There are a lot of things to keep in mind when you start an eCommerce business. It is an exciting, but also a challenging time. On the one hand, it is exciting as online stores open up a lot of possibilities – options to sell different types of products to markets that were previously out of reach. Part of the challenge though is to transition from simply an online store, to a viable business. That’s where three key value metrics come in: gross revenue, gross profit, and net profit.
There are three things on your eCommerce store that you can to focus on right from the start. These are also generally the easiest to measure on most eCommerce platforms, like WooCommerce and Easy Digital Downloads.
Gross revenue = the total amount customers spend on your store, including taxes and shipping costs.
Gross revenue, also called gross sales or total earnings, is the sum total of all orders on your store. This is part of the built-in reporting on both WooCommerce and Easy Digital Downloads. This gives you a measure of how much money customers are spending on your store. The more orders you have, whether small or big, the more gross revenue you generate.
Before anything else, you will need to make sales, which is what gross revenue measures. This means people need to find out about your store, like your products, and trust your store enough to spend their money. Once your store is getting orders, next step is to see whether you make any money off of those sales.
Gross profit = gross revenue - cost of goods
To find out whether you make any money from the sale of a product, you will need to subtract the cost of the product from its selling price. The cost of goods can include costs like cost of materials, labor costs, equipment used, etc. that help create a product. It is up to you to determine what your cost of goods is for each product.
For example, you may be selling a physical product and a digital product on your store. For the physical product, your cost of goods can include cost of product, cost of assembly, and equipment, whereas for your digital product, the cost may just be the labor time to produce the good. Again, depending on your business, it is up to you to determine what you include in your cost of goods.
The first two key value metrics have to do mostly with the individual products and their sale. The last thing to measure is for your business, which is your net profit.
Net profit = gross profit - overhead costs
The cost of goods are typically not the only costs that your business incurs. There can be overhead costs like website domain and server costs, warehousing fees, office rental costs, support staff fees, administrative fees like human resources, lawyers, accountants, etc.
The net profit measures how much money your business makes after paying for everything that goes into running your business. Net profit is what is often referred to as the bottom line. And net profit is how much money you will typically have to put towards expanding your business, and your product line-up.
There are many ways to measure these key metrics on your WooCommerce and Easy Digital Downloads stores.
You can use the basic reporting to measure the gross revenue and number of sales. You can also use free services like Google Analytics to track some information.
If you’re interested in using Google Analytics, we have an overview of available plugins or integrations in our article on getting average order value.
If you want to track gross revenue with more detail, the Advanced Reports plugin for Easy Digital Downloads will be helpful.
By default, you can access product specific reporting for individual products on Easy Digital Downloads. With the Advanced Reports extension, you can compare multiple products within the same report.
The extension also provides more enhanced information about earnings, sales, and store activity.
If you want to track profit, there aren’t many plugins available on different platforms that can track item costs. WooCommerce offers a Cost of Goods plugin to do so.
The Cost of Goods extension allows you to add the cost of individual products, including variations, in the product dashboard. The extension uses this information to calculate and create enhanced reporting about your gross revenues and your gross profits.
The extension adds detailed reporting about profitability during different periods, total value of inventory in stock, and a break down of profitability by product.
Since you can include cost of goods for individual products, the extension measures your most (and least) profitable sellers.
You can get a complete overview of the Cost of Goods extension in the extension documentation.
Once you’ve calculated your gross profits from item sales, you can then calculate your store’s net profits by backing out your overhead costs. These are typically tracked separately in your company’s overall bookkeeping or accounting, as the costs aren’t directly related to eCommerce sales.
Your net profit will be measured by subtracting overhead (such as salaries, website hosting costs, domain name costs, SSL certificates, and any other operational costs) from your gross profits from sales.
For new eCommerce stores, there are three key value metrics that will determine whether the business stays afloat or not. These are gross revenue (or gross sales), gross profits, and net profits.
Other metrics – like customer satisfaction, or social return on investment, etc. – are secondary to these when it comes to the viability of your business (which is why these 3 are generally asked about on Shark Tank!). This doesn’t mean that other metrics aren’t important, as they can help improve the three key metrics.
You can easily calculate and monitor your gross sales and gross profits for your WooCommerce store using the Cost of Goods plugin. The plugin lets you easily see your most profitable products so that you can focus on those, and work to make other products as profitable.
If you want detailed sales reports by product or other factores, the Advanced Reports extension for Easy Digital Downloads will be helpful.
While profit reporting isn’t available within other platforms themselves, you can export sales data and do these calculations manually in a spreadsheet or accounting software.
What were key metrics you focused on when you started your eCommerce store? Please tell us in the comments below.