3 Reasons Why Merchants Should Track SKU Profitability
Your business is making money. In fact, last year was a very good year, and this year should be even better.
Unfortunately, with the many moving parts of eCommerce, it can be difficult to know which products are actually contributing to (or detracting from) your overall profitability. Sure, it would be nice to have this information at your fingertips – but who has time for more number crunching?
In this post, we’ll discuss three reasons why merchants should track profit at the SKU level.
The Big Companies Research and Plan for New Products When a major consumer brand considers the addition of a new product line, it rarely does so on a whim. In fact, a significant amount of research and planning goes into the decision. The company is likely to conduct multiple feasibility studies, examining every aspect of the situation, such as:
- Sales projections for the new product
- Minimum performance criteria
- Comparative analyses versus existing product lines
- Production cost modeling
- Packaging and tooling considerations
- Marketing requirements
- Potential disruptions to existing production
- Staffing and other overhead costs
After the product goes into production, the company will begin to closely measure the item’s sales revenue, margins and costs against the original plan. If significant deviations occur (especially negative deviations), the company will work tirelessly to refine its planning, manufacturing and distribution models. This process continues throughout the product’s entire life cycle (or until the item is discontinued or sold to a competing firm).
Obviously, you’re not trying to invent the next billion-dollar consumer good. You’re just aiming to capture a larger share of the eCommerce pie and grow your bottom line. Smart sellers, however, can learn a lesson or two by studying the “big business” playbook: namely, the importance of calculated decision making and continuous performance monitoring. These lessons apply not only to macro outcomes (such as profit earned by the company in general) but in particular to micro outcomes (such as how each product is performing individually).
High Volume SKU Can Be Misleading
The allure of a high volume SKU can be very tempting for merchants – some might even say hypnotic. For example, owning the Buy Box for a top-rated item on the Amazon marketplace could transform a seller’s business model overnight.
But is simply winning the Buy Box a recipe for long-term Amazon success?
Taking a closer look at the Amazon example, it’s important to note how the Buy Box is awarded. There are a number of factors that Amazon considers, including:
- Your feedback rating
- Whether you’re an FBA seller
- Your inventory levels
- How low you’re willing to price an item
- All things being equal, two FBA sellers with similar feedback scores and inventory levels may both win some orders. However, the one with the lowest price is going to capture the largest share of the Buy Box.
Winning the Buy Box for a hyper-competitive item is sure to boost the seller’s ego, but the long-term damage to profitability is usually not detectable until much later. Amazon charges a myriad of seller fees for each transaction, including: referral fees, variable closing fees, per-item fees and subscription fees (not to mention FBA storage fees and freight costs). Therefore, without the right tools, most merchants have no way to correlate the many fees back to a given item or transaction. What seemed like a record-setting month can often turn into a nightmare once the P&L is finalized.
Profit Tracking is Getting Easier for Merchants
Unlike a big company, you don’t have the luxury of a multi-national corporate workforce at your disposal. You can’t spend hours of your own time developing in-depth regression tests. You also can’t pass on every high-volume opportunity that comes along.
So, What is a Merchant Like You to Do?
Being the resourceful seller that you are, you do some quick web research and are delighted to find several affordable, web-based profit-tracking tools. (As an example, our RestockPro tool was designed specifically for the needs of Amazon FBA merchants. There are several other tools out there for non-Amazon eCommerce applications.)
By leveraging a third-party tool, you’re not beholden to a particular marketplace’s reporting limitations. Rather, all of your order, inventory and fee data can flow real-time into a cloud-based dashboard. Depending on the tool you pick, you may even be able to manage supplier details and purchase order information. By aggregating all of your cost data (not just transaction fees) into a central hub, you’re able to get a full picture of SKU-level success. Be sure to find a solution that offers a variety of drill-down options, such as:
- Profitability of each order/reorder
- Profitability by supplier
- Profitability by time of year or season
- Profitability as a historical trendline
- Profitability of each parent/child variation
These data points will help you better understand which SKUs are working – and which ones need to be dropped from your catalog. Best of all, this data was made available to you with minimal effort on your part. In this context, technology offers the best of both worlds – better intelligence without the complex (and frustrating) job of advanced data analysis.
Let Each SKU in Your Catalog Pull Its Own Weight
At the end of the day, you’re in the business of staying in business. It’s time you started thinking of each SKU as a stand-alone entity (just like big companies do).
Sure, you may have an emotional connection to certain products. Likewise, some customers may be surprised if you chose to stop stocking a certain item. Intangibles such as these are certainly worth considering, but at what cost to your business?
Since Amazon ranks best selling products in various categories, it’s always best for you to to look for ways to gather better data about the products you sell – as efficiently as possible. In doing so, you’ll be better positioned to objectively evaluate each item.