We frequently read about the importance of merchandising, branding, gross margin, marketing, and expense management in driving a profitable online/catalog business. We infrequently read about the importance of managing the mundane details of a business, things like filling orders, minimizing returns, and running and efficient fulfillment center.
In the example below, we have an online/catalog business that is barely profitable.
|Profit and Loss Statement / Break-Even|
|Lost Sales Rate||15.0%||$6,000,000|
|G & A Expense||$3,570,000|
|Earnings Before Taxes||$69,000|
|EBT / Percent of Net Sales||0.3%|
Now, let's assume that management improves three key metrics. Assume that the lost sales rate improves from 15% to 10%. Assume that the return rate improves from 30% to 25%. Also assume that fulfillment expense (what it costs to pick, pack and ship and item) improves from 17% to 12%. The profit and loss statement below illustrates the impact of these improvements on profit.
|Profit and Loss Statement / Improvement|
|Lost Sales Rate||10.0%||$4,000,000|
|G & A Expense||$4,050,000|
|Earnings Before Taxes||$1,835,000|
|EBT / Percent of Net Sales||6.8%|
In this example, profit dramatically improves, from about break-even, to more than $1.8 million in annual profit.
This is one of the big secrets about profitability. Many management experts look to driving top-line sale, improving gross-margin, driving sales via marketing, or managing general and administrative expenses as the route to business success. However, a relentless focus on filling each order, reducing returns, and improving distribution and contact center efficiency have a significant impact on overall profitability.