October 10, 2022

Gross Margin Dollars

Your business (and your marketing strategies) are determined by the gross margin dollars you generate per order. It's the primary reason I detest it when you decide to offer 40% off of your merchandise.

Want an example?

Here's a pair of trail shorts from Vuori ... priced at $78 flippin' dollars for a pair of shorts (click here).

Meanwhile, Northyard is selling hiking shorts on Amazon for $24.99 (click here).

Vuori is likely generating 60% gross margins on their products, +/-. Every time they sell a pair of trail shorts for $78 they generate $46.80 of gross margin dollars.

Lower priced items typically have lower gross margin percentages ... I don't know what Northyard generates for a gross margin percentage, but assume it is 50% (because they are selling at 20% off their list price). Every time they sell a pair of trail shorts for $24.99 they generate $12.50 of gross margin dollars. Then they have to give Amazon $2.50 for the luxury of selling the item on Amazon, so they're left with $10.00 of gross margin after paying a commission to Amazon.

Now, you're about to beat me up about the fact that one brand is selling low-cost commodity items on Amazon and the other brand is selling fashion on their own so I can't compare the two tactics.

Yes, I can compare the two tactics, because the comparison enables all of us to open our minds to the power of gross margin dollars.

One brand is making $46.80 per item. Then they have to ship the item to you, and that likely costs them $5.00 or more.

The other brand, selling via Amazon, is making $10.00 per item, then they have to ship the item to you at a cost of $5.00. Uh oh.

Which business would you rather operate?

Here come the comments again!

  • "Kevin, did you injure your brain? I'll make $10.00 per item all day long as long as Amazon is driving all of the traffic for me. You obviously don't understand the power of different marketing channels. Let Amazon do all of the marketing work, let me benefit from the work Amazon does."
There we go.

One marketer (Vuori) has to do all of the marketing work, but gets to make a ton of money doing it. Vuori, I mentioned yesterday, was profitable before accepting nine figures worth of money to help them move along and pay off original investors. But this brand has to figure out how to market in a cost effective manner, protecting as much gross margin dollars as possible. Yeah, you'll strive for organic customer acquisition in this scenario. And again, this is the point where you start yelling at me.
  • "Kevin, this forces Vuori to market to affluent customers. Poor people cannot afford their products. This greatly limits their market potential. Bad idea."
Well, yeah ... there are consequences to brand positioning.

One marketer lets Amazon do some of the marketing work for them. Now, this brand needs to do organic customer acquisition as well because so few gross margin dollars drop to the bottom line ... they can offset this dynamic by offloading work to a 3rd party (Amazon) or by employing high-traffic marketing tactics to generate a 5x increase in traffic to make the same amount of gross margin dollars as Vuori.

Do you see how important gross margin dollars per order is? Gross margin dollars per order dictate the marketing tactics a brand employs.

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