Sell Online And Profit.com

[Last Updated July 7th 2009]

Rule 5. Calculate your Profitability

a. You must be able to calculate your profitability.

Profitability is the ultimate goal of any business. It is also yours.

The problem is most companies lose money. Many grind through day after day, with the owner wishing they could sell their operation and get out. Many close down due to losses. Very successful businesses are not many. This is not by chance. They know the right things to do, and did most things right.

We are hoping that this blog will help guide you do the right things.

One of the most important things to know is whether your sales plans can be profitable.

If you are about to start a business, we suggest you carefully examine your sales strategy.

If you followed the previous articles closely, you have done a good job till now. Please continue to do the same with the coming articles.

Following the previous articles, you now have selected good products. That is a very good move and you have started on the right track.

BUT! — Just having good products does not guarantee success. It is not enough. You will need to do much more.

This article will examine your profitability from only the sales aspect. Marketing your products will be detailed in future articles.

You may now have projected monthly sales volume for each of your products. Is that projected volume sufficient for profitability? You may need much higher volume to break even. In actuality, you don’t know the figure.

Most will say “I will sell as much as I can.”. This doesn’t work. You may over stock and tie up your money in stocks, or, under stock and not be able to meet your customer’s orders. Worse still, you may need a sales volume that you cannot achieve. This will lead you to continue losing money until your funds run out and you are forced to close your operation.

This won’t do. You need better information.
We will examine this topic now. Let’s take the pen example again.

Let’s say, you think selling 300 pens a month will make you money, and selling more than that is a problem. Let’s calculate together and see what will happen.

(The following figures are taken from article 5)
The selling price of the pen is $20.00
Your unit cost for the pen is $10.00
Your fixed cost is $5000 per month
Your variable cost per unit is $1.00

Let’s see if selling 300 pens a month is profitable.

Your net Profit or Loss will be:
1. Sales Price — $20
2. Unit Cost —— $10
3. (minus) variable cost $1
4. bal = $20 – $10 – $1 = $9 (Gross profit after variable cost)
5. Earning for 300 pens = 300 x $9 = $2700
6. Earning minus Fixed Cost ($2700 – $5000 = -$2300)
7. You now know that selling 300 pens a month will not be enough to make you money. In fact, you will be losing $2300 per month.

Now, relate the above example to your products. Do similar costings for each product. Find out how they fare.

For the above example, you have 3 options:

1. Cut your costs down (Fixed Cost, Unit Cost and/or Variable Cost), so you will break even at selling 300 pens a month. Or,

2. Increase your sales volume.

3. Perform a combination of the above 2 options, or do not start your venture.
Through the Product Costing calculation above, you will get information you normally will not have.

With Product Costing, you will have the following information:
1. Your break even sales volume. (Please refer to Article 5)

2. Will you be profitable at a sales volume you can comfortably achieve. (Please refer to the earlier paragraphs in this Article)

3. (If #2 is true) Are you happy with that amount? If not, do you want to start the business? Are there ways to increase sales volume to make the profit you are expecting? Yes. (We will cover these issues in coming articles. We will email you when they are published. Please subscribe to our Newsletter so we can email you when they are ready.)

4. At what sales volume do you achieve your target monthly profit? (You can achieve this by Product Costing)
To answer this question, let’s return to the pen example.
The selling price of the pen is $20.00
Your unit cost for the pen is $10.00
Your fixed cost is $5000 per month
Your variable cost per unit is $1.00
Your target profit is $4000 per month

1. Sales Price — $20
2. Unit Cost —— $10
3. (minus) variable cost $1
4. bal = $20 – $10 – $1 = $9 (Gross profit after variable cost)
5. Your Fixed Cost is $5000 per month
6. Your target Profit is $4000 per month
7. You have to hit your Your target Monthly Revenue = Fixed Cost + Target Profit = $5000 + $4000 = $9000 / month
8. Your Target Monthly Sales Volume = $9000/ $9 = 1000 pens per month
9. Therefore, to make a profit of $4000 per month, you have to sell 1000 units of pens monthly.

Apply the above calculation to your products. What are the results? (Remember, if you have multiple products, use the method on Shared Value described in Aritcle 5)

b. For existing online or physical stores, apply Product Costing to all your products. You will have a clearer picture of your entire operation. You will know which products make you money and which don’t.

Ditch those money losing products if you can. (But most times, you cannot as those products help you sell the profitable ones.)

Remember that you still have Sales/Marketing costs and Delivery costs.

Sales/Marketing:
Sales and Marketing doesn’t need to cost anything if you know the marketing methods to increase online sales. We will assist you in this area in our later articles.

Sales and Marketing is very important.
1. It increases the number of customers visiting your site
2. It gives you extra exposure
3. It places your website on higher pages in search engines, thus allowing customers to find your site easily.

The above points result in increased Sales Volume.

Please subscribe to our newsletter so we can inform you when the Sales and Marketing article is published.
Delivery Costs:

These are separate charges that are paid by the customer.

Remember that Delivery Costs should cover all costs:
1. Transport costs from your operation (factory, physical store or home) to the postal drop-off point and,
2. Full postage charges.

Also, check out the local and international postage rates. USPS (www.usps.com) will be the cheapest. Remember to also compare rates to UPS (www.ups.com) and FedEX (www.fedex.com). Their rates are higher and you might require their services from time to time.

Good luck with your venture!
From, Sell Online And Profit.com

[Last Updated July 7th 2009]

This entry was posted on Wednesday, July 8th, 2009 at 12:53 am and is filed under Article. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.