February 04, 2007

Is An Item Profitable?

So many of us in multichannel retailing are asked to quantify how individual marketing activities perform.

We measure the effectiveness of an e-mail campaign. We prove that catalogs and direct mail drive business to the online channel.

Congratulations, we demonstrated that advertising works! Maybe.

Now it is time for us to measure how advertising influences the sales of individual items. I don't sense that our industry is doing the best job of measuring the profitability of an individual item, after factoring in the effect of advertising.

At the end of this post, I include a template for measuring the overall profitability of a specific item. In this case, we advertise the item through catalogs, through e-mail campaigns, and through online advertising (search, portals). During the course of an eight week period of time, we total the sales of the item, both online and over the phone. We also sum all advertising of that item.

What follows is a multichannel profit and loss statement for an item. This exercise should be replicated for every item sold by your business. Yeah, that's a lot of work. But how else are you going to know what sells, what sells because it is advertised, and what doesn't drive profit?

Quite honestly, the advent of the online channel has reduced our industry's zeal to understand the profitability of items. In catalog, it is easy to measure profitability. We need to have a passion for understanding which items truly work, across all channels.

Here, then, is a mocked-up template for the multichannel profitability of a single item. If you work for a business that also has a retail channel, simply add an additional section to the template for the retail channel.

Multichannel Merchandise Profit And Loss

Catalog Metrics

Catalogs Mailed
Total Pages in Catalog
Total Book Cost $1.00 $1,000,000
Percent of Page Allocated
Cost To Advertise This Item
Total Responses
Response Rate
Response per 000 Pages
Units per Order
Total Units Sold
Price per Unit
Total Demand
Fulfillment Rate 88.0% $14,801
Return Rate 25.0% $3,700
Net Sales 66.0% $11,100

Online Metrics

Total Visits To The Website
Total Visits, This Item
Total Website Cost, Non Adv.
Cost Allocated To This Item
Placed In Shopping Cart 25.0% 1,148
Total Responses 55.0% 632
Units per Order
Total Units Sold
Price per Unit
Total Demand
Fulfillment Rate 94.0% $41,674
Return Rate 25.0% $10,418
Net Sales 70.5% $31,255

Multichannel Profit And Loss Statement

Multichannel Net Sales
Gross Profit 48.0% $20,331
Less: Book Cost
Less: Website Cost
Less: E-Mail Cost
Less: Online Marketing Cost
Less: Pick, Pack, Ship 11.5% $4,871
Variable Operating Profit
Profit as a % of Net Sales

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