of Statistics (ABS), approximately 90% of the Australian population lived in major cities as of June 2021. Major cities in Australia are defined as urban areas with a population of 100,000 or more, and include capital cities such as Sydney, Melbourne, Brisbane, Adelaide, and Perth, as well as a number of other large urban centers.
The remaining 10% of the Australian population lived in regional and remote areas. Regional areas are defined as urban centers with a population of less than 100,000, while remote areas are those that are more isolated and typically have a small population.
Overall, while the majority of the Australian population is concentrated in major cities, there is still a significant proportion of the population living in regional and remote areas. This can impact the availability of certain goods and services, including shipping options, and may be a factor for ecommerce merchants operating in Australia.
You should empower your shipping department to make decisions on the fly as to what shipping method to use. For our company, we show what shipping options are available, and allow our shippers at time of fulfillment to utilise better options.
Screenshot of the view our shipping department has when selecting the shipping method:
Look at the difference betwen the pricing on flat rate and ePacel to the above regional location!
Regional Shipping
When it comes to shipping across Australia, different carriers are good at servicing different markets.
When shipping ot regions, just use Australia Post!
As a government-owned corporation, Australia Post is required to provide a universal service obligation (USO), which means that it must provide certain postal services to all parts of Australia at an affordable price.
Make use of their flat rate satchels.
Ever accidently accepted an order to Christmas Island, or other place off the beaten track, and then got stung on MyPost or eParcel pricing?
It has certainly happened to us, this is why for high priced areas we use Auspost’s flat rate satchels. Flat rate satchels are a type of prepaid shipping option offered by Australia Post that allows customers to ship items at a fixed price, regardless of the weight or size of the package. Flat rate satchels are typically a more affordable option for shipping smaller, lightweight items, and can be a good choice for ecommerce merchants looking to minimise shipping costs.
The key take away about flat rate satchels is that they’re fixed price, so whilst it might cost $54 to ship a parcel to Christmas Island, it costs $10 to ship via satchel.
Australia Post provides discounts for buying Australia Post satchels in bulk on their website, or you can go into your local Australia Post outlet, and explain that you’re buying them in bulk.
Shipping to the Eastern States
There are opportunities for ecommerce merchants in Sydney, Melbourne, Brisbane, and Adelaide to negotiate discounted rates with carriers, leverage bulk shipping discounts, or use fulfillment services that can handle the logistics of shipping products to customers.
We’ve seen competitive rates from couriers like TNT, Toll, Fastway, and Couriers Please in these areas. Additionally, Australia Post offers exceptional rates for intra-city shipping within these cities - for example, rates of around $6 for up to 20kg within Sydney. However, it’s important to keep in mind that some couriers may have requirements regarding the mix of commercial vs residential delivery addresses, and may charge exorbitant fees for redelivery.
So how do you tell whether an address is commercial vs residential? Well we just show our shippers a Google Street View on the order page[1], and also link off to Google Maps[2] where they can get more information. They can also make calls on whether they’ll take a hit of shipping based on the customer’s order history[3].
Shipping to the West and Tasmania
Shipping to the west coast of Australia (e.g., Perth and Tasmania) can be more expensive than shipping to other parts of the country due to factors such as distance, infrastructure (looking at you: flooded inland rail lines), and demand. When shipping to these locations, it may be beneficial to consider prepaid or flat rate shipping options.
For these two cities, it is important to compare between prepaid and post paid options, as pricy can vary.
Minimise shipping errors
We minimise shipping related errors by:
- Utilising barcoding when possible (I’ll write a whole post on this)
- Using weights
As an electronics manufacturing company, we’ve designed and built postage scales that connect directly to a web browser. This lets the weight on the scale update values directly on the webpage without our shipping staff having to plug it in.
We try to have the pre-calculated weight[1] for all our products, and show this information to our shippers.
The live scales data is shown, and our shippers can use it with a single click[2].
The shippers can override the “declared weight” (the weight we’re giving the shipping carrier), and if the weight looks too high, or too low, we warn the shipper.
If we don’t have a weight for a product, we tell the shipper:
Clicking this throws up a modal where they can easily push the weight from the scales back to each product with a single click:
To further minimise errors, we utilise “resistor colour coding” on our line items. Resistor colour coding is a standardised system for marking the values of resistors. Most resistors have four coloured bands painted on them, which are used to indicate their specification.
So what does resistor colour coding have to do with minimising picking and shipping errors?
We tint the product photos that our shipping department see.
We’re a techy company selling electronics, and even our shippers tend to be techy so this works quite well. Whilst not everyone knows the colour to value matching, you can very quickly look down a list of line items and quickly identify that one of them is 2 units, versus one.
Eliminated Shipping Fees and Overages
Many folks have picked up on that a certain shipping provider has started to get a bit militant with fees and overages for under-declared weights and package sizes.
I’m happy to say we haven’t experienced this because we weight every parcel that goes out the door as part of our process.
We also track the weight and dimensions of our stationery, and this information automatically gets plugged into the fulfillment information when our team ships.
We pretty much use EBPack for all our shipping, and have imported their entire product range into our system:
Minimise returns
Minimising returns is important because the cost of shipping and processing the return eats into your GP.
The tips are all the usual you’d expect:
- Use accurate product descriptions and high-quality product images: Customers are more likely to return a product if it does not match the description or if it is not what they were expecting. By providing detailed and accurate product descriptions and high-quality product images, ecommerce companies can reduce the likelihood of returns.
- Offer clear return policies: Customers are more likely to keep a product if they know they can return it easily if they are not satisfied. You should have clear and easy-to-understand return policies that outline the process for returning products.
- Provide excellent customer service: Customers are less likely to return a product if they feel that their concerns are being addressed. You should have a responsive and helpful customer service team that can assist customers with any issues they may have.
- Use size charts and fitting guides: Customers may return a product if it does not fit properly. You can minimise returns by providing size charts and fitting guides to help customers choose the correct size.
- Use predictive analytics to forecast demand: You can use data analytics to forecast demand and avoid overstocking, which can reduce the number of returns due to excess inventory.
- Use customer feedback to improve product quality: By gathering and analyzing customer feedback, ecommerce companies can identify and address any issues with product quality, which can reduce the number of returns due to defective products.
Best Practices for Tracking Gross Profit
Here are some best practices for tracking gross profit:
- Accurately track and calculate the cost of goods sold: The cost of goods sold (COGS) is a key component in calculating gross profit, so it’s important to track and record this accurately. COGS should include all direct costs associated with producing and selling products, such as materials, labor, and manufacturing overhead.
We track both the COGs, and the COGs currency on our product variants:
- Keep COGs up to date: COGs seem to be always changing, especially with the current inflation issues. Given this, it’s super easy to let your COGs data to get stale. We provide our purchasers a one-click button[1] that allows them to update COGs when creating supplier orders. If you make things easy, folks will use it!
We also track the cost of shipping from the supplier to us[2], as it is easy for these costs to be ignored.
- Regularly review gross profit data: To get the most value from tracking gross profit, it’s important to review the data on a regular basis (e.g., monthly or quarterly). This can help ecommerce merchants identify trends, spot opportunities for improvement, and make informed decisions about how to grow their business.
- Use gross profit data to inform business decisions: By using gross profit data to inform business decisions, ecommerce merchants can make more data-driven, strategic choices about how to grow and scale their business. This might include deciding which products to focus on, identifying opportunities to cut costs or improve margins, or making changes to pricing or marketing strategies.
- Consider the context of other factors: While gross profit is a useful metric, it’s important to consider it in the context of other factors that can impact a business. For example, a company with high gross profit but low overall revenue may need to focus on increasing sales, while a company with low gross profit but high overall revenue may need to focus on reducing costs.
Overall, tracking gross profit can provide valuable insights and help ecommerce merchants make informed, data-driven decisions to drive growth and profitability. By following best practices for tracking and utilizing gross profit data, ecommerce merchants can get a clearer view of their business performance and identify opportunities for improvement.
Conclusion
What you really need to take away is:
- Gross profit provides a clearer view of the profitability of individual products or product lines, allowing ecommerce merchants to make informed decisions about which products to continue carrying, which to discount or discontinue, and which to invest more in.
- Gross profit is more stable and less affected by external factors such as changes in marketing and advertising spend, making it a more reliable metric to track and providing a more accurate view of a company’s underlying profitability.
- Gross profit can help ecommerce merchants identify opportunities for cost-cutting and margin improvement, such as negotiating better deals with suppliers, streamlining operations, or finding ways to upsell or cross-sell to customers.
- By regularly tracking and using gross profit data to inform business decisions, ecommerce merchants can make more strategic, data-driven choices about how to grow and scale their business.
Overall, gross profit is a valuable metric that can help ecommerce merchants understand the profitability of their business and identify opportunities for improvement. By making it their North Star Metric and regularly tracking and utilizing gross profit data, ecommerce merchants can make informed, data-driven decisions to drive growth and profitability.
I'd love to hear how you boost the GP of your ecommerce business. Comment below to share your thoughts, tips and tricks!
A bit about our platform (we call it Koi).
You might have seen a few features above that you’d like to use for your own business. We’re very slowly making our platform available to other merchants. If you’d be interested in using it, hit me up and I can give you a demo.