It’s a mistake to account for the IRP Commerce Cloud solely as an overhead.

 

It’s the key to your online success and finance departments should account for it correctly.

Introduction

As you become more successful the temptation from finance teams is to reduce platform costs to further increase the bottom line – that’s a mistake.

Success is based on partnership and your cost reductions should focus on rigorous control of the agreed marketing spend.  This highly variable Cost Per Acqusition (CPA%) is the money spent on online marketing and is effectively a Cost Of Selling .

The IRP Commerce Cloud pays for itself by enabling your success and giving you all the tools needed to drive down this CPA% by maintaining cost control on online marketing.

Accounting for online sales

Accountants and finance departments are key influencers in organisations. Their understanding of numbers and profits means that they are ideally placed to be aligned with the IRP financial model.

While accountants can be key players in ecommerce success, they can be a company’s undoing if they don’t take the right approach when they evaluate online sales.

Finance teams should not see the IRP Commerce Cloud as a ‘cost’ to cut - but as the key driver of revenues. It’s added-value more than pays for itself by enabling you to control your costs and to increase your revenues and profit. 

The IRP Commerce Cloud cost should be assessed as a variable cost of selling. 

Ecommerce accounting should not be approached in the same way as retail accounting

To avoid misunderstandings between ecommerce and finance departments, the difference between standard retail accounts and online accounts needs to be made clear.

Standard retail accounts

In standard retail, or even B2B selling, there are essentially only sales and overheads:

Shop Sales Total
Sales £100,000
Product margin 50%
Gross profit £50,000
Overheads £30,000
Net profit £20,000

Standard retail offers a clear layout to assess profitability. Footfall (shop traffic) is driven through the sales line by specific discounts and promotions or as a general marketing overhead.

Online accounts

Online accounts have additional variable cost that should be evaluated as a cost of selling.  This is because you have to pay for footfall as an unavoidable difference between online and offline selling.

Online Sales 100K Sales 200K Sales 1M Sales
Online sales £100,000 £200,000 £1,000,000
Product margin 50% 50% 50%
Gross profit £50,000 £100,000 £500,000
Variable online marketing costs  (CPA 5%) £5,000  £10,000 £50,000
IRP Commerce Cloud £5,000 £10,000 £50,000
Gross profit after online marketing spend £40,000 £80,000 £400,000
Overheads £30,000 £50,000 £200,000
Net Profit £10,000 £30,000 £200,000

* Online marketing spend is the required spend on well-understood online marketing channels – Google PPC, Facebook Paid, Affiliates & Email.  Overheads will grow - in our experience economies of scale on overheads and margin improvements begin to pick up >5M creating a stable model  >10M.  

This cost of selling is - unfortunately - extremely variable and depends on the skills of service providers who drive the online traffic helped by the IRP Marketing Cloud. You have to tightly manage this cost of selling as an acceptable percentage cost of all sales – the cost per acquisition (CPA%) - and then model this figure into the accounts to remain profitable.

What is an acceptable cost of selling?

IRP puts a major focus on controlling your online marketing costs.

To provide a benchmark: Amazon charges 20% for providing an order, so that’s a 20% cost of selling (and Amazon provide only the order, not the customer). If you stop paying the 20% on a sale, you stop selling.

At IRP Commerce, we say that your target CPA% must be set at a level that ensures there are sales and margins to run your operation.

The CPA% that we report each month varies around 6% to 8% but will depend on the market. You can view the numbers on our ecommerce market data page.

How do companies make money in ecommerce?

On the upside in ecommerce is that markets are incredibly large. If you get things right in your selling and run the operation well, the rewards can be significant.

On the downside, there is this unavoidable cost of selling – the CPA%, a percentage cost on every item sold.

So the answer to profitability in ecommerce is to set the right CPA%, monitor it very carefully and run a very efficient company.

Having the right ecommerce platform is critical to that success. The IRP Commerce Cloud gives you all the tools you need to drive down your CPA% and increase your conversion rate and revenues.

Conclusion  

At IRP Commerce, every company we work with makes online profits. In fact the IRP Commerce Cloud pays for its own cost to a company because it brings down the CPA% by ensuring that traffic generation is efficient and conversion is high.

Businesses sometimes make the mistake of seeing the IRP Commerce Cloud as an increasing overhead when really it’s the main reason for revenue growth and success.

The value-add that the IRP Commerce Cloud brings to your business should not be discounted or purely seen as a cost that can easily be reduced or replaced without significant impact to your revenues and success.

Account for the IRP Commerce Cloud correctly and continue to see your business grow and succeed.

IRP

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