Owning an e-commerce store is one of the most thrilling experiences ever. You have a virtual storefront. Your foot traffic? Everyone with Internet access. Getting people to “walk through your door” is a challenge but once you do, it provides you with a lifelong income. However, you can’t just rest on your laurels once you’ve optimized traffic flow and conversion rates. You still run a business and that means you need to keep tabs on several critical business metrics unique to your industry.
The unit cost is the most fundamental inventory metric in an e-commerce business. It tells you the individual cost of a product you’re selling. For example, if you’re selling office equipment, you might list the unit price for pens or pencils. The unit price would be the cost for just one, individual pen. Knowing this cost means you can track inventory turnover and profit margins.
If you don’t sell a product, you don’t make money. Inventory turnover is the metric you pay attention to when you want to know how quickly or slowly your inventory is moving. It’s the time that elapses between your company ordering an item and that item selling on your site.
If you’re using a drop shipper, inventory turnover is almost a non-issue since you never actually take physical delivery of products. Instead, they’re shipped direct from your wholesaler or supplier. Even still, it’s helpful to know the rate at which any given product is selling. Even if you drop ship, you can use “virtual turnover” to measure how quickly products are selling. The way you would do this would be to place a virtual order at the beginning of the week – call it a sales goal or target – and track how quickly you meet that goal.
Example: You sell office equipment. You set a target of 2,000 units (2,000 pens) by the end of the week. On Monday, you set a sales target of 2,000 units. Everyday, you track the number of sales made. By the end of the week, you can calculate the turnover using Monday as your “order date” for the pens.
Turnover rates help you better understand which products sell and which ones do not, which sales work best for what products, and when your company’s slow times are during the year.
Customers have come to expect variability in product offerings. It’s not enough to sell just one color of iPhone cover. You need to have several colors, and even several styles of covers. You may not like to think of yourself as a commodity seller but that’s how a lot of customers will view you. The best you can do is manage customer expectations. Think about what Amazon.com does in the grocery niche. They sell all kinds of products – like nut flours for example. They don’t just sell Bob’s Red Mill though. They sell several different suppliers’ products. Why? Because not everyone likes Bob’s Red Mill flours. Apply this same line of thinking to your own e-commerce business.
If you use drop shipping, supplier fulfillment is something you might need specialized software to track. If possible, coordinate with your suppliers and secure a firm commitment on their inventory. The last thing you want to do is find yourself in a situation where you’ve received orders, money, and have no product to ship out to customers.
Now we’re cooking with gas. This is why you’re in business. Profit margin is the most important metric and determines whether you stay in business or not. You need to calculate a fair profit margin that takes into account your supply costs, depreciation, and even taxes. Most businesses try to price products by looking at the competition. However, your competitors might have a better (or sometimes worse) relationship with their suppliers than you do with yours.
Your competition’s profit margins might allow for lower retail pricing, or they may be making the all-too-common mistake of not deducting depreciation and taxes from the profit on each item – these are real costs and they need to be accounted for.
In most cases, there is a software solution that will help you monitor each of these metrics. Still, you need human eyeballs on the software to keep track of them. If you don’t like crunching numbers yourself, consider hiring a bookkeeper to do it for you.
Ted Hosford is a business software consultant at Ordoro with extensive experience. He mainly writes on business and software blogs about issues affecting the industry. Visit Ordoro.com to see their range of software solutions.
This article is a guest post. If you would like to write for Money Soldiers, you may visit the Write for Us menu for details.