What is considered profit?
Posted: Mon Jan 06, 2025 6:56 am
The most familiar and natural indicator of a company's performance for entrepreneurs is profit. As a rule, the word profit means either gross profit (revenue minus cost of goods sold) or net profit (gross profit minus all company expenses). Less often - EBITDA.
In operational management for a company trading on marketplaces, these indicators are inconvenient. Gross profit is too general and therefore uninformative. Net profit is too “high-level”. Ordinary employees and almost all managers cannot fully influence this indicator. It is, in fact, a score on the board, an indicator of the activity of czech republic whatsapp phone number the entire company as a whole.
For operational management purposes, we took the marginal profit and operating profit. Marginal profit is revenue minus the cost of goods sold, minus fully variable costs.
Fully variable costs (FVC) are costs that change proportionally to sales volume. When selling on marketplaces, this is the commission and most of the logistics. For retail sales, FVC will include, for example, acquiring.
When applied to a unit of production, marginal profit (selling price minus purchasing price minus MP commission minus MP logistics) allows you to calculate unit economics and compare, for example, earnings from each unit sold on different marketplaces. With the same purchasing price and selling price, earnings on different MPs will be different depending on their conditions.
In the given example, the markup on the marginal profit of a unit of goods is 49% for SMM and 56.5% for Ozon
At the same time, our expenses on sales on marketplaces are not limited to commission and logistics. There are also conditionally variable costs (CVC), which are related to sales, but they cannot be reliably linked to a specific order. These are marketing costs, fines, storage costs in MP warehouses, etc. In some cases, we manage to reclassify part of the CVC into PVC.
For example, we can say: "This marketing budget was spent on sales of this specific quantity of these products." Although even here the question may arise: "How do we take into account deferred demand?" But in general, it is incorrect to distribute such expenses among all units of goods sold during the period. This can greatly distort the real picture and lead to making incorrect decisions.
At the same time, the share of such expenses for different marketplaces or product categories is different. We need to keep such expenses under control. And, as a rule, we can identify a person in our company who is able to influence these expenses: the head of the sales department, the sales team lead on a specific marketplace, a brand or category manager, etc.
To evaluate the work of a manager or department, we calculate: operating profit = marginal profit – conditionally variable costs.
It often makes sense to add, for example, the costs of maintaining an account (including the salaries of sales managers) to the conditionally variable costs. It is also important to take into account the write-offs of defective/damaged/lost products.
It also makes sense to try to take into account the cost of warehouse processing of goods. Especially if you are not using your own warehouse, but the services of an operator. And also the cost of logistics to the marketplace warehouse.
In operational management for a company trading on marketplaces, these indicators are inconvenient. Gross profit is too general and therefore uninformative. Net profit is too “high-level”. Ordinary employees and almost all managers cannot fully influence this indicator. It is, in fact, a score on the board, an indicator of the activity of czech republic whatsapp phone number the entire company as a whole.
For operational management purposes, we took the marginal profit and operating profit. Marginal profit is revenue minus the cost of goods sold, minus fully variable costs.
Fully variable costs (FVC) are costs that change proportionally to sales volume. When selling on marketplaces, this is the commission and most of the logistics. For retail sales, FVC will include, for example, acquiring.
When applied to a unit of production, marginal profit (selling price minus purchasing price minus MP commission minus MP logistics) allows you to calculate unit economics and compare, for example, earnings from each unit sold on different marketplaces. With the same purchasing price and selling price, earnings on different MPs will be different depending on their conditions.
In the given example, the markup on the marginal profit of a unit of goods is 49% for SMM and 56.5% for Ozon
At the same time, our expenses on sales on marketplaces are not limited to commission and logistics. There are also conditionally variable costs (CVC), which are related to sales, but they cannot be reliably linked to a specific order. These are marketing costs, fines, storage costs in MP warehouses, etc. In some cases, we manage to reclassify part of the CVC into PVC.
For example, we can say: "This marketing budget was spent on sales of this specific quantity of these products." Although even here the question may arise: "How do we take into account deferred demand?" But in general, it is incorrect to distribute such expenses among all units of goods sold during the period. This can greatly distort the real picture and lead to making incorrect decisions.
At the same time, the share of such expenses for different marketplaces or product categories is different. We need to keep such expenses under control. And, as a rule, we can identify a person in our company who is able to influence these expenses: the head of the sales department, the sales team lead on a specific marketplace, a brand or category manager, etc.
To evaluate the work of a manager or department, we calculate: operating profit = marginal profit – conditionally variable costs.
It often makes sense to add, for example, the costs of maintaining an account (including the salaries of sales managers) to the conditionally variable costs. It is also important to take into account the write-offs of defective/damaged/lost products.
It also makes sense to try to take into account the cost of warehouse processing of goods. Especially if you are not using your own warehouse, but the services of an operator. And also the cost of logistics to the marketplace warehouse.