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
1,000,000
Total Pages in Catalog
124
Total Book Cost $1.00 $1,000,000
Percent of Page Allocated
33.0%
Cost To Advertise This Item
$2,661
Total Responses
225
Response Rate
0.02%
Response per 000 Pages
0.07%
Units per Order
1.15
Total Units Sold
259
Price per Unit
$65.00
Total Demand
$16,819
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
1,483,005
Total Visits, This Item
4,593
Total Website Cost, Non Adv.
$800,000
Cost Allocated To This Item
$2,478
Placed In Shopping Cart 25.0% 1,148
Total Responses 55.0% 632
Units per Order
1.08
Total Units Sold
682
Price per Unit
$65.00
Total Demand
$44,334
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
$42,356
Gross Profit 48.0% $20,331
Less: Book Cost
$2,661
Less: Website Cost
$2,478
Less: E-Mail Cost
$1,500
Less: Online Marketing Cost
$3,550
Less: Pick, Pack, Ship 11.5% $4,871
Variable Operating Profit
$5,271
Profit as a % of Net Sales
12.4%

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