Losing on Every Sale: selling products that don’t cover the costs of fulfilling them in ecommerce

In this fourth post in the series covering challenges in eCommerce, we look at the dangers of not focusing on profitability down to the order level and suggest ways to make sure you’re always clearing profit on your orders.

eCommerce, especially marketplace eCommerce, is competitive. A variety of factors conspire to make the total cost of getting a product to a customer less than what they’re paying for the item. These include low pricing, expensive logistics, costly delivery and returns.

To compound the issue, many businesses don’t know the full picture of how much it’s costing them to get an order safely delivered until the financial figures for the period come in from the accountant and it’s too late to do anything. So, there’s selling products at a loss, and not knowing you’re selling products at a loss.

Here are seven challenges and some suggestions on how to address them.

1. Eroded profit margins in the business

When you fulfil certain orders without knowing the full costs, including production, shipping, handling, and marketing expenses you risk eroding your profit margins. The good orders are having to fund the bad orders. This lack of visibility can result in considerable financial losses.

The key is to focus your attention at an order level, or better still a shipped order level. In other words, if a customer orders five items and you send them in two packages, how much is the total cost of each shipped package? It makes sense to start recording not only the costs associated with buying and fulfilling each shipment but also apply a portion of your business-wide fixed costs to that shipment. You can only realistically do this through automation, and let the software tell you which orders are not profitable so you can fix the problem quickly.

2. Cash flow problems

Pricing that fails to cover your total order fulfilment cost can lead to cash flow problems. Cash flow is essential for your day-to-day operations, like paying for inventory and investing in the business. You know what they say: revenue is vanity, profit is sanity, cash flow is reality.

Regular monitoring of cash flow and the creation of cash flow forecasts will help you plan for any pinch points coming up. Try to negotiate better terms with suppliers and creditors by demonstrating your track record with them.

3. Unreliable or delayed financial reporting

Not knowing your full costs can result in inaccurate financial reporting, making it difficult to assess the true financial health of your business. Not getting the financial results until weeks or months later means you’re relying on lagging indicators of performance, rather than ‘in-period’ leading indicators from good measurement and analytics.

As before, setting up a full breakdown of your purchase costs, your order fulfilment costs like marketplace fees, and your fixed costs like utilities allows you to see your net margin on your orders and shipments. If you do this with analytics software, it can often automatically pull in all the costs from your various partners in the ecosystem – marketplace providers, shippers, software companies and so on.

4. Unsustainable growth

You might be growing the top-line figures by selling too low, but this growth can exacerbate financial problems if it’s based on selling unprofitable products. Scaling up your operations without a clear understanding of the costs of doing business, including factoring in post-sale costs like customer service and returns management, can lead to increased losses and financial instability.

When you have a clear picture of your actual order fulfilment margins and your net margins then you can make some quick decisions. Can I raise prices on the products that are causing loss-making deals? Should I kill these products instead of continuing to throw good money after bad?

5. Damaged brand reputation

Consistently offering products at unsustainable prices can damage your brand reputation and may eventually torpedo the business. Build your brand around quality products that represent fair value and that you can make money on so that you can cultivate customers who go to you for your quality and service.

6. Competitive disadvantage

Not knowing your fully loaded costs of delivering an order puts you at a competitive disadvantage. Competitors with a clear understanding of their cost structures can price their products more strategically and scale their business profitably over the long term.

Build a complete cost picture of your order fulfilment and automate this where possible so that you’re getting early warning signals of loss-making orders without having to constantly crunch the numbers.

7. Limited ability to work on the business

Selling products at prices that don’t cover full costs limits your ability to invest in your business. If you don’t know your full costs you’re working in your business, if you do, you’re working on your business. Profits drive forward progress.

With the right intel, you can kill any product-price combinations that don’t bring in enough money to cover their total fulfilment costs. Then you can double down on the products that make up the orders where you know you’re making the most net margin.

Who wants to work hard to fulfil orders at a loss? To maintain profitability, you need to know which orders you’re making a loss on when you’ve factored in all the costs – purchasing, marketing, fulfilment, returns, and fixed costs like warehousing, salaries, insurance and so on. Then you can fix the unprofitable orders. To do this, you need accurate and up-to-date analytics and reporting so you can make good decisions.

Contact us to discuss how you can put the magnifying glass on the true cost of fulfilling your customer order obligations.