We seldom talk about Gross Margin.
We should talk about Gross Margin.
Gross Margin is what is left after subtracting the cost of goods sold. If you sell an A/V Receiver for $300 and it cost you $240 to purchase the item from a vendor, then you earned $60 Gross Margin (60/300 = 20% Gross Margin).
Conversely, if you create your own products, you have an opportunity to earn more Gross Margin dollars. Companies that create their own products frequently enjoy high Gross Margin rates. For instance, if you sell a handbag for $300, you might earn $180 in Gross Margin after subtracting the cost of creating the item.
To achieve the same amount of Gross Margin dollars, the first company has to sell three A/V Receivers ($60 * 3 = $180). The first company has to sell one handbag ($180 * 1 = $180).
Needless to say, the second company has an advantage.
If you have a low Gross Margin, you can generate a lot of profit via a high annual repurchase rate. If 70% of last year's customers purchase again, you obtain downstream Gross Margin dollars that compensate for marketing expenses.
If you have a high Gross Margin, you can generate more profit via infrequent buyers. Catalog brands have been around forever, managing 60% Gross Margins with 40% Annual Repurchase Rates.
If you have a low Gross Margin and a low Annual Repurchase Rate, you must achieve, as the online pundits like to say, "scale". In other words, you need a highly viral product that causes numerous customers to purchase.
Now think about the Kindle. Amazon states that they make no profit on the sale of a Kindle, zero Gross Margin dollars. Amazon, however, has a high Annual Repurchase Rate (i.e. you're going to have to buy books to use your Kindle), and Amazon has "scale". This causes the numbers to work out, over time.
Notice that all of the excitement starts with merchandise ... opposite of where most discussions start these days (social, mobile, omnichannel).
Merchandise and Gross Margin, however, dictate everything that follows.
Showing posts with label Gross Margin. Show all posts
Showing posts with label Gross Margin. Show all posts
November 20, 2012
May 13, 2007
Return On Investment When Business Is Good
If you're one of the lucky folks managing online or catalog marketing at a company that is "winning", you have an interesting opportunity.
Let's say that this profit and loss statement represented what you expected to happen in April.
You expected to generate $7,300 profit, and 1,176 new customers.
You execute this marketing plan, and observe these actual results for the month of April:
Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.
Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.
Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:
This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.
Choice number one allows us to pocket an additional five thousand dollars of profit.
Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.
I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.
What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?
Let's say that this profit and loss statement represented what you expected to happen in April.
| Demand | $100,000 |
| Net Sales | $85,000 |
| Gross Margin | $42,500 |
| Less Marketing Cost | $25,000 |
| Less Fulfillment Expense | $10,200 |
| Operating Profit | $7,300 |
| % of Net Sales | 8.6% |
| Ad to Sales Ratio | 29.4% |
| Average Order Size | $85.00 |
| Number of Purchasers | 1,176 |
| Cost Per Purchaser | $21.25 |
| Profit Per Purchaser | $6.21 |
You expected to generate $7,300 profit, and 1,176 new customers.
You execute this marketing plan, and observe these actual results for the month of April:
| Demand | $115,000 |
| Net Sales | $97,750 |
| Gross Margin | $48,875 |
| Less Marketing Cost | $25,000 |
| Less Fulfillment Expense | $11,730 |
| Operating Profit | $12,145 |
| % of Net Sales | 12.4% |
| Ad to Sales Ratio | 25.6% |
| Average Order Size | $85.00 |
| Number of Purchasers | 1,353 |
| Cost Per Purchaser | $18.48 |
| Profit Per Purchaser | $8.98 |
Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.
Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.
Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:
| Demand | $143,635 |
| Net Sales | $122,090 |
| Gross Margin | $61,045 |
| Less Marketing Cost | $39,000 |
| Less Fulfillment Expense | $14,651 |
| Operating Profit | $7,394 |
| % of Net Sales | 6.1% |
| Ad to Sales Ratio | 31.9% |
| Average Order Size | $85.00 |
| Number of Purchasers | 1,690 |
| Cost Per Purchaser | $23.08 |
| Profit Per Purchaser | $4.38 |
This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.
Choice number one allows us to pocket an additional five thousand dollars of profit.
Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.
I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.
What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?
November 25, 2006
Business Review: PC Connection
PC Connection significantly improved the profitability of its business during the past year. Let's take a look at some of the key findings from their most recent 10-Q statement.
Through nine months, net sales increased by fifteen percent to just over $1.2 billion dollars. Earnings before taxes dramatically improved, from $7.8 million last year to $14.7 million this year.
In this case, PC Connection largely sources merchandise from vendors who can and do sell their own merchandise through their own distribution channels, or through other channels. For instance, HP computers can be sold via HP's website, or through businesses like Best Buy. Competitively, PC Connection would have to differentiate itself in some manner, so that customers choose their business. In my case, I buy from PC Connection because merchandise is shipped in a rapid and inexpensive manner.
As you can see, PC Connection faces challenges managing a business with gross margins in the twelve percent range. Downturns in business can cause the business to not leverage fixed expenses. Large accounts appear highly profitable, as sales and margin leverage a minimal expense structure. The majority of the profit generated by PC Connection is generated by only 87 employees. More than four hundred employees manage the small business segment.
It will be interesting to see if PC Connection can continue to drive sales and profit increases at a time when margin pressure increases in the computing industry. What do you think about the prospects for PC Connection?
Through nine months, net sales increased by fifteen percent to just over $1.2 billion dollars. Earnings before taxes dramatically improved, from $7.8 million last year to $14.7 million this year.
- Small Businesses and Consumers = $655.6 million dollars sales and $4.3 million dollars profit. Sales improved seven percent, profit improved by $1.4 million dollars. Gross Margin was 13.5% in 2006 verses 12.5% in 2005.
- Large Accounts = $350.0 million dollars sales and $17.6 million dollars profit. Sales improved by a whopping forty-nine percent, profit improved by $5.2 million dollars. Gross Margin was 10.9% in 2006 verses 10.3% in 2005.
- Public Sector = $197.8 million dollars sales and a loss of $7.2 million dollars. Sales were essentially flat, while profit improved by $0.3 million dollars. Gross Margin was 12.3% in 2006 verses 11.5% in 2006.
- Notebooks and PDAs = +7% (the largest merchandise division, $210,000,000 YTD).
- Desktops and Servers = +12%
- Storage Devices = +14%
- Software = +20%
- Net/Com Products = +19%
- Printers and Supplies = +11%
- Video, Imaging & Sound = +25%
- Memory & System Enhancements = +8%
- Accessories & Other = +23%
- Small business sales increased among businesses, but decreased among consumers.
- Increases in online sales were offset by decreases in telephone sales.
- The number of catalogs mailed were decreased verses 2006, focusing instead on more diverse strategies to drive sales among businesses.
- Large accounts benefited from inclusion of sales from Amherst sales representatives, and a twelve percent growth in organic sales.
- Gross margins were improved by vendor considerations.
In this case, PC Connection largely sources merchandise from vendors who can and do sell their own merchandise through their own distribution channels, or through other channels. For instance, HP computers can be sold via HP's website, or through businesses like Best Buy. Competitively, PC Connection would have to differentiate itself in some manner, so that customers choose their business. In my case, I buy from PC Connection because merchandise is shipped in a rapid and inexpensive manner.
As you can see, PC Connection faces challenges managing a business with gross margins in the twelve percent range. Downturns in business can cause the business to not leverage fixed expenses. Large accounts appear highly profitable, as sales and margin leverage a minimal expense structure. The majority of the profit generated by PC Connection is generated by only 87 employees. More than four hundred employees manage the small business segment.
It will be interesting to see if PC Connection can continue to drive sales and profit increases at a time when margin pressure increases in the computing industry. What do you think about the prospects for PC Connection?
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