November 24, 2006

Running A Profitable Business

Given that today is the alleged day that retailers finally turn a profit, we should spend some time on profitability.

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




Key Annual

Metrics Results



Total Demand
$40,000,000
Lost Sales Rate 15.0% $6,000,000
Gross Sales
$34,000,000
Return Rate 30.0% $10,200,000
Net Sales
$23,800,000
Gross Margin 45.0% $10,710,000
Marketing Expense
$3,025,000
Fulfillment Expense 17.0% $4,046,000
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




Key Annual

Metrics Results



Total Demand
$40,000,000
Lost Sales Rate 10.0% $4,000,000
Gross Sales
$36,000,000
Return Rate 25.0% $9,000,000
Net Sales
$27,000,000
Gross Margin 45.0% $12,150,000
Marketing Expense
$3,025,000
Fulfillment Expense 12.0% $3,240,000
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.

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