Why cost of goods is all wrong for eCommerce stores?
A guest article by Order Metrics. They run OrderMetrics.io, the only Shopify app that combines your real shipping costs, cost of goods, and order revenue to analyze profit on a per order basis. This app saves merchants hours each month combining the data needed to monitor their store’s profitability.OrderMetrics.io offers a clean dashboard to display key financial metrics
Traditional retail stores have the luxury of being able to set the selling price for a product, know the product’s cost of goods, and then calculate their profitability for each sale with relative certainty - minus any discounts or promotions.
eCommerce stores on the other hand face an additional challenge when calculating a sale’s profitability - shipping costs. Shipping costs are highly variable due to factors such as distance, package weight and dimensions, fuel costs, priority, and how your Fedex rep woke up feeling that morning. OK, joking about the last one. With all this variability, how on earth do you include shipping costs in your cost of goods (COGS) calculation? Well our answer is that most eCommerce businesses simply cannot. To get an accurate picture of how much profit an eCommerce business makes on each sale, they must figure out their cost of each order which takes an order’s shipping cost into consideration. Let’s call this Cost of Order.
To calculate cost of order, we need two things - the sum of an order’s line item (or product) costs and the shipping cost of an order. Product costs can be calculated using various COGS methods while shipping costs must be retrieved from shipping software such as ShipStation or your carrier’s bill.
Order Metrics shows your profitability on a per-order basis.
Our Shopify app, Order Metrics, automates and simplifies this process. Order Metrics integrates directly with your shipping provider and automatically associates each order with it’s shipping cost. Then, our app combines this data with your product’s cost of goods to calculate your profit on a per-order basis. Our customers have told us that by using our app, they have reduced the amount of time they spend inserting order data into Excel and have gained better visibility about their orders and profitability. We have heard stories where shops have discovered popular order combinations with unusually high shipping costs, gone back and changed the shipping method for those shipments, and reduced their shipping costs by 15% or more.
Analyzing profitability metrics on a detailed level can be extremely valuable to find pricing discrepancies, excess shipping costs, and how discounts affect profitability. Our Shopify app is currently the only software that automatically associates your orders with their real shipping costs and view your profitability on a per-order basis. Our customers have found this is the best way to measure their store’s profitability.
Order Metrics is free for stores with under $50k in annual revenue and we offer a 14-day free trial for larger stores. We currently integrate with ShipStation, Shippo, and Shipwire. For stores using other shipping services or 3PL warehouses, we provide an easy-to-use interface to upload your shipping costs. Integrations for Facebook Ads and Google Adwords are coming soon. You can install our app from the Shopify app store.