Strategy Centre

The Implications of a Cost of Sale Accounting Model in Ecommerce

  
05 October 2016 14:54
  

The Implications of a Cost of Sale Accounting Model in Ecommerce

Ecommerce in the mid-market is often conducted by companies that have started with an alternative selling channel, such as retail, and have had to move into ecommerce due to the disruption created by the online channel.

As such, the strategies used can often be eye opening. Mistakes that simply could never happen in any other channel are regular occurrences in the online channel. Sales go up, sales go down and mid-market companies often have no real understanding of why.

And in the world of ecommerce where there are no degrees or charterships, companies generally do not know where authoritative opinions should come from.

At IRP Commerce, we align ourselves completely with companies in a pure form. We exist for two reasons:

  • To increase online sales;
  • To decrease costs through operational efficiency.

Using the anonymised data that flows around the IRP World system, we can understand online markets very clearly from a numbers point of view. Key to this understanding is benchmarking — what costs should be, what sales should be, and who should provide a particular service.

The Cost of Sale Model versus the Overhead Model

There are some basics in ecommerce that, if a company cannot grasp them, they may be better not to participate in online selling at all.

The primary point to grasp is that online marketing is a Cost of Sale and not an overhead. Accountants will understand the difference between the two — and if they want a successful online operation they will have to back a Cost of Sale model one hundred per cent.

A real-life example that we have seen repeatedly in this area will help draw out the implications of not adopting a Cost of Sale model. An online company’s Google PPC channel starts to deliver on results: online sales increase by 100% from the same month last year. Costs of the PPC channel also increase — to make the maths easy let’s say this is also by 100%. The accountants flag that “overheads” are up 100% and that they need to be reduced. The Ecommerce Manager then cuts the PPC budget and sales evaporate. Then the circle begins again.

Let’s look at some basic accounting maths.

DATEONLINE SALESONLINE MARKETING SPENDCOST PER ACQUISITION %OPERATING PROFIT MARGINPROFIT CALCULATION SALES- COSTACTUAL
PROFIT
July 2015 Online Sales £100,000 £5,000 5% 15% 15,000-5,000 £10,000
July 2016 Online Sales £200,000 £10,000 5% 15% 30,000-10,000 £20,000

Online marketing spend as an overhead is actually how some company accountants still view their online operation. In the above example, when sales drop again from £200,000 to £100,000 when the budget is cut — unlike any other sales channel where a rational view is formed — the drop can be ascribed to any number of causes. Perhaps the SEO was responsible …

Obviously a Cost of Sale model is adopted for many selling channels, including by anyone selling on eBay or Amazon. You do not pull the plug on the channel because you sold £100,000 on eBay and it cost £12,000. It is exactly the same with a company’s own direct-selling website, only the Cost of Sale will be less if they run a tight ship.

Blunders that can never happen in any tangible selling channel are everyday occurrences for many companies in the online channel — and they are often not even noticed. If a company cannot adopt a Cost of Sale model for online marketing, the long-term prospects are not good. They can expect their competition to take their business.

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