Profitability · 5 min read
Sales are growing, but your margin isn’t: what should you check?
More orders do not always mean a higher margin. What to check before changing your prices or advertising budget.
In this article
The month ends with more orders. Yet once costs are deducted, no more money is left than before. The reason may lie in the products sold, the fees incurred or the information used in the calculation.
Before changing your prices or advertising budget, work through these factors in order to understand what has changed.
Check that you are comparing like with like
Look at what your spreadsheet calls ‘margin’. Does it deduct only product costs from sales, or does it also include commissions, shipping and advertising? Note which expenses are included so you can use the same calculation for both periods.
If fixed overheads such as rent have not been deducted, the amount remaining is not the company’s net profit. The break-even point is the revenue needed to cover fixed and variable costs. Bpifrance’s explanation of the break-even point.
Then check the periods, marketplaces and currency. Two full months may contain different numbers of days. If you have opened a new channel, also look at the performance of the marketplaces where you were already selling.
Finally, check the date of the last import. Flag any fees that have not yet come through so the team knows the calculation is incomplete.
Look at which products explain the increase
If the additional orders are mostly for products with a low margin, revenue can grow while the amount left over falls.
Consider a hypothetical example. Two product ranges sell at the same price, €100 excluding VAT. After the variable costs included here, the first leaves €20 per sale and the second €5. We call this amount the ‘contribution’: it is available to cover fixed overheads.
| Metric | Period A | Period B |
|---|---|---|
| Sales of the range with a €20 contribution | 400 | 300 |
| Sales of the range with a €5 contribution | 100 | 400 |
| Revenue excluding VAT | €50,000 | €70,000 |
| Contribution before fixed overheads | €8,500 | €8,000 |
Revenue grows by 40%, but contribution falls by €500. No price or unit cost has changed: the change in the mix of products sold is enough to explain the difference. These figures illustrate the calculation only and do not come from a client.
Look at which products account for the change in euros. A low margin on a handful of sales does not necessarily have the same effect as a small decline on a product that sells in high volumes.
More sales. Less contribution.
Choose a tab to explore the example.
Revenue excluding VAT rises from €50,000 to €70,000, an increase of 40%.
Revenue excluding VAT
Scale: 0 to €80,000Identify the fees and costs behind the sales
For the products concerned, compare the price after discounts, commission, purchase cost and shipping. Also consider order preparation, storage, advertising and costs associated with returns: these expenses may explain a difference that the selling price alone does not reveal.
Fees depend on the platform and services used. Amazon distinguishes between selling fees, fulfilment fees and other possible costs. Including only commission would therefore leave out some expenses. Official Amazon pricing.
Review a few orders that account for the difference and compare invoices and marketplace statements with the amounts recorded in your tools. If a cost is missing, mark it as missing: assigning it a value of zero would make the sale appear more profitable than it is.
Put refunds in the right period
A refund recorded this month may relate to a sale from the previous month. Equally, recent sales may still lead to returns that have not happened yet.
You can examine refunds issued during the month to understand what happened in that period. To find out what the month’s orders ultimately earned, you also need to track any later returns. State which view you are using: they answer different questions.
Also check which fees are refunded. Amazon, for example, applies refund administration fees, so refunding a customer does not necessarily reverse every fee associated with the sale. Check the terms of each marketplace concerned. Amazon pricing rules.
Choose an action that addresses the difference
Once you understand the difference, you can take more focused action. An incorrect cost can be corrected in the data. If shipping weighs too heavily on a product’s margin, review its packaging, shipping terms or price. You can also review a promotion product by product.
Record what you change, who is responsible and when you will review the result. You can then compare sales and costs after the correction, taking account of other changes that occurred in the meantime.
PerfSell brings together your sales, fees and costs to help you understand profitability. Missing costs or data still waiting to be imported need to be added before you draw conclusions. Our guide to marketplace costs you should include explains how to build the calculation.
Further reading
Sources used in this article. Illustrative examples are not client results.
