Product Profitability Analysis: Employ the 80/20 Rule

As the economy continues to change, many eCommerce businesses face eroding profits as fees and interest rates increase. While there is still money to be made in the eCommerce world, today it requires more attention to the details and the drivers of profitability.

Here are a few areas to focus on if you are finding that your cash is tight. Start with a product profitability analysis, take a closer look at your operating expenses, and then determine your cash flow plan.

Product Profitability Analysis

First, conduct a product profitability analysis for each of your product groupings. Often the 80/20 rule is at work with 20 percent of your products delivering 80 percent of your revenue. Look at the top revenue producers and make sure that your contribution margin (Gross Profit less Ad Spend) generates an adequate gross profit margin.

If your margins are subpar on any of these products, get serious about the drivers you can change: Price? Cost of the product? Minimum Order Quantity? Changes in packaging to improve costs and fees? Changes in shipping and warehousing? Adjustments in advertising strategy, including aligning it with your inventory situation?

You want to understand the impact of each product on your profits and your cash flow. Be ruthless here. If a product does not contribute to your business expenses and profits after you experiment with new strategies, then it needs to go. These are your top sellers and need to add to the bottom line and the top line.

Then repeat this process for your bottom 20 percent of your revenue. These are the ones to eliminate quickly if they are not generating profits. If they are slow sellers and little to your bottom line, they are zapping cash and attention. Let them go and don't spend years evaluating them. Your mantra should be: "My cash has a better use."

As you are performing your 80/20 product profitability analysis, you'll likely see patterns in the profitability drivers. Take what you learn and apply it to the remaining 60 percent of your products. Do the changes you made in the top or bottom 20 percent also apply to your other products?

Related reading: 8 Sneaky Ways Amazon Gets Your Money

Operating Expenses

Next, look at your operating expenses. I recommend looking back at your expenses for the last three months and determining if there is anything you can cut, reduce, or keep. Any expense that is not adding value can be eliminated and it will start adding to your bottom line!

I also suggest you look at what types of loans and credit card balances you are carrying. Get proactive about finding low interest loans and getting those balances on higher interest rate cards paid down quickly.

Cash Flow Plan

The final recommendation to get out of a cash crunch is to get better visibility. The best process for this is weekly cash flow planning. This method is where you start with your beginning cash balances and then project your income and the outgoing costs week by week for the next 13 weeks.

Each week you evaluate how well your plan went for the prior week and you add another week to the end of your spreadsheet. You will get better at planning, and you will get more innovative, efficient, and frugal with what you spend. This visibility can put you back in charge of your finances.

Paralysis is your enemy - this is not a time to wait and see or to think your problems will all be solved by more sales. The only way to solve these issues is to sharpen your pencil and get to work.

If you need help with your 13-week cash flow plan, or just determining the financial future for your business, our SmartCFO Advisors are ready to help! Reach out to the bookskeep Team today!