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ECOMMERCE SOLVED by Real Time Calculation of Sales, Margins and Net Profit

WHITEPAPER - IRP effectively solves eCommerce by demonstrating novel technology that calculates merchant net profit in real time.
Author
15 August 2022 - 5 min read

IRP demonstrates novel technology and maths that effectively solves eCommerce by calculating net profit in real time

Net Profit is essential to know yet this calculation is difficult enough in ecommerce that no platform has been capable of achieving this in real-time.... until now.

With £2 Billion in sales transacted on the IRP - the problem for merchants is not only revenues - it is costs.  Cost control and understanding of the Gross to Net is the key ecommerce problem that we have now SOLVED.

The Net Profit Position is the true measure of a merchant’s ecommerce operation. IRP has invested in novel technology that not only shows sales and margins, but reveals net profit in real time.

IRP Trading Terminal Positions

“The IRP Trading Terminal has succeeded in using merchant data to reveal sales, costs and overheads - removing any lack of clarity in ecommerce.”

IRP Trading Terminal presents merchants with a full view on sales, margins, costs and profits that detail true trading positions.

The Trading Terminal crunches millions of data points in real-time to:

  • Calculate Sales and Margins with 100% accuracy to get Gross Profit
  • Accurately calculate all Traffic Costs to show Ecommerce Gross Profit
  • Reveal Net Profits with a Gross to Net Waterfall incorporating Overheads

The PROOF - Step by Step Accounting from Sales to Net Profit

Ecommerce profits are achieved by maintaining product margin, controlling Traffic Spend and managing overheads. Trading Terminal Positions uses sessions, conversions and AOV to calculate sales. The terminal works from there to determine net profit.

The following equations show the link between traffic and net profit:

  • Traffic x Conversion Rate x Average Order Value = eCommerce Sales
  • eCommerce Sales - Cost of Goods = Gross Profit
  • Gross Profit - Traffic Spend = eCommerce Gross Profit
  • eCommerce Gross Profit - Overheads = NET PROFIT

STEP 1 - ECOMMERCE SALES

Ecommerce sales only grow by increasing TRAFFIC, CONVERSION RATE or AVERAGE ORDER VALUE (AOV). These are the three inputs that determine the sales number.

Traffic x Conversion Rate x Average Order Value = eCommerce Sales

Total Sales Traffic, Conversion & AOV Example

IRP Positions - Sales

Above example: Realtime YTD September = Sessions 1,006,052 x Conversion 2.82535% x AOV £84.31 = Total Sales £2,396,467

STEP 2 - GROSS PROFIT

IRP Trading Terminal takes the ecommerce sales above, and by using Product Margin calculates the Gross Profit.

eCommerce Sales - Cost of Goods = Gross Profit

Gross Profit Example

IRP Positions - Gross Profit

Above example: Realtime YTD September - Ecommerce Sales £2,396,467 - Cost of Goods £1,627,852 = Gross Profit £768,615

STEP 3 - ECOMMERCE GROSS PROFIT

The Ecommerce Gross Profit construct is a core Ecommerce metric - it indicates true performance by revealing profit after the variable cost of the Traffic Spend.

Traffic Spend is the total cost paid to Google, Facebook, Bing, Affiliates, Email and all paid traffic sources. This Traffic Spend in ecommerce is measured as the percentage cost of sale - the CPA%.

Variable Traffic Spend substantially dictates overall merchant profitability.

Gross Profit - Traffic Spend = eCommerce Gross Profit


Ecommerce Gross Profit Example 

IRP Positions ecommerce Gross Profit

Above example: Realtime YTD September - Gross Profit £768,615 - Traffic Cost £179,906 = Ecommerce Gross Profit £588,709

STEP 4 - ECOMMERCE NET PROFIT

Below “Ecommerce Gross Profit” other costs of revenue such as credit card and postage costs are combined with the operating overheads for simplicity - and then all deducted as overheads as follows.

eCommerce Gross Profit - Overheads = Net Profit

Online Sales £2,396,467 
Cost of Goods (£1,627,852)
Gross Profit £768,615
Variable Traffic Spend (£179,906)  
eCommerce Gross Profit £588,709
Overheads (£376,765)
Net Profit £211,944
Net Profit Margin 8.84%

Above Example: Revealing the Merchant's Net Profit of £211,944 and Net Profit Margin of 8.84% in Realtime with a CPA% of 7.50% and Product margin of 39.75%

OUR ECOMMERCE EQUATIONS ARE SIMPLE AND SELF EVIDENT

Ecommerce has converged where people, data and profit must be connected in real time to deliver value. The IRP Trading Terminal has fundamentally solved the complex ecommerce profit problem.

"Not only does this completely transform ecommerce thinking - it puts the Merchant Owner in control and puts their interests first.”

 

Download the Whitepaper as a PDF

Solving Ecommerce Profitability

Supporting Information & Notes about this Whitepaper
The whitepaper is a true and realtime example of the IRP Gross to Net Waterfall available in IRP Trading Terminal. The numbers above especially conversion show major YOY differences because of lockdowns in 2021. IRP took the view it was necessary to show the real numbers. 

We have also made the Overheads section more simplified than we would recommend in accounting.  While not being in any way essential - Cost of Sale such as postage costs and payment costs are best separated from overheads as a separate line. Including these all in Overheads in this whitepaper simplifies the accounts and does not affect in any way the accurate calculation of Net Profit.

Accounting for Ecommerce | IRP Service Market | IRP Attribution Model

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