A strong profit is the goal of any online business. It’s the main indication of your store’s performance and your strength as a business owner. A high profit indicates growth, a strong customer base, and a successful business. A poor profit shows there are weaknesses that need attention; these may include your products, marketing, website, or business plan. So, how can you create a profitable online store?
In this guide, we’ll dive into calculating profitability. You’ll find out more about profit and its different variables, the benefits of predicting your profit, and how to calculate (and even predict) the profit of your online store. This post dives into the details of how to create a profitable online store. Let’s go!
What Is Profit for an Online Store?
Profit is financial performance (i.e. the money you make), but there’s a bit more to it than that. Here are a few terms you need to know when calculating profit.
Sales revenue is the money you receive in exchange for your products or services. This includes all types of income, including cash, checks, credit cards, debit cards, and other payments. A high sales revenue is a strong sign that your online store is doing well. However, it’s not the same as your profit because it doesn’t include any of your expenses.
Cost of Goods Sold
Cost of Goods Sold (COGS) is the money you spend to produce or acquire your products. For an online store, this may include the cost of purchasing the products to sell, the cost of the materials to create the products, and the labor you pay to create your products. It doesn’t include overhead costs like your office utilities, office rent, online store fees, etc. It does include rent and utilities used for a warehouse to store the products, however, because those expenses directly relate to the products themselves.
When you’re calculating COGS, think about each individual product you sell. What are the expenses related to a particular product? For example, if you sell paintings you create yourself, your COGS might include canvases, paint, paintbrushes, and other supplies. Your own labor may or may not be part of COGS, depending on whether you pay yourself a salary. If you commission other artists to create the paintings for you, though, their salary is definitely part of COGS.
Overall, these are expenses directly related to the cost of the products (aka goods) you sell, and should be correlated with revenue. That means, as revenue increases, so should your COGS at a consistent rate.
If you subtract your COGS from your sales revenue, you’ll find your gross profit. This figure shows how well your store is performing based on just your products. But it does not consider overhead expenses.
Operating Expenses (Overhead, etc.)
Nearly every online store has expenses besides COGS. Most of these expenses fall under the umbrella of overhead. These are usually shipping fees, website fees, software subscriptions, payment processing fees, and other office-related expenses. These aren’t part of your gross profit calculation, but they are important considerations.
Overall, these should be viewed as expenses that would still exist if you had no orders or sales. They are typically recurring expenses (like rent) that do not fluctuate with sales revenue.
Finally, and perhaps most importantly when calculating profitability, your net profit (aka net income) is the money you have once you deduct ALL of your expenses from your total sales revenue.
Sales Revenue – COGS – Operating Expenses = Net Profit
It’s your sales revenue, minus your COGS, minus your overhead and operating expenses. That remaining number is your net profit, which is the strongest indicator of how well your online store is doing.
If you want a quick and easy way to calculate the profit of your online store, there’s a handy online calculator that will do the work for you.
Predicting Your Online Store Profit
You can also predict the profit of your online store if you know a few estimates for the numbers.
First, estimate how many sales you might make within a given time period (e.g., a month, a quarter, or a year).
Next, estimate your COGS. Remember, these are the expenses that directly relate to your products
Finally, estimate your operating expenses for that given period.
Sales Revenue Estimate – COGS Estimate – Operating Expenses Estimate = Net Revenue Prediction
When you subtract all of your expenses (both COGS and operating expenses) from your estimated sales revenue, the final number is your predicted profit.
The Benefits of Predicting Profits for your Online Store
Why should you be calculating profitability in advance? The most obvious reason is to understand the viability of your business. If everything goes like you think it will, how much money will you make?
You can also use different estimates to find how many sales you need to make to hit certain goals.
For example, if you need to make $5,000 per month in net profit and you estimate your COGS and operating expenses, how much sales revenue will it take to hit that goal? You can just plug the numbers into the equation to find the answer:
Sales Revenue – COGS Estimate – Operating Expenses Estimate = $5,000
You can use this formula to determine what your breakeven point is. This is the amount of sales to generate a $0 profit – the minimum amount of sales needed before your business becomes profitable.
You can also use these predictions to find your optimum sales price. If you think you’ll make about 100 sales within a month and you need to make $5,000 in net profit, estimate your COGS and expenses to find the total revenue you need. Then divide that revenue total by 100 to estimate the revenue per sale.
That’s a great basis for pricing.
For example, let’s assume you estimate your monthly overhead and operating expenses at $2,000. Your COGS is roughly $5 per product sold. You need to make $5,000 in net profit, and you predict about 100 sales this month.
Here’s the equation:
Sales Revenue – ($5 * 100) – $2,000 = $5,000
In this example, your Sales Revenue needs to be at least $7,500. Because you estimate 100 sales, each product needs to sell for $75.00.
Predicting your profit is also a start to understanding your cash flow. The amount of profit (or loss) can help in determining whether you’ll have enough cash for upcoming purchases and whether financing may be needed.
How to Create A Profitable Online Store: Get Help!
As you can see, when you’re learning how to create a profitable Online store, the math can get complicated, but software and third-party tools can help. If you need help calculating profit, try this free online calculator. It’s a handy way to determine the current and future profitability of your online store.
Have questions about these calculations? Email us at firstname.lastname@example.org.