- Let's calculate the profit margin and profitability
for your e-commerce store and your products.
This is an incredibly important video
that every e-commerce store owner needs to watch.
So let's get into it.
(orchestral music)
Hey guys, Sam Baldwin here from keycommerce.com
and today we're getting into an incredibly important topic
that every e-commerce store owner needs to be on top of.
It's the lifeblood of your store,
too many e-commerce store owners have no idea
about the financials for their store.
Yes, it can get complicated.
So let's keep it simple.
I'm going to show you the two simple calculations you need
and I'm even providing the free template
so you can get it all done really easily.
Just fill in your information and boom it's done.
man I wish I had this when I was studying.
You'll find a link in the description to the page
that has all the info there including the template.
So go check that out and make it happen.
Okay.
So first, why do we even care about the profit?
Because this tells you the health of your store.
It's the real money in your bank account
at the end of the month.
It shows that you're actually delivering value
for people in the world.
Fake gurus, love showing off revenue and sales.
They don't tell you the profit
because one, they actually don't know.
And two, they do know
but it doesn't sound as impressive as just revenue numbers.
You can sell $100,000 worth of products
but if you spent $1 million on ads,
well then you've made a loss.
But that doesn't sound as cool.
You're just burning cash,
but Hey that doesn't sound as good.
It doesn't sell their courses.
So they're not going to tell you the actual profit,
okay rant over.
Let's just get into my computer
and let's calculate our profitability let's go.
Hey guys, Sam here from keycommerce.com.
We're now in my computer
and I'm going to show you how to calculate the profit
for your e-commerce store.
So you should have access to this template.
If you go to my website you might need to put in your email
and the reason is I just wanna give this
to people that are really serious
about their e-commerce stores.
So putting your email, you'll get access to this template
and then you can start calculating the profit
for your e-commerce store.
Now I've tried to make it super easy for you guys here
so you can follow along as I talk through right now
and calculate this for a hypothetical store.
Okay.
So you have access to this template
it's called a profit and loss statement.
Okay.
Now in my past life I used to be an accountant
and I also really love getting into the numbers
because I really believe that with every business,
especially e-commerce the numbers are
what really make a business.
Yes, branding is so important
and you won't have your business
without focusing on a good product
and finding a target market.
But then at the end of the day,
if you're making a loss on all your advertising
or your products then really your business is
just not gonna last very long at all.
Okay.
So that's what this side of things is really important.
And very few e-commerce store owners
actually care about this or know about this.
And the reason is
because they just focus on the traffic side
the product side and hope for the best,
but if you get this sorted, you're going to see today,
where some opportunities are for your own store
as well as know exactly how much you should be spending
on your ads to make sure it's profitable.
And that's just incredibly powerful,
because if you know how much to spend on your ads
you can spend more than your competition
and get all that traffic that they might be bidding on
at the same time.
And you'll know, yes, it's worth it for me
because I'm getting a return on this ad spent.
Okay guys.
So firstly, what I want you to do is get it open up the,
this template that you'll have link in the description,
go to the website and then get this template here.
What we're gonna do is I like to put
in the time period here.
So putting the depth that's just for future reference
so that when you look back on this you can tell,
okay, I did this for this period
and this is the data there to say,
if we do it for the first six months of 2020.
So it would be first, first, 2020
until I'm actually gonna do an American style.
Awesome.
So that will be until the 1st of January to June
what we can do first here is
we're gonna go for those dates
and look at our Shopify dashboard
or your WooCommerce dashboard
or whatever dashboard you're using for your e-commerce store
and pull in all the sales that you've made.
So say, if I put it, I'm gonna put,
I put in $100,000, just as an example
but you wanna put in the total sales right there
from the dashboard.
The next thing we're gonna do is go down here.
And this is called the cost of goods sold.
Okay.
So we did our revenue.
Now we're basically working out
all the stuff that we had to pay for.
Cost of goods sold what this means.
This is the cost that you paid
to the suppliers for your products.
The cost of goods sold that may be a new term
you've never heard before.
It just means how much did you pay supplies?
How much did you actually pay for these products?
And what you want to do here is
I like to break it down by product.
So I can see that there,
but make sure that you put in how much you actually paid.
So calculate for those dates
how much you paid to your suppliers.
But here's the thing
sometimes depending on what type of store you're running
even it isn't a drop shipping store.
You might have paid $100,000 in stock
but that lasts you for 12 months.
Well, what you wanna do here is a workout from your sales
how much stock did you actually sell
and then work out the cost of your stock
and make sure that this matches this.
So not the same amount, but this, if this is for,
100 products, and this is for 100 products
then make sure that this, that it's it,
that what you paid for a hundred products is
the same as this is attributed to the sales
that you've paid for this a hundred product.
Sorry.
I had a bit of a brain fart trying to explain that properly.
So basically just like I put here
meaning make sure that the cost of goods sold here,
matches up with the sales above.
Meaning if you sold 200 products
include the cost of goods sold for those 200 products.
That's the important thing here
because what we're trying to work out here
is our gross profit.
So gross profit is the profit after you sell your products
but before all your other expenses, this is very important.
And something that a lot of people don't understand
you have two types of profit, gross profit and net profit.
Gross profit is after your product costs,
but before all your other costs, what other costs?
Well for your store it might be software.
Maybe you have warehouse costs if you have a warehouse,
maybe marketing spend all that sort of stuff.
We really wanna see our gross profit
because that gives a good indication
of the health of our margins.
And because a lot of the time,
you can reduce the costs of your product.
That's a great opportunity and you'll be able to see,
okay, 50% like here, 50% total cost of all the products
that I've sold and I've made $100,000 in sales.
So my gross profit is $50,000.
100 minus 50 equals 50,000.
It's the gross profit is gonna be 50%.
So that's a formula that's there for you
just goes gross profit divided by total sales.
It's a very common, gross profit.
That's the gross profit margin formula.
And then what you can do there is just track that over time.
So maybe you get a better deal with your supplier
and your actual cost of goods sold decreases
because you've got more volume.
Well, your gross profit margins, then going to increase
because you're making more profit on the front end
from those products before your other expenses.
So that's the first thing you need to do.
So once you get that sorted, that's the first thing there.
The next thing you wanna do is work out the your expenses.
So I've broken it up into two types of expenses here
because I think this is very, very important
especially for e-commerce stores.
The first thing here is your fixed expenses.
These are expenses that you have to pay every single month.
Okay.
So even if you don't sell any products
you still have to pay for your Shopify membership,
your Shopify subscription,
you have to pay for all the apps on your store.
Maybe you've got a home office, you have to pay for that,
all the rent, all this sort of stuff like that.
That's where you include under fixed expenses.
Just think about this.
If you didn't sell any products, you would still be liable.
You would still have to pay these expenses.
Okay.
And the reason we split this up
between fixed and variable is because fixed expenses
they actually are much more risky, even though generally
especially when you're selling more and more products
your verbal expenses, these are expenses that increase
when you sell more products
these are gonna be much bigger.
Even right now,
I've got shipping in their payment processor fees,
total verb expenses 5,500 that's much more than fixed.
But the thing is you only have to pay these.
If people actually buy your products,
like you're never you're not gonna pay
for your Stripe fees or anything like that or PayPal fees,
if no one buys because PayPal isn't gonna charge you
for that for the transactions that never actually existed.
Like you have to actually have transactions
before they charge you.
And this is something
that's really, really important for your business,
especially in e-commerce but your business overall is
that fixed expenses are incredibly risky.
And what this, like, even if you don't make any, any sales.
So say if COVID 19 happens again,
and suddenly it affects your niche in particular
it's been great for e-commerce honestly, it's been insane
but say, if something else comes in
maybe some new law that says, okay
no more e-commerce businesses.
Well, unless you try and cancel these apps
and all these things, you still have to pay for it.
So, especially if you have a lease
for some sort of warehouse,
you still have to pay for that lease,
which is that's, where's that gonna come from
if you can't sell your products?
So this helps you to see an opportunity here and go,
okay these are fixed expenses and they are risky.
They have to be, you have to pay them
even if I'm not making sales
that's just something you wanna make sure
that those fixed expenses make sense
for you and your business.
The next thing here.
So you're gonna put them in here.
So basically go through,
I would look at your bank statement
on a monthly basis in particular
and go through all the fixed expenses and put them in here.
Okay.
And what I've done here is I've made it
so you can actually put in the cost per month
the number of months that are,
that you paid for them and use this period
it should be all within this period.
And then it works out the total cost.
It then calculates the total fixed expenses
by using this formula called sum,
you'll see this in here that basically sum means,
add up all those ones there.
So this is the total fixed expenses.
You might have other fixed expenses.
Maybe there's other memberships you're paying for.
Maybe there's some sort of online course you're paying for
you would even put that there
even if it's not an ongoing thing,
if you incurred that cost,
if you paid for that expense during the period
and then put it in there,
cause that's really important
to make sure you calculate that.
The next thing here is the verbal expenses.
So you wanna put in here basically
how all the expenses that you have to pay
even if when you sell your product.
So that shipping expenses you only pay shipping
when you're actually sell a product
and you ship that product basically.
So payment processing fees are in there
you can also put in like, especially if you're looking
at over the period, marketing expenses are hard
because they we'll put them as fixed if you're,
because you're looking retrospectively
and you're going okay in this period,
I incurred these expenses.
They're not technically a fixed expense
with pay-per-click marketing.
It kind of actually is if you're doing
some sort of television advertisements stuff like that
but with pay-per-click
well, honestly, actually it is a fixed expense actually,
when I think about it
because if you have it ramped up
and you're in a good spot with your marketing
your Google ads and your Facebook ads campaigns
you know that you're going to make sales basically.
But in the beginning you might not make sales
and you still have to pay Google
and being in Facebook and Amazon,
they're still gonna charge you even if you don't make sales.
So technically it is a fixed expense
but what you do is you put that in there
and you'll put it in there for the period.
What I would do is try
and attribute that spend for that period.
And when you actually sold those products, okay?
And once you put that in there
it's gonna calculate, the total fixed expenses
but for the variable expenses, the same thing.
And then this calculates the total expenses.
I'm actually gonna make this double line.
That makes sense so that gets your total expenses
by adding up the two expenses.
And then here, I've got a summary for you guys
and this gets, once you putting that information there
you can get some really, really awesome data.
I'm actually gonna put this here.
So you know that you need to put this in yourself
but it's, if they're gonna grab the sales from the very top.
So you've already put this in here
and then it's gonna get your cost of goods sold
from what we already did over here and cost of goods sold.
So you're gonna get calculate your gross profit.
You'd already calculated it here
but I like to have it here in the summary too
because then you can just see it all in one place.
See as your gross profit total expenses,
which is from here and then it calculates your net profit.
So over this period,
how much actual profit you put in your pocket?
Okay.
And that that's really, what's gonna be in your bank account
at the end of this period.
Of course, you're gonna go
and invest more in the next period.
And there's, you may have to buy new stock,
but really that's the profit
that's what you've made yourself
which is a really, really awesome thing.
So that's what we wanna really maximize.
And here we've got the actual net profit margin
and that's really important
because if your net profit margin is 10%
that's really low for an e-commerce store.
Maybe if you're shipping
and you'll say drop shipping on eBay,
it's all about arbitrage
then that's when you can have a really low profit margin
but for a good brand store when you're delivering value,
in all the dozens of stores I've worked with,
generally the lowest is 20%
but it can be all the way up to 60% net profit margin.
And that's because these people are able,
and in my store as well, we're able to charge much more
because we have all these reviews we've got targeted copy.
That's really speaking to our audiences.
We've got an email list.
We're putting a lot of effort into this stuff.
And so that's where we can really maximize
that profit margin.
And hopefully this helps you to see the value
in building a brand store and really putting time
into you're increasing your conversion rates,
increasing that social proof on your website,
because it makes everything else easier.
Like when you do the numbers like we're doing right now
you'll see this go up because you need to not only spend
you'll spend less on your ads and you get more sales
because you have a high conversion rate, more trust it.
You can also increase your pricing,
which means like higher like same number of orders,
but more sales more actual volume of money from sales.
The next thing you wanna do down here is put in
your total number of orders.
So just like you've got your sales
from your e-commerce dashboard,
go and get the total orders in this period.
And then it's gonna calculate
for you the average order value,
which is really, really, really useful here
because then we also use that profit margin
to work out the actual average profit per order.
So this basically goes and grabs gets all your net profit
and then spreads it over your total orders
and works out your average profit per order.
And then it tells you your breakeven ROAS.
So this is gonna be really useful
in all your ad accounts in analytics
and looking at how your marketing is performing,
because you can see like what sort of return on ad spend.
You need to be profitable and keep this in mind.
If you've put in your marketing spend up here,
your ad spend that's then going to affect this.
So it's kind of what you wanna do is what I would do here
is I would add back in my marketing spend.
So before my marketing spend,
it works out your breakeven,
your basically average profit per order,
and then go into your Google ads account
and you can create a custom column.
And I believe I've got a view on this.
So check the description as well.
And I'll put the video to adding in these custom columns
into your Google ads account,
but it actually allows you to see
the actual profit generated and profit per order
in your Google ads account.
And it'll dynamically pull in the ad spend
for your account on a campaign basis
on a keyword basis, on an ad basis
for all parts of your campaigns,
which is really really helpful.
Okay cool.
So the next thing here, and this is what
there's something I just pulled in
and this is from a template
that I have for a lot of my clients
in my store that we use.
And it's basically a pause in the target ROAS
and it tells you, okay, that's the break even ROAS.
So if you just want it to break even, not make any profit
but just you'll be able to push the ad spend to the limit
and just scale that up and you don't need to rely
on the store for profits to pay yourself.
You can set it as that basically.
That's what you're aiming for.
But, especially after you've started the story,
you've got it going, you wanna make a profit guys
like you you actually don't wanna just like sit on breakeven
because you're not making any money
you're putting in all this time in,
you're setting up these systems.
So what you wanna do here is
this actually works out okay.
We wanna keep 10% of the profit, let's set it to this.
So that's just like a tiny bit of profit, not a lot.
If we gonna do 25% or 33%,
and you can change these formulas, here it is.
And then you can start, you can play with this
if you wanna keep a lot more of the profit.
But honestly, a lot of like with my store
and with a lot of my clients,
we really just want to scale it up
because once it's scale up, you're building up the brand
and then you start getting organic rankings
from all the links you're building.
And it just it's worth it to push hard at the start
and then you can ease back later
and then maximize the profit by having a higher target ROAS
that you're trying to aim for in the account.
Anyway, so that'll tell you there
and you can use that ROAS for Google ads.
So if you're setting your target ROAS bidding strategy
in your campaign settings, you can use that yourself.
It really relies on having good information here
and making sure you add in the right expenses,
verbal expenses here.
If you have employees, make sure you add them in.
If you have a VA, don't forget to add that in
how much it costs for that period?
So if it's six months here
how much did you pay them in salary for six months?
So that's really something really important
to add in as well.
Okay guys, that was quite a long walk through
but I really hope that helped you guys set up
and figure out the profitability for your e-commerce store.
Okay.
That's how you do the fundamental profitability calculations
for your e-commerce store.
If you have any questions at all
about what we've gone through, please leave a comment below
and I'll do my best to answer you as soon as I can.
If this video was helpful, please give it a thumbs up.
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for e-commerce store owners.
Check out the rest of the videos on my channel.
I make a lot of videos just like this one
on e-commerce marketing, building your store,
finding products, all the finances
and all that stuff that you really need to learn.
So check it out and consider subscribing
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when I release new videos almost every day.
Thanks again guys for watching.
I really appreciate the support
and I'll see you in the next video.
Bye for now.
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