Whether they sell holistic online yoga courses or custom pet accessories on Etsy, every eCommerce business owner craves insight that can help scale their business. They want to know how their investments, such as high-quality materials or marketing campaigns, affect their bottom line, and how they can capitalize on financial trends within their business.
It takes time and specialized expertise to analyze financial data. Between the countless responsibilities that eCommerce business owners juggle, it can be difficult to put the numbers into context and strategize for the future.
Over the last five years, Xendoo has had the honor of working with numerous eCommerce business owners across the country. Through years of partnership, we have compiled several eCommerce KPIs that help business owners make decisions for growth and plan for successful exits.
In this playbook, we will share those KPIs, so you can achieve deeper insight into your own business performance!
Revenue
What is it?
Revenue, sometimes referred to as Sales, is the money a business earns from selling goods or services during a specific time period., with no expenses applied. It is calculated by multiplying the number of units sold by the average price.
For example:
Sam sells t-shirts online, and wants to know what her Revenue was last year.
She sold 20,000 t-shirts at a retail price of $30 each.
Her revenue was: 20,000 t-shirts x $30 = $600,000.
Why is it important?
The trend of your Revenue over time provides a basic idea of whether your sales and business are growing financially. Be aware that because no deductions are made, Revenue does not indicate profitability. When Revenue is examined alongside other metrics, you can see a more complete picture of financial health.
Industry Benchmark. According to JungleScout, the average Amazon seller makes between $1,000 to $25,000 in monthly revenue. Generally, the more Revenue a business produces, the more money it has to cover expenses and reap a profit. Remember, high Revenue does not necessarily mean high profitability. To understand how your costs affect your bottom line, other factors should also be taken into consideration.
Cost of Goods Sold (COGS)
What is it?
Cost of Goods Sold, also known as COGS or Cost of Sales, refers to the direct costs of producing and purchasing goods or services. Some examples of Direct Costs include:
- The cost of materials: The amount paid to vendors to purchase materials and products.
- Shipping costs: The amount the business owner spends to have materials shipped to their location.
- Labor costs: Wages paid to employees or contractors directly involved in producing the good or service.
Note that indirect costs, such as marketing and advertising, rent, insurance, taxes, and payroll, are considered Operating Expenses. They are not included in COGS.
For companies with inventory, COGS can be calculated using the formula:
Beginning Inventory + Inventory Purchases (during the period) – Ending Inventory = COGS.
For example:
Last month, Sam’s beginning inventory was $22,000, and she purchased $10,000 more. Her ending inventory was $2,000.
Her COGS for last month was: $22,000 + $10,000 – $2,000 = $30,000
Another way to look at COGS is the number of products sold, multiplied by their cost.
For example:
Last month, Sam sold 1,000 t-shirts at a Direct Cost of $30 each.
The COGS was: $30 x 1,000 (t-shirts sold) = $30,000.
Why is it important?
COGS guides pricing decisions. By knowing your COGS, prices can be set that produce a strong Profit Margin, which measures how much Revenue your business keeps after direct costs are applied. If your COGS for a product is $20, the final price must be higher than $20 in order to pay for other expenses and keep the business operational. This insight can determine whether prices need to be adjusted to increase profitability.
What if my COGS is too high?
The higher your COGS, the higher your selling price should be. COGS should always be lower than Revenue to maintain profitability. If COGS comes too close to, or exceeds Revenue, consider raising your pricing, or finding ways to decrease COGS, such as negotiating your pricing agreement with your supplier, or finding affordable alternatives to your materials.
Gross Profit
What is it?
What is it?
Gross Profit is the amount of money that remains after subtracting COGS (or Direct Costs) from Revenue. It is used to pay for Operating Expenses, such as marketing, rent, insurance, payroll, and taxes.
It is calculated using the formula
Gross Profit = Revenue – COGS.
For example:
Sam’s t-shirts are priced at $30, and it costs $10 to produce them.
The costs include $5 to purchase t-shirts from her supplier, $2 for vinyl, and $3 for labor.
Her Gross Profit is: $30 (sale price) – $10 (Direct Costs) = $20 per t-shirt sold.
Let’s calculate her Gross Profit for the year.
Her monthly COGS is $30,000, as illustrated above, with a Revenue of $600,000.
Her yearly Gross Profit is: $600,000 (Revenue) – $360,000 (yearly COGS) = $240,000.
Why is it important?
Gross Profit reveals how profitable your pricing is, relative to the costs of producing the product or service. This provides insight into your top expenses, and how they can be decreased in order to maximize Gross Profit.
What Should My Gross Profit Look Like?
The lower Direct Costs are compared to Revenue, the higher Gross Profit will be. If a decline in Gross Profit occurs, examine your COGS, discounts, and pricing. If the data suggests that too much money is being spent on supplies, consider negotiating lower prices with your supplier, or opting for more affordable materials.
Gross Profit Margin
What is it?
Gross Profit Margin is the percentage of money that remains after direct costs have been subtracted from Revenue.
It is calculated using the formula:
Gross Margin = Revenue – COGS / Revenue x 100.
For example:
Sam’s t-shirts are priced at $30, and it costs $10 to produce them.
The remaining Gross Profit on each t-shirt is $20.
Her Gross Profit Margin is: $30 – $10 / $30 x 100 = 66.67%.
Why is it important?
Gross Profit Margin helps business owners determine if their pricing is able to (and their costs are low enough) to provide the money needed to pay for operational expenses, such as rent and insurance. If you need to know if your products are producing enough profit, consult your Gross Profit Margin.
Industry Benchmark. According to Shopify, a good Gross Profit Margin for online retailers is around 45.25%. A simple way to increase your Gross Profit Margin is to raise prices, even by 3%, and to reduce costs by 3%. Check out our latest eBook, The Power of 3, to learn more about profitability solutions that will help you achieve long-term financial success!
Net Income
What is it?
Net Income, also known as the Bottom Line, is the total amount of money a business earns, after deducting all direct and indirect costs.
It is calculated using the formula:
Net Income = Gross Profit – Expenses.
For example:
As mentioned earlier, Sam made $600,000 in Revenue, with a COGS of $360,000. Subtracting COGS from Revenue results in a Gross Profit of $240,000.
$80,000 goes toward employee wages, $70,000 is used for operating expenses (rent, insurance, marketing), and she pays $20,000 in taxes. These numbers are then subtracted from Gross Profit to determine Net Income:
$240,000 (Gross Profit) – $80,000 (wages) – $70,000 (operating expenses) – $20,000 (taxes) = $70,000 (Net Income).
Why is it important?
Net Income is an indicator of financial health and business success. By tracking it year over year, business owners can see if they are making more than they spend. It also shows what the business’ biggest expenses are. With this insight, business owners can strategically reduce expenses, such as decreasing labor and operational costs, and drive up their bottom line.
What Should My Net Income Look Like?
A great goal is to grow Net Income steadily each year. If it remains stable or declines, consider working with an eCommerce bookkeeper. They will reconcile your expenses on your behalf, and provide you with monthly financial statements so you can enjoy financial visibility and make informed decisions and strategize for growth.
