Profitability Update

Back in April I did a post entitled Thoughts on Pricing and Profitability where I basically pondered the advantages of become a higher volume, lower margin retailer:

Generating sales is the hardest thing to do in the world of business. If I find a hands-off way to drive sales AND can turn over inventory faster by doing it, I’ll gladly sacrifice some profitability.

The comments were mixed – some in agreeance, some not. And rightfully so. It’s an interesting debate with no clear cut right answer for every business in every situation.

In the time since, we’ve become more and more of a volume retailer.  Our main revenue increases have come from business wholesale accounts, creative sales (particularly Mike’s newsletters and the Daily Special on Detailed Image), and increased volume on Amazon (mostly due to being the low cost leader for certain products).  That’s not to say that normal sales of full retail value aren’t up as well, but the majority of that increase has come from those other methods.

The big question is whether or not we’re a better business for making this decision?  I say yes, and the numbers agree with me.

First things first though, numbers aside, we have the advantage of exposing more people to our business.  More sales – especially through sites like Amazon – give us more packages to include promo material in, and more email addresses for our newsletters (provided they opt-in of course).  Some people will like our fast shipping and our products and come back naturally, so that’s a win.  Then there’s people who get on our newsletter list and forget about us until a sale really entices them, and that’s a win too.  That’s huge because every newsletter has a greater impact than the previous one.  Some day our newsletter list will have 100k people on it and every single mailing will have a massive impact on sales.  Doing more volume is helping us get there sooner.

Financially, pretty much the best case scenario happened:

  • We dipped in profitability during Q2, with margins dropping from around 35% to around 25%
  • Sales continued to increase.  Compared to the same month last year, we hit our goal of doubling revenue every month this year.  By September we had tripled revenue from September 2007 and had our best month in company history in a month that is traditionally one of the slowest of the year.
  • When we looked at our Q3 numbers last week, margins had risen back up to 35%.  We received volume shipping discounts from FedEx (and a free label printer, which I thought was pretty sweet), and we started hitting the highest volume tiers with our vendors.  Those cost savings offset our sales, and essentially we’ve “passed our savings on to the customer” while growing immensely in size and volume.  Overall as a company, we turned a pretty significant profit for the first time in Q3 (this is after salaries, warehouse expenses, rent, utilities, insurance, etc – in the past we’ve been closer to breaking even after all of those expenses).

Like anything else, this had the potential to backfire and I’d be lying if I was sure it would work.  We could have squeezed ourselves too thin and ran out of available credit and had trouble paying bills.  In this case though, it was a risk that seems to have paid off.

4 comments on Profitability Update

  1. nethy says:

    Hi Adam,

    I think arguments against your previous decision were all wrong for one reason or another:

    – What potential investors would think-
    1, that only means something if you’re looking for them. 2, I disagree with the assumption that it hurts your valuation. Companies are valued largely based on their size.

    – Semantics –
    You said ‘profitability,’ I think you meant margins or grosss profit margin (Revenue – COGS). I never heard you say you took on staff to pay for this, got a bigger warehouse etc. Your fixed expenses stayed the same, your marginal expenses went up. Did your net ‘profitability’ really go down?

    – Reliance on Amazon –
    You were warned to not be dependant on amazon or ebay or anything else that could sour. Good advice. But not something to keep you from adding a channel. The opposite, what you did was diversify.

    Finally, I think that they ignore the most important part of the scheme: It’s essentially marketing scheme. One that generate cash instead of sucking it up.

    Especially in ecommerce, a customer can be worth more then a sale. If your marketing process only starts to heat up after the sale, you can lose money on a sale & make it up later. That’s a powerful position. You can outbid anyone. The usual problem, is that a client acquired with a loss leader sale, isn’t worth as much so you can’t win sales by being cheaper & still get this effect. But you can spend more on marketing.

    How many stores never changed the default thank you page? It could be an important page. A very important one. One that you pay to get customer to.

  2. Adam McFarland says:

    Thanks as always for the very in depth comment Nethy.

    You’re right about the semantics – I was referring to profit margin (rev – COGS).

    “Especially in ecommerce, a customer can be worth more then a sale.” I think we’ve talked about this a bit before, but I obviously agree with you 100%. The interesting thing is how much more are they worth…because I do think a lot of companies take this philosophy too far and blindly spend to acquire customers. You still need to have positive cash flow to survive.

  3. nethy says:

    “The interesting thing is how much more are they worth…because I do think a lot of companies take this philosophy too far and blindly spend to acquire customers.”

    Very true. Fine lines huh?

    My personal feeling is: As a rule of thumb, paying for a customer is ok. You won’t go wrong there. Paying for volume. paying for market share, etc. is where the trouble is.

    This is really a technical issue & I think these discussions are better kept at the ‘high level’. But if we had smart analytics (Google Analytics is not smart) we’d know where our online customers came from. Small businesses like yours probably have 10 20 customer that make the business. Another 50 pull a bit of weight.

    If analytics & CRM played nice, we could look back at a customers interactions & see how the relationship was built. First sale via Amazon, second via email coupon. Visited a few more times. Bought at a sale. Spoke on the phone. etc. etc. etc.

    It’d still be a challenge to work out how all your campaigns work together. But that’s be valuable info.

  4. Jeff says:

    You’re right: Walmart

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