Introduction

In eCommerce, understanding the ins and outs of each product's share of profit and revenue can make a huge difference in the success and growth of your business. In this lesson, we'll dive into the importance of these metrics, explore the different roles that products play in your eCommerce ecosystem, and uncover how these insights can supercharge your pricing strategy.

Unleashing the Power of Products: Profit and Revenue Heroes

Not all products are created equal in terms of revenue and profit generation. Some products have the magic touch and bring in loads of revenue through high sales volume. Others might not be as flashy but pack a punch with their high profit margins. Recognizing these differences is like having a secret weapon for shaping your pricing strategy and overall business model.

Every product has its own superpower

Customer acquisition products: These are typically popular, trendy, or competitively priced items that attract new customers to your online store.

Profit generators: These items may not sell in high volumes, but their high margins contribute significantly to your profits.

Volume drivers: These products, often sold in bulk or at low prices, drive sales volume, enabling you to negotiate better deals with suppliers and reduce per-unit costs.

Revenue optimizers: These items may not yield high profit margins, but their consistent sales contribute to steady revenue streams.

Understanding Share of Revenue and Profit

The share of revenue and profit refers to the percentage contribution of each product to your total revenue or profit.
For example, if a product generates $20,000 in revenue in a month where total revenue was $200,000, the product's share of revenue is 10%. Similarly, if a product contributes $5,000 to a total monthly profit of $50,000, its share of profit is 10%.

Understanding the share of revenue and profit can work wonders when it comes to cost allocation, especially for fixed overheads. By dividing your fixed costs based on the revenue and profit share of each product, you can paint a clearer picture of each product's true cost and, consequently, its profit margin.

For example, if your fixed overheads are $10,000 per month and a product's share of revenue is 10%, you might allocate a tidy sum of $1,000 of the overhead costs to that product. This cost allocation can then become a secret ingredient in your pricing strategy, ensuring your price covers all costs and delivers a satisfactory profit margin.

Informed Pricing and Margin Calculation

When it's time to set your prices and calculate those enticing margins, it's crucial to work from the operating margin, taking into account all costs associated with a product, including its allocated share of fixed overheads. This approach ensures you don't go discount-crazy, protecting your profit margins while still offering prices that put your competitors to shame.

Conclusion

Understanding the share of profit and revenue in eCommerce is like discovering a hidden treasure chest for your pricing strategy. It helps you identify the heroes that drive your profit and revenue, allocate costs effectively, and price your products with precision. As the eCommerce world continues to evolve and become more cutthroat, these insights will be your trusty sidekick, keeping you profitable and one step ahead of the competition.