How to Perform a Profitability Analysis for Your E-Commerce Store

Of all the metrics you need to calculate, profitability analysis insights can offer some of the most valuable guidance for your online store. With a profitability analysis, you can determine which products, consumers, and efforts in your company are the most “profitable.”

Measuring the profitability of different factors for your online store shows you which strategies you should be investing more of your budget into and which you should be avoiding.

Let’s look at the basics of performing a profitability analysis to enhance different profit margins in your store.

Benefits of a Profitability Analysis for E-Commerce

In an e-commerce store, customer profitability is measured in the difference between the costs of acquiring a customer and the lifetime value of that client. Different types of profitability measures can also look at the value of marketing campaigns, products, and other strategies.

E-commerce revenue analysis tools can help you to determine customer profitability in a range of environments and outline which factors are influencing your e-commerce profit margins.

Having a strong indicator of profitability can also help you to focus on the customers most likely to generate the most income, leading to better productivity across the organization and a good profit margin for your e-commerce store.

Steps to a Successful Profitability Analysis

Conducting a successful profitability analysis could be easier than you’d think.

1. Find the Right Technology

For most companies, the first step in a successful customer or product profitability analysis is accessing the right technology. Tools for tracking valuable information like net sales and profit can help you avoid profit calculating mistakes. Tools like BeProfit make it easy to streamline the process of tracking business expenses and determining profit at a glance.

2. Determine Your Outgoing Costs

Use your technology to determine the outgoing costs of creating your products, acquiring customers, or running the campaigns you want to measure profit for. These costs can include everything from paying for technology to labor and marketing costs.

3. Calculate the Revenue

Determine how much revenue you’ve created as a result of the product, customer group, or campaign you want to track. For instance, if you’re checking the profitability of a group of customers, you can add up all the revenue from the customers in this group. If you’re checking the profitability of a product, you can add up all the sales of the product.

4. Determine Your Profit

To determine the profit from a campaign, product, or customer, subtract the cost of the initiative from the overall revenue. For instance, to calculate product profitability, you would subtract the cost of making and advertising the product from the money it earned you.

5. Implement Steps to Improve Profitability

If your profitability is low, you can take steps to improve the situation. With a profitability analysis, you can more quickly eliminate any customers, campaigns, or products costing you money. For instance, if you discover the net sales of a certain group of customers is lower than the cost of acquiring them, you can stop focusing on that group.

Remember, continuing to collect the right data over time will help you to see instantly if your profitability for a campaign or initiative drops over time.

Tips for a Successful Profitability Analysis

While there’s no one-size-fits-all roadmap for a successful profitability analysis, there are certain steps that can improve your chances of earning the right insights. For instance:

Look at the Past as Well as the Present

Remember to go back and look at your profit levels from previous years and quarters. This will give you the insights you need to determine whether your profit levels are successfully growing with time. If they’re not, this could be a sign the customer base or product you’re looking at is losing its value.

Consider Industry Benchmarks

Every business is different, but looking at the benchmarks achieved by other companies will give you a good insight into whether you’re on the right track. Using industry benchmarks is often useful if you don’t have any prior quarters or years of profit to look back on in your own company.

Find Time for Deeper Analytics

Where possible, take advantage of your tools and technology to dive deeper into your profitability analysis. If it seems as though your profit levels are dropping with a particular product or customer base, try and establish why this might be before you simply write them off as unprofitable.

Remember, you should be checking your profitability levels on a regular basis to ensure your current metrics are up-to-date.

Set Yourself Up for Better Long-Term Profits

Ultimately, the only way to make sure you’re spending your budget on strategies that will generate a positive return on investment is with the right analytics.

Learning how to calculate profitability analysis metrics successfully will help you to make better decisions for the future of your company. While you might need to dedicate some extra time to tracking all of your net sales and exploring the factors behind a good gross profit margin, the work will eventually pay off.