Column: Multichannel Merchandise Profit and Loss
One challenge facing multichannel organizations is an understanding of the profitability of merchandise and services offered online. Merchandise profitability calculations were straightforward when direct merchants only mailed catalogs.
The online channel created challenges when evaluating merchandise profitability. Catalogs drive sales online, and sometimes they drive sales to merchandise classifications not offered in the catalog. Online marketing drives visitors to the Web site. However, the visitors may buy merchandise that they did not search for or purchase merchandise not advertised on a portal. E-mail marketing can drive business in all channels as well.
Developing a multichannel merchandise profit and loss statement is critical to understanding how various merchandise classifications perform. There are several steps in creating this statement. Allocation of online expenses is probably the most critical. Let's assume you are the general manager for flash memory at an electronics direct merchant that mails catalogs and has a Web site. Your department is responsible for generating $7 million in annual sales, $2 million in catalog and $5 million online.
First, determine how much of the catalog advertising budget is allocated to your department. Let's assume this total is $500,000. Next, allocate your online marketing budget across all departments. Assume that, of the total online marketing budget, $250,000 is allocated to flash memory (Click here to download a PDF of the chart).
E-mail marketing expenses should be allocated across all departments, with product-specific e-mail expense allocated to that department. Assume that, of the total e-mail budget, $50,000 is allocated to flash memory.
Web site expenses need to be allocated as well. Home page visits and non-shopping clicks can be allocated across all products. Landing page visits can be allocated across all products in that department. Page views for each product are allocated to each product proportionately. In our example, assume that home page/non-shopping visits are allocated at $50,000. Department landing page visits are allocated at $100,000. Page views for flash memory are allocated at $100,000.
Lastly, we need to address the profit and loss factors for flash memory. Assume that the gross margin on flash memory products is 35 percent. Assume that 10 percent of net sales is allocated to pick, pack and ship expense. Also assume that $500,000 of general and administrative expense is allocated to the flash memory department, proportionally divided between the catalog and online channel. With these elements quantified or estimated, we can calculate the multichannel merchandise profitability of flash memory.
The multichannel merchandise profit and loss statement is an important tool in the analysis of a multichannel business. Obviously, advertising drives business to all channels. In this example, looking at catalog or online profit is misleading. The total profit and loss statement looks realistic.
Your job is to determine the best way to allocate expenses for your organization. You know the products your company features in online advertising, paid search, e-mail, RSS feeds and catalogs. After partnering with your finance team to determine expense allocation, the profit and loss statement is reasonably easy to calculate.