By failing to incorporate Cost of Goods Sold (COGS) data into Magento, ecommerce stores are missing a key opportunity to increase return on marketing investment by understanding product profitability on a granular level.
Without COGS data, store owners are effectively flying blind by making decisions using incomplete information. In turn, many companies are making marketing or channel sales decisions that have a low return, or that leave money on the table.
Understanding the Basics of Cost of Goods Sold and Gross Margin
First, let’s review some basic economic terms. Cost of Goods Sold refers to the amount of money used to either produce a product, or to purchase a product for resale. If your ecommerce store purchases raw materials that are used to make your products, the cost of your raw materials, plus the cost of assembling your product, equals your Cost of Goods Sold. If your store has a dropship relationship or purchases inventory from a wholesaler, your Cost of Goods Sold equal the price you pay the wholesaler for your inventory.
Why is this important? Because it dictates your Gross Margin, or the amount of money you generate after subtracting COGS from the price at which you sell each product. For instance, if you purchase an item for $10 (your COGS), then sell that item for $25, your Gross Margin on that item is $15 ($25 of revenue – $10 of COGS = $15 gross margin).
Your Gross Margin is the capital you have available to fund your ecommerce store operation. Costs like marketing, web development, label printing, warehouse space, or employee wages will come out of the Gross Margin, so it’s important to ensure that Gross Margins are large enough to comfortably pay operating expenses.
Profitability Per Item is Key For Marketing Decisions
Too many stores rely solely on Revenue when making marketing decisions, instead of focusing on profitability. By factoring in Cost of Goods Sold data stores can gain insights that help them optimize advertising decisions and store profitability.
Let’s take the previous example of the product that generated $15 of Gross Margin. On a percentage basis, this product sale produced a healthy Gross Margin, however on a dollar basis, $15 of cash leaves little room for an expensive form of marketing for this product. As such, a scalable form of marketing like an email campaign would best suit this product.
For high Gross Margin items, consider more expensive forms of marketing such as paid search or retargeting. In doing so, you can be sure to generate enough income to cover other operating expenses beyond the cost of marketing products.
Many stores, including large retailers, struggle with incorporating COGS into marketing expense decisions. As a result, these companies run seasonal or other campaigns, only to learn that the cost of the campaign consumed too much of the Gross Margin to justify having run that campaign. The result is a breakeven outcome, or worse, a slight loss on a campaign that was designed to drive cash to the bottom line.
With a better understanding of COGS, stores can understand which products to aggressively market, and which products to market with low cost, scalable marketing campaigns.
It’s easy to set up Cost data in Magento, you simply need to enable the attribute for all products and know where to input the numbers. Once this is complete, you are on the path to profit optimization. Good luck and happy marketing!
Setting Up Cost Data in Magento
First you need to set the Magento Cost Attribute to show on all product types. Go to Magento > Catalog > Attributes > Manage Attributes.
To find the Cost Attribute, go to Attribute Label > type in Cost > Click enter or search.
To edit, click anywhere on the row.
‘Apply To’ defaults to only include ‘Virtual Products’ and ‘Downloadable Products.’ Let’s enable it for all products. Go to ‘Select Product Types’ > All Product Types > Save Attribute (top right hand corner).
Now you need to find cost data. Go to Catalog > Manage Products.
Select one of your products and then click ‘Prices’ in the left hand navigation.
Now the Cost field is available for each product. Enter in Cost data one product at a time, or bulk import for all products. Make sure to save your work.
Sheryl Davis is a digital marketer at Glew, an ecommerce analytics software provider, where she focuses on helping online stores understand and act on their data. Each week she publishes practical strategies for ways to rock ecommerce success.