Back to Blog

How Profitable Is Your Marketplace Business - Really?

Image of Gary G.
Gary G.

You probably already know that digital marketplace businesses provide a world of profit opportunities. Just 10 years ago, ecommerce made up only 5.1% of total retail purchases. Now, that number is 21%, and it seems likely it will grow. The potential for profit is pretty remarkable. 

The top-performing ecommerce companies spread their products out across multiple channels. By placing your products on a variety of online stores, you widen your reach and can capitalize on the potential growth. But this strategy comes with unique challenges, too.

 

Balancing the data from these various channels can be frustrating. Important details can get missed, creating misleading information about various costs and fees and throwing off estimations of profitability.  

 

That’s why it’s critical for every multichannel marketplace business to know the best metrics to track.

 

The basics will sound familiar, things like Average Order Value (AOV), Customer Lifetime Value (CLV), or Conversion Rates. But what about some of the lesser-known metrics, the ones that represent little issues that can stack up and cause big problems?

 

Below, you’ll discover five of the most critical and forgotten metrics needed to measure profitability.

 

Gross Revenue

 

This probably sounds like an easy one. What company doesn’t look at revenue, right? Still, it’s such a crucial starting point that we wanted to make it clear: every ecommerce business needs to track the gross revenue across all channels.

 

For multichannel sellers, this can seem pretty complicated considering the different sources of information. Companies that list their product exclusively on Amazon, for example, can easily find their data in one place. As you start adding more sites, however, you must look at each store’s portal and add the numbers. It’s not like Ebay is going to give you figures for your Amazon sales. 

 

You can solve this problem in a variety of ways. Some companies prefer to group the datasets together in an Excel sheet and add them together. Others opt for integrated, multichannel management solutions to eliminate that excess work and show comparisons of product performances between channels (see the image below). 

 

Metrics for measuring profitability

Whatever you choose, knowing your gross revenue numbers sets a foundation for your company to measure profitability. It also opens the door for other pieces of data like gross profit margin, which takes your overall revenue minus the cost to sell and divides that number by the revenue again to reveal your average margins.

 

Landed Costs

 

Consumers love ecommerce for its convenience. They click a button and a few days later their item magically shows up at their door. 

 

For us in the business, that process is a bit more troublesome. We know there’s no magic involved. Getting the package delivered requires a complex chain of events to ensure the item seamlessly gets there.

 

Shipping costs cover most of this process. But ecommerce companies can track a more thorough metric, especially when they send anything internationally: landed costs.

 

Landed cost is the term for the combined charges and fees associated with getting a shipment to the buyer’s doorstep. You might think of things like duties, taxes, and related fees for international shipping, but the landed costs umbrella covers package insurance, fraud prevention, storage, handling, and regulations, too. 

 

Even if your company doesn’t include these with every item you ship, it’s still an important metric to track. The small fees can quickly add up and throw off your profit numbers and predictions in the long run. 

 

Fulfillment Fees (FBA, MCF, or FBM)

 

Fulfillment fees cover the expenses related to storing and shipping inventory. 

 

Multichannel businesses may have different kinds of fulfillment types. Amazon allows sellers to use their warehousing and fulfillment services through their “Fulfilled by Amazon” (FBA) option. Sellers send their inventory to Amazon warehouses, and the company fulfills the order when received. There’s even an option to use Amazon to fulfill sales from other channels through their “Multi Channel Fulfillment” (MCF) program, which works the same way. 

 

The other options would be to fulfill the order yourself or through another third party fulfillment company. Amazon sellers can do this through the “Fulfilled by Merchant” (FBM) service, which allows them to continue selling through Amazon even if they use a separate company for fulfillment. 

 

Like anything, there are pros and cons to these different methods. Using a large company like Amazon to fulfill orders can be very convenient, freeing you up to focus on creating and selling your products. But the convenience comes with a fairly steep price, ranging from $2.70 per item to $6.12 depending on the size. Anything over 3 pounds receives an extra 30 cents per pound. Items over 70 pounds receive heftier prices as well since they are considered oversized.

 

The FBM fees are a bit more complex. Amazon charges a referral fee that ranges from 6%-45% depending on various factors, plus an additional 99 cents per item sold. Sellers can avoid the per item fee and reduce other costs by paying a monthly subscription fee of $39.99. 

 

Any of these options can work. It just comes down to what you want for your business and what will work best. Consider the types of relationships you have with your stores. Are you a 1P or 3P seller? Do you want to use drop shipping or keep inventory on hand? These aspects of your business will influence your fulfillment choices. Whatever you go with, make sure to track the fulfillment cost.  

 

Advertising Costs 

 

Every business needs customers, and digital advertising is a great way to draw people to your online store. The only problem is that places like Google and Facebook don’t give away advertising for free. If you want customers to find you, it will cost money. Measuring the amount of money spent can help you have a better understanding of your actual profitability. 

 

Google’s pay per click (PPC) model is nice because you only pay when someone clicks on your ad. The cost indicates that something is working right, and if no one clicks, you don’t pay. 

 

This lower-risk luxury comes at a higher premium, though. It’s hard to narrow down costs when it comes to Google ads, but you can expect to pay somewhere around $1.00 for every click. A similar metric looks specifically at Amazon Sponsored products: Advertising Cost of Sales (ACoS). To get this number, you divide the ad cost by the revenue created from that ad and multiply that number by 100. This gives you a percentage for how much your advertising took from the overall profits of the product you sold. The lower the ACoS, the higher the profits. 

 

Commissions

 

The final metric that gets missed when ecommerce businesses look at profitability is commissions. 

 

Working off commissions helps push sellers to their peak performance. It creates a bit of competition and thrill, which sellers love, and it helps them define their own income to at least some degree.

 

There are different commission models out there. The most common these days is a base salary plus commission agreement, but some companies utilize variable or straight commission models, too. 

 

However you do it, it’s crucial to track the commission the sellers receive. Companies can easily forget about this number since it may not be part of the set salary costs, but it still comes from the overall revenue and therefore can affect profits. Keeping track of the cost will give you a better sense of your company’s actual profits.

 

Getting Your Metrics to Work for You

 

Metrics are a great place to start when measuring profitability, but the data only goes as far as you want it. The most successful companies use their metrics to influence their Key Performance Indicators. Setting KPIs can show whether something – a strategy or campaign, for example – accomplished what it set out to do. 

 

We’ve gone through lots of metrics. Now it’s up to you to set KPIs. You want your advertising cost to be 25% of your revenue? Great. That’s a KPI built from the advertising cost metric. Good KPIs follow good metrics, and good metrics are tracked. 

 

Tracking all of those numbers can feel burdensome for multichannel businesses. That’s why we created a platform that brings the most important metrics across all your channels together in one place, enabling you to easily track the numbers and create action plans.  

 

Interested in hearing more about how our flexible and scalable platform can help your marketplace business? Feel free to book a demo with us soon. 


Related Posts

3 Tips for Successful eCommerce Catalog Management

Image of Gozde MERT
Gozde MERT

Catalog management is something that should be taken very seriously. If you cannot manage the data,...

Read more

How to Manage Multiple Dropship Suppliers

Image of Nicole Blanckenberg
Nicole Blanckenberg

Dropshipping has become a very popular eCommerce fulfillment strategy. Why? Because it alleviates...

Read more