Are you familiar with the term, “Inventory Days to Zero”? Monitoring this metric can help you avoid running out of stock, and it’s just one of several performance indicators sellers should be watching.
Rob McGrorty of Webgility is back with more advice for online merchants on retail/ecommerce metrics. In part one, he shared the Key Performance Indicators that multi-channel merchants use to monitor the health of their business, and in part two, he looked at customer metrics.
Today, he looks at product metrics that can help you work smarter and grow your online business.
The Hidden Secrets of Your Product Metrics
by Rob McGrorty
So far in our series discussing the importance of translating ecommerce metrics to actionable business intelligence, we’ve covered Key Performance Indicators (KPIs) for selling on multiple stores and how to gain a better understanding of your customers. But there’s one more area of metrics that is powerful enough to change the game for your online retail business.
Knowing which products are your top performers, seeing what and when inventory needs to be reordered, and understanding which items are your profit and loss makers – these are all crucial to the health of your business and to your sanity. Let’s drill down more on how product metrics can be translated into higher profits.
You can’t sell what you don’t have, and you shouldn’t sell what doesn’t help your business, so keeping a close eye on inventory and its associated costs will help reduce unnecessary chaos and irresponsible guesswork related to your products.
Inventory Days to Zero
This is an estimate of how long you have until any given product is out of stock. It’s based on the average of how many of each item you sell daily and has layers of complexity such as relationships between your historical sales, seasonality, major trends, and web traffic, and more.
If you rank the items in a range from “almost sold out” to “greatest buffer,” you can see what the most critical re-orders are, and exactly how much time you have left to make it happen.
Why is it important? Simple: Overselling puts you at risk of unhappy customers and bad reviews. So unless you’ve figured out how to sell something you don’t have, make sure you’ve got inventory on hand when the customer hits the “buy” button.
Gross Profit Performance by Item
List the top 10 items that drive the highest gross profit to your business in any given month. Go ahead, I’ll wait. If it’s harder than it sounds, let’s recap: Gross profit is the total sale value paid by a customer, minus the costs for purchasing the products sold to that customer (shipping and payment processors are not included here). So, assuming no discounts or repricing tools, take the selling price for each item and subtract what you paid for the inventory item, then multiply that by the number of that product you sold during a given time period. It’s not rocket science, but can be time consuming to get the insight you so desperately need.
Why is it important? An item’s gross profit, relative percentage of total gross profit, and your top 10 products’ cumulative impact on gross profit will help you prioritize vendor orders, keep an eye on inventory, and most importantly identify the right products to push versus those that are not worth it for you to sell.
Contribution Amount by SKU
Contribution is an accounting term that gets at the heart of variable costs versus fixed costs. Contribution amount is the dollar-value left over after subtracting all the variable costs from the sale. This takes into account more than the cost of goods sold (COGS) of your inventory items. It accounts for the shipping and payment processor costs as well as marketplace fees, too, since they’re only costs that happen because of the sale. This results in a level of clarity beyond the typical gross profit amount on an item.
Why is it important? Simply put, it shows what helps keep the business afloat. It tells you what items are most valuable to your business overall – what “keeps the lights on,” so to speak. Somewhat less simply put, it identifies the often hidden costs of selling particular products, and attaches these costs to them as expenses. Do this math and you’ll get a clearer picture which products have the power to generate useful cash for your business instead of assuming that all products are equal.
Let’s be honest, no one has time to dig around for metrics, especially when selling on several stores. The average ecommerce SMB is lucky to get the stuff out the door on time.
Great news, there are tools out there to do it all for you. Your part is knowing what to look for and what to do with the information once you have it. With the right solution you can up your ecommerce business game from the comfort of your own computer screen. Learning about your metrics will help you work smarter and earn more.
About the Guest Columnist:
Rob McGrorty is the Director of Product and Operations at Webgility, Inc.. You can find Part One – Do You Know Your Multi-Channel Metrics? – on this page, and Part Two – Do You Know Your Customer Metrics? – on this page.