April 22, 2018

Generating Profit

This week we are going to talk about some of the dynamics surrounding generating profit. I know, I know, this is going to bore the living daylights out of many of you ... for those who are likely to be bored silly, read this little ditty about an old-school gaming organization who needed 11 years before being willing to "change" (click here) and then ask yourself if your organization would take that long to change.

Ok, let's pretend you sell widgets. The average price of a widget is $35.00. The gross margin of that widget is $17.50 (about 50%), yielding a cost of goods of $17.50 each. That's the business you are in. When a customer orders, the customer typically purchases three widgets, for an AOV of $105.00.

When the customer purchases, the customer pays $10.00 for shipping and handling. The cost to ship the merchandise is $8.00.

Make sense?

So here are the dynamics of a typical order.
  • Three items at $35.00 = $105.00 net sales.
  • Cost of goods for three items at $17.50 = $52.50.
  • Gross Margin Dollars = $105.00 - $52.50 = $52.50.
  • Shipping Revenue = $10.00.
  • Shipping Expense = $8.00.
  • Net Shipping Revenue = $2.00.
  • Total Profit from the Order = $52.50 + $2.00 = $54.50.
Tomorrow we'll take a look at what happens when the marketing team thinks 30% off is a good idea.

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