ecommerce finance

Ecommerce Finance - The Ultimate Guide to Making More Money

Everything you need to know about eCommerce finance - how to make money, track your net profit, and optimize your entire operation.

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Whether you are running your own eCommerce business or managing a marketing team, the most important metric to keep your eye on is the bottom line - the net profit.

But that’s not what usually happens.

Usually, the owner of the business is focused on the profit, while everyone else is running around showing off their sales numbers, revenue numbers, social media followers, you name it.

If you want to run a successful eCommerce business you need to keep your finger on the pulse of the business which is your next profit. If you focus on the net profit every month you will be able to make decisions that are more financially sound.

The question is how to do that, and it really breaks down into 3 main challenges:

  1. How to calculate the net profit - there are so many variables from your COGS (cost of goods sold), shipping, inventory, storage / warehouse costs, salaries, marketplace fees and commissions, ad spend, etc. It gets very difficult to keep track of all of them.
  2. How to increase the net profit - it’s hard to know what to focus on to decrease costs, and when it’s even right to do so.
  3. How to train your team to focus on the net profit - how to create a culture that is focused on the right business metrics to move the needle.

That’s why we wrote this guide, to break down every facet of your eCommerce financials and suggest some practical tools and solutions that are used by the experts to solve these three challenges.

Let’s dive in.

[Add Banner Here]


To start, let’s talk about all the costs that you should track for your business.

Top 5 eCommerce Expenses

Here we are going to break it down into 5 main categories -

  1. The website
  2. Marketing
  3. Manufacturing
  4. Shipping & logistics
  5. Salaries & overhead

Let’s talk about each one.

The Website

Your website is one of the easiest costs to calculate because it’s constant and predictable. Here are some of the items you should put on your sheet:

  • Domain name
  • Hosting
  • SSL certificates
  • Redesign (you should have a budget allocated to A/B testing and conversion rate optimization)
  • Content management system (CMS)
  • Cyber security
  • Other plugins and optimizations

Marketing

  • Ad spend (Google Ads, Facebook, YouTube, Google Shopping, Native Advertising)
  • Marketing apps and plugins (email marketing, chatbots, push notifications)
  • Marketplace fees & commissions
  • Influencer and partner fees/payouts

Manufacturing

This section is only if you are producing your own product. If you’re dropshipping or having someone else make your product for you then you can skip this section.

  • Materials - the cost of all the parts of your product and the raw materials that go into production
  • Labor - all the salaries of the employees in your factory
  • Overhead - your factory rent and upkeep costs

Shipping & Logistics

This section deals with shipping and storing your product and these are often the most complicated costs to calculate.

  • Warehousing - the cost of the warehouse (often calculated as $ per sq ft)
  • Packaging - the cost of packaging and branding your products
  • Shipping costs - shipping can vary based on the provider you use (and whether you are using FBA)
  • Fulfillment fees - these can be the same as shipping or be calculated separately if you are having a company like Amazon fulfill your products

Salaries & Overhead

A pretty straightforward section here where you add up all of the salaries and HR costs associated with your business. Overhead includes things like your office rent and any equipment and technology costs you might have.

Those are all of the costs that you need to keep track of. And perhaps the biggest and most complex cost is the cost of goods sold or COGS.

Here’s how to calculate it.


How to Calculate Cost of Goods Sold

The cost of doing business for any eCommerce or traditional retailer can be quantified in the cost of goods sold (COGS).

Here’s an example.

Let’s say that you make shoes. You bought 100 shoes this month but only sold 20. So you’re not going to count the production, shipping, and logistics of all the shoes you produced that weren’t sold.

You will focus on the shoes that you sold. And for each shoe sold you will have a cost of production, shipping from the factory to the warehouse, shipping from the warehouse to the consumer, etc.

It could take a month, a quarter, or a whole year for a business to sell all of the inventory from one shipment and that’s why businesses calculate the cost of goods sold. The cost of the unsold goods becomes a manufacturing/inventory cost.

The COGS Formula

Here’s the formula you should use to calculate the cost of goods sold.

The Cost of Goods Sold = Beginning Inventory + Purchases Made During Period - Ending Inventory

So let’s say you started out with no inventory and then bought $2000 worth of goods. Then in 30 days you only sold $1,000 worth of product. So your cost of goods sold = $0 + $2,000 - $1,000 = $1,000. Your COGS is $1,000 for that period.

Let’s take a real-world example.

Here’s Johnson & Johnson’s income statement.

johnson & johnson cost of goods sold
Source: Stock Analysis

Notice that their total sales were $82B in 2020, their cost of goods sold was $28B and when they subtract their total sales from their COGS they get a gross profit of $54B. Their eCommerce marketing expenses all come afterward and are deducted from the gross profit to get their net profit.

The difference between Gross Profit and Net Profit

There is a world of difference between the two and it’s super important to understand it and how to calculate each.

A gross profit is the profit a company makes after deducting the costs associated with making and selling its products and can be calculated by subtracting the cost of goods sold (COGS) from the revenue (sales), like so:

Gross Profit = Gross Revenue - COGS

The net profit (net income) is the actual profit a company makes after all of its expenses and costs. It’s the bottom line of the income statement and is calculated by subtracting the COGS and expenses from the revenue, like so:

Net Profit = Revenue - COGS - Expenses (marketing, research, overhead, labor, etc.)

Going back to our discussion about COGS, you’re probably wondering what’s included in the calculation.

What is included in COGS?

All shipping & logistics costs go into the cost of goods sold calculation such as:

  • Packaging costs
  • Storage costs
  • Warehouse fees
  • Fulfillment fees
  • Shipping costs
  • Manufacturing/supplier costs

So the key is to calculate your cost of goods sold (COGS) and then plug it into the formula to get the most accurate number for the net profit of the business. What if you’re not good with spreadsheets and don’t want to keep all of this information in your head? How do you best get clarity on all of your different costs?

Great question, here’s how.


Use an app to keep track of all your costs in one place

The first step to increasing your net profit is to get clarity on what your costs actually are. And unless you’re an Excell wiz, this is going to be quite an undertaking. You would have to manually download your costs from every online marketplace, your ad spend data on Facebook and Google Ads, look at the COGS of each product, and on and on.

Instead of getting a master’s degree in accounting get an app like BeProfit that could do all the heavy lifting for you.

Advantages of using BeProfit:

  • Pull data from all your marketing channels
  • Track your profit on one dashboard
  • Sync your COGS and fulfillment costs
  • Get predictions on how much product you should purchase
  • Get optimization tips on each cost and what you can do to improve net profit
beprofit profit tracker shopify app ecommerce

Here’s a really great video that shows the app in action:

Now that you know the different types of costs and keep track of them in one place, let’s talk about how to decrease each one and improve your bottom line.

How to Decrease Marketing Costs

Marketing costs can be very different from one another and that makes it harder to know how to decrease them.

Here are some of the main ways to go about it decreasing your marketing costs:

Use omnichannel apps and platforms

So many eCommerce brands fill up their budgets with marketing apps and widgets that have overlapping functionalities. For example, you might be using Klaviyo for sending emails and SMSBump for sending text messages, but you can use Klaviyo for both.

klaviyo text message sms marketin gcampaign and email campaign
Source: Klaviyo

It’s always better to use omnichannel apps that let you manage several marketing channels within one app. You can use an app like Flashy for email marketing, popups, SMS, and an app like OctaneAI for SMS, chatbots, and interactive quizzes.

facebook messenger popup omnichannel octaneai
Source: OctaneAI

Improve your conversion rate

Speaking of marketing channels, there’s one tactic that can help you improve your budgets and cut costs on all of them at once, and that’s conversion rate optimization. Work on improving the conversion on your site and you will improve each marketing channel’s conversion.

You can use a tool like HotJar to get data on what your visitors are doing on your site through heat maps and surveys. You can use a tool like Shogun, Google Optimizer, or Optimizely to run some A/B tests and improve the design and usability of your site.

simplified online order form conversion rate optimization
Source: Optimizely

Reduce wasted ad spend

One of the largest marketing costs of medium to large eCommerce brands is the ad spend. A lot of times brands spend way too much money on their ads without realizing it.

Reasons your ad spend is too high are:

  • Your Campaigns aren’t optimized or structured correctly
  • You’re missing the low-hanging fruit like bidding on branded keywords or retargeting campaigns
  • You’re not testing different ad formats
  • Ad fatigue - your audience has already seen your ads and you need to change them up and show something new

A lot of these problems can be solved by simply working with an advertising expert that has proven experience and a track record in your particular industry or niche.

If you’re a pet food brand owner you need someone that has experience advertising pet products. If you’re in fashion you need someone that has experience advertising for the fashion industry.

You can find an expert advertiser with Mayple, where we have vetted experts with a wide range of experience in many industries and niches.

How to Decrease Shipping & Logistics Costs

The next batch of costs we’re going to deal with are shipping and logistics costs. These can be a little tricky depending on where you sell to (if you’re only selling in the US or if you’re shipping globally).

Here are some of the things you can do to decrease shipping & logistics costs.

Improve your inventory management

Managing your inventory becomes super-complex when you have a variety of online marketplaces and sales channels that you're actively selling on. So it might be a good time to upgrade your inventory management by using software like Skubana or StitchLabs to unlock your brand's full potential.

screenshot-skubana-fulfillment-automation-346477

Hire a third-party logistics company (3PL)

There are two main ways to fulfill a product - either you do it using your own warehouse or your use a 3PL which is a company that handles all the logistics for you - from the warehousing to the delivery. The advantage of using a 3PL is that you are able to ship products in less time and deliver it in just a few days across the US.

3rd party fulfilment

How to Decrease Overhead Costs

Last but not least, if you want to stay competitive you need to decrease your overhead costs. Overhead costs are mostly 2 things - office space and people.

Go remote

The year 2020 completely changed the way the world looks and thinks about remote work. It’s now completely normal to be fully remote or even have a hybrid remote set up. If you have your remote work remotely even some of the time you could save a lot of money on office rent costs.

Rent instead of own

Renting your own office offers much more flexibility and often lower costs than owning your office space. It means you could move or downsize when your lease is up and you don’t have to pay for the upkeep or repair costs of the place.

Go paperless

Another great way to save on costs is to go paperless and use as little paper as possible. You can have all of your contracts and agreements online, you really don’t have to print anything up anymore. It’s 2022! Get with the times!

Streamline your tech stack

A really cool new industry that’s coming to tech is Spend Management. You can get an app like Payem to display all of your tool costs and help you manage your team’s fund requests better. Payem even lets you create virtual cards to limit the number of transactions or give access to specific vendors.

manage tool and tech subscriptions with payem

Recap

Scaling your eCommerce brand boils down to one thing - increasing your net profit.

And the way you do that is by doing 3 things:

  1. Get clarity on what your costs are
  2. Work with vendors and upgrade to new apps and tools
  3. Get an app like BeProfit for ongoing tracking and management

Once you these 3 simple steps and get your team on board then you are well on your way to making more money.

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Ecommerce Finance - The Ultimate Guide to Making More Money

Everything you need to know about eCommerce finance - how to make money, track your net profit, and optimize your entire operation.

No items found.

Whether you are running your own eCommerce business or managing a marketing team, the most important metric to keep your eye on is the bottom line - the net profit.

But that’s not what usually happens.

Usually, the owner of the business is focused on the profit, while everyone else is running around showing off their sales numbers, revenue numbers, social media followers, you name it.

If you want to run a successful eCommerce business you need to keep your finger on the pulse of the business which is your next profit. If you focus on the net profit every month you will be able to make decisions that are more financially sound.

The question is how to do that, and it really breaks down into 3 main challenges:

  1. How to calculate the net profit - there are so many variables from your COGS (cost of goods sold), shipping, inventory, storage / warehouse costs, salaries, marketplace fees and commissions, ad spend, etc. It gets very difficult to keep track of all of them.
  2. How to increase the net profit - it’s hard to know what to focus on to decrease costs, and when it’s even right to do so.
  3. How to train your team to focus on the net profit - how to create a culture that is focused on the right business metrics to move the needle.

That’s why we wrote this guide, to break down every facet of your eCommerce financials and suggest some practical tools and solutions that are used by the experts to solve these three challenges.

Let’s dive in.

[Add Banner Here]


To start, let’s talk about all the costs that you should track for your business.

Top 5 eCommerce Expenses

Here we are going to break it down into 5 main categories -

  1. The website
  2. Marketing
  3. Manufacturing
  4. Shipping & logistics
  5. Salaries & overhead

Let’s talk about each one.

The Website

Your website is one of the easiest costs to calculate because it’s constant and predictable. Here are some of the items you should put on your sheet:

  • Domain name
  • Hosting
  • SSL certificates
  • Redesign (you should have a budget allocated to A/B testing and conversion rate optimization)
  • Content management system (CMS)
  • Cyber security
  • Other plugins and optimizations

Marketing

  • Ad spend (Google Ads, Facebook, YouTube, Google Shopping, Native Advertising)
  • Marketing apps and plugins (email marketing, chatbots, push notifications)
  • Marketplace fees & commissions
  • Influencer and partner fees/payouts

Manufacturing

This section is only if you are producing your own product. If you’re dropshipping or having someone else make your product for you then you can skip this section.

  • Materials - the cost of all the parts of your product and the raw materials that go into production
  • Labor - all the salaries of the employees in your factory
  • Overhead - your factory rent and upkeep costs

Shipping & Logistics

This section deals with shipping and storing your product and these are often the most complicated costs to calculate.

  • Warehousing - the cost of the warehouse (often calculated as $ per sq ft)
  • Packaging - the cost of packaging and branding your products
  • Shipping costs - shipping can vary based on the provider you use (and whether you are using FBA)
  • Fulfillment fees - these can be the same as shipping or be calculated separately if you are having a company like Amazon fulfill your products

Salaries & Overhead

A pretty straightforward section here where you add up all of the salaries and HR costs associated with your business. Overhead includes things like your office rent and any equipment and technology costs you might have.

Those are all of the costs that you need to keep track of. And perhaps the biggest and most complex cost is the cost of goods sold or COGS.

Here’s how to calculate it.


How to Calculate Cost of Goods Sold

The cost of doing business for any eCommerce or traditional retailer can be quantified in the cost of goods sold (COGS).

Here’s an example.

Let’s say that you make shoes. You bought 100 shoes this month but only sold 20. So you’re not going to count the production, shipping, and logistics of all the shoes you produced that weren’t sold.

You will focus on the shoes that you sold. And for each shoe sold you will have a cost of production, shipping from the factory to the warehouse, shipping from the warehouse to the consumer, etc.

It could take a month, a quarter, or a whole year for a business to sell all of the inventory from one shipment and that’s why businesses calculate the cost of goods sold. The cost of the unsold goods becomes a manufacturing/inventory cost.

The COGS Formula

Here’s the formula you should use to calculate the cost of goods sold.

The Cost of Goods Sold = Beginning Inventory + Purchases Made During Period - Ending Inventory

So let’s say you started out with no inventory and then bought $2000 worth of goods. Then in 30 days you only sold $1,000 worth of product. So your cost of goods sold = $0 + $2,000 - $1,000 = $1,000. Your COGS is $1,000 for that period.

Let’s take a real-world example.

Here’s Johnson & Johnson’s income statement.

johnson & johnson cost of goods sold
Source: Stock Analysis

Notice that their total sales were $82B in 2020, their cost of goods sold was $28B and when they subtract their total sales from their COGS they get a gross profit of $54B. Their eCommerce marketing expenses all come afterward and are deducted from the gross profit to get their net profit.

The difference between Gross Profit and Net Profit

There is a world of difference between the two and it’s super important to understand it and how to calculate each.

A gross profit is the profit a company makes after deducting the costs associated with making and selling its products and can be calculated by subtracting the cost of goods sold (COGS) from the revenue (sales), like so:

Gross Profit = Gross Revenue - COGS

The net profit (net income) is the actual profit a company makes after all of its expenses and costs. It’s the bottom line of the income statement and is calculated by subtracting the COGS and expenses from the revenue, like so:

Net Profit = Revenue - COGS - Expenses (marketing, research, overhead, labor, etc.)

Going back to our discussion about COGS, you’re probably wondering what’s included in the calculation.

What is included in COGS?

All shipping & logistics costs go into the cost of goods sold calculation such as:

  • Packaging costs
  • Storage costs
  • Warehouse fees
  • Fulfillment fees
  • Shipping costs
  • Manufacturing/supplier costs

So the key is to calculate your cost of goods sold (COGS) and then plug it into the formula to get the most accurate number for the net profit of the business. What if you’re not good with spreadsheets and don’t want to keep all of this information in your head? How do you best get clarity on all of your different costs?

Great question, here’s how.


Use an app to keep track of all your costs in one place

The first step to increasing your net profit is to get clarity on what your costs actually are. And unless you’re an Excell wiz, this is going to be quite an undertaking. You would have to manually download your costs from every online marketplace, your ad spend data on Facebook and Google Ads, look at the COGS of each product, and on and on.

Instead of getting a master’s degree in accounting get an app like BeProfit that could do all the heavy lifting for you.

Advantages of using BeProfit:

  • Pull data from all your marketing channels
  • Track your profit on one dashboard
  • Sync your COGS and fulfillment costs
  • Get predictions on how much product you should purchase
  • Get optimization tips on each cost and what you can do to improve net profit
beprofit profit tracker shopify app ecommerce

Here’s a really great video that shows the app in action:

Now that you know the different types of costs and keep track of them in one place, let’s talk about how to decrease each one and improve your bottom line.

How to Decrease Marketing Costs

Marketing costs can be very different from one another and that makes it harder to know how to decrease them.

Here are some of the main ways to go about it decreasing your marketing costs:

Use omnichannel apps and platforms

So many eCommerce brands fill up their budgets with marketing apps and widgets that have overlapping functionalities. For example, you might be using Klaviyo for sending emails and SMSBump for sending text messages, but you can use Klaviyo for both.

klaviyo text message sms marketin gcampaign and email campaign
Source: Klaviyo

It’s always better to use omnichannel apps that let you manage several marketing channels within one app. You can use an app like Flashy for email marketing, popups, SMS, and an app like OctaneAI for SMS, chatbots, and interactive quizzes.

facebook messenger popup omnichannel octaneai
Source: OctaneAI

Improve your conversion rate

Speaking of marketing channels, there’s one tactic that can help you improve your budgets and cut costs on all of them at once, and that’s conversion rate optimization. Work on improving the conversion on your site and you will improve each marketing channel’s conversion.

You can use a tool like HotJar to get data on what your visitors are doing on your site through heat maps and surveys. You can use a tool like Shogun, Google Optimizer, or Optimizely to run some A/B tests and improve the design and usability of your site.

simplified online order form conversion rate optimization
Source: Optimizely

Reduce wasted ad spend

One of the largest marketing costs of medium to large eCommerce brands is the ad spend. A lot of times brands spend way too much money on their ads without realizing it.

Reasons your ad spend is too high are:

  • Your Campaigns aren’t optimized or structured correctly
  • You’re missing the low-hanging fruit like bidding on branded keywords or retargeting campaigns
  • You’re not testing different ad formats
  • Ad fatigue - your audience has already seen your ads and you need to change them up and show something new

A lot of these problems can be solved by simply working with an advertising expert that has proven experience and a track record in your particular industry or niche.

If you’re a pet food brand owner you need someone that has experience advertising pet products. If you’re in fashion you need someone that has experience advertising for the fashion industry.

You can find an expert advertiser with Mayple, where we have vetted experts with a wide range of experience in many industries and niches.

How to Decrease Shipping & Logistics Costs

The next batch of costs we’re going to deal with are shipping and logistics costs. These can be a little tricky depending on where you sell to (if you’re only selling in the US or if you’re shipping globally).

Here are some of the things you can do to decrease shipping & logistics costs.

Improve your inventory management

Managing your inventory becomes super-complex when you have a variety of online marketplaces and sales channels that you're actively selling on. So it might be a good time to upgrade your inventory management by using software like Skubana or StitchLabs to unlock your brand's full potential.

screenshot-skubana-fulfillment-automation-346477

Hire a third-party logistics company (3PL)

There are two main ways to fulfill a product - either you do it using your own warehouse or your use a 3PL which is a company that handles all the logistics for you - from the warehousing to the delivery. The advantage of using a 3PL is that you are able to ship products in less time and deliver it in just a few days across the US.

3rd party fulfilment

How to Decrease Overhead Costs

Last but not least, if you want to stay competitive you need to decrease your overhead costs. Overhead costs are mostly 2 things - office space and people.

Go remote

The year 2020 completely changed the way the world looks and thinks about remote work. It’s now completely normal to be fully remote or even have a hybrid remote set up. If you have your remote work remotely even some of the time you could save a lot of money on office rent costs.

Rent instead of own

Renting your own office offers much more flexibility and often lower costs than owning your office space. It means you could move or downsize when your lease is up and you don’t have to pay for the upkeep or repair costs of the place.

Go paperless

Another great way to save on costs is to go paperless and use as little paper as possible. You can have all of your contracts and agreements online, you really don’t have to print anything up anymore. It’s 2022! Get with the times!

Streamline your tech stack

A really cool new industry that’s coming to tech is Spend Management. You can get an app like Payem to display all of your tool costs and help you manage your team’s fund requests better. Payem even lets you create virtual cards to limit the number of transactions or give access to specific vendors.

manage tool and tech subscriptions with payem

Recap

Scaling your eCommerce brand boils down to one thing - increasing your net profit.

And the way you do that is by doing 3 things:

  1. Get clarity on what your costs are
  2. Work with vendors and upgrade to new apps and tools
  3. Get an app like BeProfit for ongoing tracking and management

Once you these 3 simple steps and get your team on board then you are well on your way to making more money.

Browse Agencies by Expertise

Ecommerce Finance - The Ultimate Guide to Making More Money

Everything you need to know about eCommerce finance - how to make money, track your net profit, and optimize your entire operation.

Whether you are running your own eCommerce business or managing a marketing team, the most important metric to keep your eye on is the bottom line - the net profit.

But that’s not what usually happens.

Usually, the owner of the business is focused on the profit, while everyone else is running around showing off their sales numbers, revenue numbers, social media followers, you name it.

If you want to run a successful eCommerce business you need to keep your finger on the pulse of the business which is your next profit. If you focus on the net profit every month you will be able to make decisions that are more financially sound.

The question is how to do that, and it really breaks down into 3 main challenges:

  1. How to calculate the net profit - there are so many variables from your COGS (cost of goods sold), shipping, inventory, storage / warehouse costs, salaries, marketplace fees and commissions, ad spend, etc. It gets very difficult to keep track of all of them.
  2. How to increase the net profit - it’s hard to know what to focus on to decrease costs, and when it’s even right to do so.
  3. How to train your team to focus on the net profit - how to create a culture that is focused on the right business metrics to move the needle.

That’s why we wrote this guide, to break down every facet of your eCommerce financials and suggest some practical tools and solutions that are used by the experts to solve these three challenges.

Let’s dive in.

[Add Banner Here]


To start, let’s talk about all the costs that you should track for your business.

Top 5 eCommerce Expenses

Here we are going to break it down into 5 main categories -

  1. The website
  2. Marketing
  3. Manufacturing
  4. Shipping & logistics
  5. Salaries & overhead

Let’s talk about each one.

The Website

Your website is one of the easiest costs to calculate because it’s constant and predictable. Here are some of the items you should put on your sheet:

  • Domain name
  • Hosting
  • SSL certificates
  • Redesign (you should have a budget allocated to A/B testing and conversion rate optimization)
  • Content management system (CMS)
  • Cyber security
  • Other plugins and optimizations

Marketing

  • Ad spend (Google Ads, Facebook, YouTube, Google Shopping, Native Advertising)
  • Marketing apps and plugins (email marketing, chatbots, push notifications)
  • Marketplace fees & commissions
  • Influencer and partner fees/payouts

Manufacturing

This section is only if you are producing your own product. If you’re dropshipping or having someone else make your product for you then you can skip this section.

  • Materials - the cost of all the parts of your product and the raw materials that go into production
  • Labor - all the salaries of the employees in your factory
  • Overhead - your factory rent and upkeep costs

Shipping & Logistics

This section deals with shipping and storing your product and these are often the most complicated costs to calculate.

  • Warehousing - the cost of the warehouse (often calculated as $ per sq ft)
  • Packaging - the cost of packaging and branding your products
  • Shipping costs - shipping can vary based on the provider you use (and whether you are using FBA)
  • Fulfillment fees - these can be the same as shipping or be calculated separately if you are having a company like Amazon fulfill your products

Salaries & Overhead

A pretty straightforward section here where you add up all of the salaries and HR costs associated with your business. Overhead includes things like your office rent and any equipment and technology costs you might have.

Those are all of the costs that you need to keep track of. And perhaps the biggest and most complex cost is the cost of goods sold or COGS.

Here’s how to calculate it.


How to Calculate Cost of Goods Sold

The cost of doing business for any eCommerce or traditional retailer can be quantified in the cost of goods sold (COGS).

Here’s an example.

Let’s say that you make shoes. You bought 100 shoes this month but only sold 20. So you’re not going to count the production, shipping, and logistics of all the shoes you produced that weren’t sold.

You will focus on the shoes that you sold. And for each shoe sold you will have a cost of production, shipping from the factory to the warehouse, shipping from the warehouse to the consumer, etc.

It could take a month, a quarter, or a whole year for a business to sell all of the inventory from one shipment and that’s why businesses calculate the cost of goods sold. The cost of the unsold goods becomes a manufacturing/inventory cost.

The COGS Formula

Here’s the formula you should use to calculate the cost of goods sold.

The Cost of Goods Sold = Beginning Inventory + Purchases Made During Period - Ending Inventory

So let’s say you started out with no inventory and then bought $2000 worth of goods. Then in 30 days you only sold $1,000 worth of product. So your cost of goods sold = $0 + $2,000 - $1,000 = $1,000. Your COGS is $1,000 for that period.

Let’s take a real-world example.

Here’s Johnson & Johnson’s income statement.

johnson & johnson cost of goods sold
Source: Stock Analysis

Notice that their total sales were $82B in 2020, their cost of goods sold was $28B and when they subtract their total sales from their COGS they get a gross profit of $54B. Their eCommerce marketing expenses all come afterward and are deducted from the gross profit to get their net profit.

The difference between Gross Profit and Net Profit

There is a world of difference between the two and it’s super important to understand it and how to calculate each.

A gross profit is the profit a company makes after deducting the costs associated with making and selling its products and can be calculated by subtracting the cost of goods sold (COGS) from the revenue (sales), like so:

Gross Profit = Gross Revenue - COGS

The net profit (net income) is the actual profit a company makes after all of its expenses and costs. It’s the bottom line of the income statement and is calculated by subtracting the COGS and expenses from the revenue, like so:

Net Profit = Revenue - COGS - Expenses (marketing, research, overhead, labor, etc.)

Going back to our discussion about COGS, you’re probably wondering what’s included in the calculation.

What is included in COGS?

All shipping & logistics costs go into the cost of goods sold calculation such as:

  • Packaging costs
  • Storage costs
  • Warehouse fees
  • Fulfillment fees
  • Shipping costs
  • Manufacturing/supplier costs

So the key is to calculate your cost of goods sold (COGS) and then plug it into the formula to get the most accurate number for the net profit of the business. What if you’re not good with spreadsheets and don’t want to keep all of this information in your head? How do you best get clarity on all of your different costs?

Great question, here’s how.


Use an app to keep track of all your costs in one place

The first step to increasing your net profit is to get clarity on what your costs actually are. And unless you’re an Excell wiz, this is going to be quite an undertaking. You would have to manually download your costs from every online marketplace, your ad spend data on Facebook and Google Ads, look at the COGS of each product, and on and on.

Instead of getting a master’s degree in accounting get an app like BeProfit that could do all the heavy lifting for you.

Advantages of using BeProfit:

  • Pull data from all your marketing channels
  • Track your profit on one dashboard
  • Sync your COGS and fulfillment costs
  • Get predictions on how much product you should purchase
  • Get optimization tips on each cost and what you can do to improve net profit
beprofit profit tracker shopify app ecommerce

Here’s a really great video that shows the app in action:

Now that you know the different types of costs and keep track of them in one place, let’s talk about how to decrease each one and improve your bottom line.

How to Decrease Marketing Costs

Marketing costs can be very different from one another and that makes it harder to know how to decrease them.

Here are some of the main ways to go about it decreasing your marketing costs:

Use omnichannel apps and platforms

So many eCommerce brands fill up their budgets with marketing apps and widgets that have overlapping functionalities. For example, you might be using Klaviyo for sending emails and SMSBump for sending text messages, but you can use Klaviyo for both.

klaviyo text message sms marketin gcampaign and email campaign
Source: Klaviyo

It’s always better to use omnichannel apps that let you manage several marketing channels within one app. You can use an app like Flashy for email marketing, popups, SMS, and an app like OctaneAI for SMS, chatbots, and interactive quizzes.

facebook messenger popup omnichannel octaneai
Source: OctaneAI

Improve your conversion rate

Speaking of marketing channels, there’s one tactic that can help you improve your budgets and cut costs on all of them at once, and that’s conversion rate optimization. Work on improving the conversion on your site and you will improve each marketing channel’s conversion.

You can use a tool like HotJar to get data on what your visitors are doing on your site through heat maps and surveys. You can use a tool like Shogun, Google Optimizer, or Optimizely to run some A/B tests and improve the design and usability of your site.

simplified online order form conversion rate optimization
Source: Optimizely

Reduce wasted ad spend

One of the largest marketing costs of medium to large eCommerce brands is the ad spend. A lot of times brands spend way too much money on their ads without realizing it.

Reasons your ad spend is too high are:

  • Your Campaigns aren’t optimized or structured correctly
  • You’re missing the low-hanging fruit like bidding on branded keywords or retargeting campaigns
  • You’re not testing different ad formats
  • Ad fatigue - your audience has already seen your ads and you need to change them up and show something new

A lot of these problems can be solved by simply working with an advertising expert that has proven experience and a track record in your particular industry or niche.

If you’re a pet food brand owner you need someone that has experience advertising pet products. If you’re in fashion you need someone that has experience advertising for the fashion industry.

You can find an expert advertiser with Mayple, where we have vetted experts with a wide range of experience in many industries and niches.

How to Decrease Shipping & Logistics Costs

The next batch of costs we’re going to deal with are shipping and logistics costs. These can be a little tricky depending on where you sell to (if you’re only selling in the US or if you’re shipping globally).

Here are some of the things you can do to decrease shipping & logistics costs.

Improve your inventory management

Managing your inventory becomes super-complex when you have a variety of online marketplaces and sales channels that you're actively selling on. So it might be a good time to upgrade your inventory management by using software like Skubana or StitchLabs to unlock your brand's full potential.

screenshot-skubana-fulfillment-automation-346477

Hire a third-party logistics company (3PL)

There are two main ways to fulfill a product - either you do it using your own warehouse or your use a 3PL which is a company that handles all the logistics for you - from the warehousing to the delivery. The advantage of using a 3PL is that you are able to ship products in less time and deliver it in just a few days across the US.

3rd party fulfilment

How to Decrease Overhead Costs

Last but not least, if you want to stay competitive you need to decrease your overhead costs. Overhead costs are mostly 2 things - office space and people.

Go remote

The year 2020 completely changed the way the world looks and thinks about remote work. It’s now completely normal to be fully remote or even have a hybrid remote set up. If you have your remote work remotely even some of the time you could save a lot of money on office rent costs.

Rent instead of own

Renting your own office offers much more flexibility and often lower costs than owning your office space. It means you could move or downsize when your lease is up and you don’t have to pay for the upkeep or repair costs of the place.

Go paperless

Another great way to save on costs is to go paperless and use as little paper as possible. You can have all of your contracts and agreements online, you really don’t have to print anything up anymore. It’s 2022! Get with the times!

Streamline your tech stack

A really cool new industry that’s coming to tech is Spend Management. You can get an app like Payem to display all of your tool costs and help you manage your team’s fund requests better. Payem even lets you create virtual cards to limit the number of transactions or give access to specific vendors.

manage tool and tech subscriptions with payem

Recap

Scaling your eCommerce brand boils down to one thing - increasing your net profit.

And the way you do that is by doing 3 things:

  1. Get clarity on what your costs are
  2. Work with vendors and upgrade to new apps and tools
  3. Get an app like BeProfit for ongoing tracking and management

Once you these 3 simple steps and get your team on board then you are well on your way to making more money.

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Kelly Beaudin social media

Kelly grew Adobe's LinkedIn community by 97% and increased monthly engagement by more than 1,000% within one year. Adobe was recognized as one of the "Best LinkedIn Company Pages" for two years in a row. Kelly also grew Adobe Creative Cloud to 1M subscribers with a comprehensive social media strategy.

Limor Gurevich

Limor grew our email list by 200% and took our email program from $0 to $6k/month in just a few months using popups + email flows + email marketing automation.

Jamie Simoni

Jamie helped build American Eagle Outfitter's online community to 15M+ followers and was integral in setting up the award winning Live Your Life influencer marketing campaign.

Kelly Benson - Marketing manager & Growth marketer

Kelly developed a 6-month marketing strategy that included paid ads, SMM, mobile marketing, and marketing automation, resulting in an increase in ROI by 1200% in just 6 months.

Deepak Shukla

Deepak helped Rivalry to rank for 20k+ organic keywords in the US and over 70k+ keywords globally in under 12 months with an extensive on-page and off-page SEO strategy.

Dorian Reeves SMM

Dorian grew Lenskart to over 10k followers and increased engagement by 50%.

Jason Hui

Jason helped Vitamin Energy grow monthly email marketing revenue 6x in less than 6 months and increased attributed revenue from email to 40% of the total sales of the business.

Brenna Kleiman

Brenna led advertising campaigns at Jessica Simpson where she increased ROAS by 250% using Google Ads, Facebook & Instagram ads, and Google Shopping.

Katrina Julia

Katrina led an influencer marketing & PR campaign for this tourism brand that resulted in a funding round of $3M.

Kelly Beaudin Strategy

Kelly created a partnership with BuzzFeed, launched a financial BootCamp for customers, and created viral content using influencers and UGC. The campaign resulted in a +6.5% lift in awareness and a +25% increase in customers' perception of the brand, helping to drive loyalty and sales.

Ashna Rana CRO

Ashna was the lead CRO manager for PrettyLitter, a subscription product, where she optimized the marketing funnel and was able to increase the conversion rate 35% test after test. As a result, the company was able to expand to Pinterest Ads, Facebook ads, and affiliate marketing.

Marija Todorovic

Marija grew Brightech's Instagram page to over 30k followers and its cumulative online presence to 200k followers using secondary accounts in just 12 months.

Pete Opakunle - PPC

Pete increased ROAS for Gillette by 4.2X, increased CTRs by 40%-60%, achieved the desired CPA within 2 weeks of the campaign launch using Facebook, Snapchat and Instagram ads.

Igor Zvagelsky

Igor promoted NY Fashion Week events using Google Ads, increasing the number of attendees at events and decreasing the cost per lead by 50%.

Jay Neyer

Jay executed a comprehensive SEO strategy that increased organic traffic by 98%, increased top 10 keywords by 190% and total keywords by 262%.

Dhariana Lozano

Dhariana grew Remy's Instagram account to 10k+ followers, increased leads from social media (LinkedIn and Instagram) by 120% and increased organic views on Linkedin by 310%.

Gustavo Morais

Gustavo took Amaz, a Yerba Mate sparkling drink brand, from $0 to $50k sales per month in just a few months by designing and launching their eCommerce website and executive a comprehensive SEO strategy.

Dan Ware

Dan created a strategic marketing plan for Mountain Dew and produced and executed 360 engagement platforms - Dare to Do, All Star Weekend, and others. These campaigns improved brand awareness, affinity and sentiment levels.

Jack Nelson - CRO

Jack led the CRO strategy for BeatBread, launched various conversion optimization campaigns, implemented advanced tracking & analytics, and exceeded KPI target by 75%.

Roman Hotsiak

Roman created seven email campaigns that led to this beauty brand's revenue to increase by 56% in just 6 months.

Angel Djambazov

Angel led influencer marketing campaigns for Keen and helped them grow to over 200k+ followers on Instagram and become one of the most loved apparel brand in the world.

Edwin Gan - CRO

Edwin helped CloudWaitress generate 2x conversions for 3+ consecutive months. They gained 10,000 new users and became one of Australia's fastest-growing startups with 700% growth.

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