The Financial Metrics Most Ecommerce Businesses Aren’t Tracking (and Why You Should!)

Most ecommerce sellers focus on revenue – but what about the financial metrics that truly drive profitability? In this video, the experts from Kelly+Partners break down the key numbers every Australian ecommerce business should be tracking to scale sustainably.

Get in touch with Kelly+Partners: https://www.kellypartners.com.au/

Get in touch with A2X: contact@a2xaccounting.com

00:00 The financial metrics most ecommerce businesses aren’t tracking (and why you should)
00:19 Meet Kelly+Partners
03:37 How to get accurate financial data & reports
14:13 What does a great Profit & Loss look like?
21:06 Gross Profit (GP) and Gross Profit benchmarking
27:17 Calculating Cost of Goods Sold (COGS)
31:18 Net Profit benchmarking
34:11 Marketing Efficiency Ratio
36:25 Customer Acquisition Cost
39:00 Performance breakdown: Booktopia, Step One, Adore

The information provided in our videos and resources is meant to be general in nature. Please consult a certified expert to get advice for your specific business requirements.

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Key Takeaways

Why your data foundation matters

“Garbage in, garbage out." – Danny

Before chasing benchmarks, nail the basics: rock solid bookkeeping, accurate accrual COGS (match COGS to what you sold, not what you purchased), and reliable marketplace/Shopify payout reconciliation with A2X. Without that, it’s tough to trust any KPI.

3 metrics you can’t afford to ignore

“Numbers are the language of business." – Danny

Danny and Rachel explained that when you understand your numbers, you gain the ability to read your business’s story, spot opportunities, and make confident, informed decisions. Here’s a list of some of the numbers you should know.

Gross Profit (GP) %

What it tells you: Money left after product costs, shipping to customers, and merchant fees.

Benchmarks & tips: As a rule of thumb for own-brand products, aim for ~50% GP or better; category matters (e.g., beauty often runs higher, apparel can run lower due to returns and shipping).

Net Profit %

What it tells you: True bottom line after OpEx (marketing, wages, rent, subscriptions, etc.).

Tips: Use GP to decide how much you can invest below the line; some brands deliberately spend more on marketing to pursue growth, with eyes wide open about the profit trade-off.

Marketing Efficiency Ratio (MER)

What it tells you: Total revenue ÷ total marketing spend.

Tips: Use it alongside margins to decide whether to push or pull back marketing spend.

Common profit leaks

• Blanket discounting – E.g., across-the-board 20% sales that quietly crush margin.
• Under-recovered shipping – Charge what it costs; some brands even turn shipping into a small profit center.
• FX & freight creep – Small changes can erode GP%.
• Subscriptions sprawl – Keep them under control as part of OpEx reviews.

Key takeaways

• Start with a strong data foundation – Clean books, accurate COGS, and reconciled payouts.
• Know your numbers – Understand what each metric means and why it matters.
• Link metrics to decisions – Use data to shape strategy, not just measure results.
• Review regularly – Monthly for big-picture, weekly for leading indicators.
• Stay profit-aware – Growth only matters if it’s sustainable.

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Transcript

Hey everyone, my name’s Geoff. I’m the Head of Marketing here at A2X, is ecommerce accounting automation software for the top Amazon, Shopify, eBay, Etsy, and Walmart sellers, as well as their accounting partners. And speaking of accounting partners, I’m joined here by Danny and Rachel from Kelly+Partners. Kelly+Partners is a full-service accounting firm based out of Australia. They also have offices internationally, but in this video, we’re going to focus on Australia specifically.

And we’re gonna talk about some of the key financial metrics as well as benchmarks every ecommerce business needs to know. And why it’s sometimes important to compare yourselves against peers. And then I’d say the most important thing is how to use that information to make informed decisions as well as build strategies for growth. So before we get started, Rachel and Danny, I’d love if you could introduce Kelly and partners as well as yourselves.

So yeah, I’m Rachel. I’m a client manager at Kelly+Partners. We work out of the Northern Beaches office of Sydney, which is pretty incredible. And yeah, we’re a full service accounting firm. We obviously do your sort of bread and butter compliance, but we are Ecom specialists. So we work a lot with, you know, financial control and business advisory, just really helping Ecom business owners and their teams just get a grip on their numbers and feed that growth mentality.

Yep. I’m Danny, senior partner at the Kelly+Partners business with Rachel. Yeah. Much of what Rachel said, we just live, breathe and sleep ecommerce accounting businesses every day. So Rachel talked about Kelly and partners providing services for bread and butter compliance. But what we’re talking about today, I think is kind of the next level of that, which is how to really get clear financial insights and then make informed decisions.

Danny, do you mind providing a little bit of additional context in terms of why an ecommerce business would work with a practice like Kellyanne Partners? Yeah, I think most people when they first start working with an accountant or when they first start their business, they think about their accountant as a partner to just lodge a tax return or lodge a bass or meet their government responsibilities. I don’t know if that’s our upbringing or whatnot, but we’re brought up to think about, need an accountant to do a tax return. But largely what we’re doing here is essentially bridging that gap between

like re re re engineering what you use your account for. It should not just be for tax compliance. And you’ll see through this conversation, like the level of depth and understanding that you should be working with your accounting partner on to understand the accounting relationship should be much more about how do I get, how do I understand my business better? How do I make better decisions, et cetera? And if all you’re doing is telling the accountant to lodge a tax return once a year, you’re definitely going to not get that. There’s going to be a gap in the advice you’re getting.

So largely what we’re doing at Kelly+Partners is yeah, building the relationship where we’re the accounting partner for the client’s businesses, where it basically feels like we’re part of their internal team, helping them get the information to make those decisions. Okay, so if you’re watching this video, you’re likely doing six, seven or eight figures a year. And one of the things that I wanna make note of is that you should be able to answer a lot of the questions that we’re going to be going through.

But if you can’t and you wanna work with an accounting partner, Kelly & Partners is available. We’ve put their link in the description below. So please do get in touch with them if you’d like additional support with your accounting and finance questions. So in this video, we’re gonna be talking about the key financial benchmarks for ecommerce. But before you even get to key financial benchmarks, one of the core themes that you’re going to see is the importance of having accurate data.

Because given the systems that we use, the reports that exist within each of these systems, we all have access to multitude of data sources. But the challenge is, and as you’ll see from this conversation, a lot of the time it isn’t right. Garbage in, garbage out, if you will. So one of the most important things before we kind of dive into the individual metrics that you should be tracking and how you can compare to peers that I want to make clear is the importance of accurate financial data.

And that’s, know, through using tools like A2X, through working with, accounting partners like Kelly+Partners, critically important. Danny and Rachel, before we actually dive into, to, the metrics, anything to add on that statement? I think that was, I think that’s kind of spot on. Like the way we think about it is you need a great process firstly. So before we do anything else, we need a great process, of how we’re to operate. Then we need a great bookkeeper or bookkeeper.

like team, whether that’s internal in an accounting firm or your own bookkeeper that can actually execute on that process, a great accountant that can ⁓ translate and help you understand those numbers and then great software and tools to allow you actually to get to like 95 % accurate relatively quickly. Cause if we don’t have those things, you know, we don’t have great data coming through the system. We can’t actually have these conversations like garbage goes into the data. The conversations are garbage. Everything’s rubbish. So yeah, we need to combine kind of process, bookkeeping, accounting knowledge.

and software tools to be able to deliver all this to someone effectively and giving them what they need to understand their business making decision process. So the cool thing about Kelly and partners is that you work with a wide variety of ecommerce businesses and you get unbelievable insight into their financial performance. So I’d imagine that when a new client comes on board, ⁓ you could quickly see if they’re under or overperforming.

other businesses. And then from there, you could really quickly probably give them some incredible advice and insights. But before we even get into that, Rachel, I’ll ask you this question. What’s, you know, some of the questions or that an ecommerce business typically has when they’re knocking on the doors of Kelly and Partners? Usually it comes from a pain point of some description. So usually they’re feeling that something’s not working. Nine times out of 10 in e-com that’s

cash that’s their issue. It’s stagnating their growth. They can’t get past a certain point because they can’t get enough cash on hand to fund the growth. So that’s the biggest one. But usually, we need to go down into deeper into why that’s happening. So that’s where we come in to give integrity of data, making sure they’ve got the reporting in place to be able to tell.

where the pain’s coming from, that’s the biggest thing. So yeah, that’s by far the most common one is cash issues and they’re struggling with something. And then we quite often go into building out a process that they have the bookkeeping, like go right down back to the basics and make sure that they have a bookkeeping process in place, make sure that they’re using the right tech stack in terms of what softwares they’re using.

And making sure that we always say this, but if my client’s having a conversation with someone and they want to know what their GP is, they should be able to call me and ask me. And I should be able to tell them what that is. And that’s the type of thing, run relationship that, you know, the client should be able to have with their accountant and know that their accountant can rely on their, on their data. And GP for those watching, we’re going to dive into it quite deeply as cross-parties. Correct.

And then I think, I think the other thing which Rachie can go deeper into is they’re actually looking for validation as well. Like they’re, they’re often showing up and like, you know, revealing their numbers for the first time to you. And it’s kind of like standing naked in front of you, be like, Hey, look at my, look at my real performance, not the stories I tell on the podcast, what’s actually happening. And, you know, they want to be told like everything’s okay, or how do I compare? ⁓ And then Rachie’s team more often than not have to

say, well, we can’t actually tell you that answer today until we fix a lot of these issues. Cause the data is a mess more, more. It makes it so much more satisfying than when you can’t have the conversation with them. Like once it’s fixed, the before and afters are, are honestly incredible. should do like transformation videos. Like, know how you have like the house before and after like a financial renovation. When you say revealing their numbers, right?

I’m assuming that you’re talking about, you your classic financial statements, profit and loss statement, balance sheet, cashflow. Do the businesses that come knocking at your door typically have these in place? So the, because we have software like Xero, anybody that sets up a Xero can have access to those reports. They’re just, if the input isn’t correct, they are meaningless.

Yes, they, nine times out of 10, you speak to them and you’re like, do you have a zero? And they’re like, yes. And then you open it and then you look at the reports and you ask them, you know, where are they, what data here they’re relying on. And they’re like, I didn’t even know that I had the ability to pull a P and L from my zero. So they do have the ability given that, you know, accounting software is, you know, it’s not designed to be used by the everyday person. It’s not like it was before where it was, you know,

super reliant on the contents to be able to use the software itself. Um, so yeah, they have access, but it usually, there’s still a bit of data and knowledge gap that, that we kind of helped bridge essentially. But yeah, they bring us, they bring us a P and L or they bring us a zero file, which has the ability to have a P and L, but the data in there is rubbish. So we have to rebuild that. The only, generally the only thing they really know is their sales number and maybe the number of employees they have is like their

their measures of success to compare to their peers. And we have to reframe that to, well, actually we need profit and more important than profit, need cash. And so we have to kind of cycle through what does a profit and loss look like? What does a balance sheet look like? How does that turn into cashflow? How do I plan my inventory purchases, et cetera, a bit different, like get them to understand not just what sales mean all the way to cash. And, we go into it today, but like the metrics around gross profit overhead costs,

cashflow marketing spend, et cetera, like getting them to really delve into become experts in their business. Cause you know, you can’t, you have an obligation as a business owner to learn the language of your business. Otherwise you don’t have a right to really, it’s like, I want to live in France, but I don’t want to learn how to speak French. It’s kind of like, well, you kind of have to learn the language if you’re going to live here. Yeah. a lot of times these folks are marketing individuals or product individuals. They’re not finance people.

So they do an incredible job in those areas. And if you’re commerce business watching this, you’re probably recognizing yourself in what we’re describing. And that’s the really cool thing about ecommerce. It’s also the low barrier to entry, but it’s also one of the fastest growing segments. There’s not many industries where you can start a business and then within a year or two, generating multiple millions of dollars in revenue, which is just quite interesting. And it is complex. It’s not.

It’s not simple, which we’ll go through today, but yeah, there’s a lot of complexity and not to get the revenue, but to actually make profit. Yeah. They’re also usually making that level of revenue with a very small team. So they don’t have people around them. Like if you think about another different type of business that’s not sort of been built in someone’s bedroom, it’s, you know, they’re hiring or they’re bringing in people to their team that, you know, helps them grow and move forward.

usually they get to such a high level of revenue without having that in place. So quite often that’s sort of where we step in and we see it all the time. And Danny’s right, it’s not just someone who’s just starting. Like we’ve seen, you know, 30, $40 million econ businesses that yeah, just don’t have a handle over financials. Yeah, a hundred percent. ⁓ you know, we talked about this idea that everyone has a zero account, but

which effectively makes most of these financial statements quite accessible, talk to me about a little bit of the technology that you might use to ensure that the financial data is actually accurate before you even start to drill into the individual metrics as well as their benchmarks.

So for sales, our first step, as soon as we have onboard a client is to set up an A2X. It’s, we’re always like, yeah, we’ve got this, you know, we use this software called A2X, our clients use it. It’s by far the most efficient way to, for us to get quick, like better data. And it’s, you know, the easiest to use, I guess, in that instance. It means that you can have a bookkeeper that doesn’t work in e-comm use it.

And it will still work as long as it’s been set up correctly and you’ve got the correct eyes on it. So from a sales perspective, yes, it’s always A2X. But second to that, we always speak about the inventory piece and whether or not they have an IMS or an inventory management software, whether that even works for the business. So logistically within the business, as

deep in the detail as we are and as closely as we do work with businesses, we’re not in a position to be able to tell them what inventory management software would work for them because there’s so many things that go into it. We have suggestions, obviously, but logistics and how that works within their business is obviously the most important factor because they’re the people that are using it day to day. So having a good inventory management software that works for the business is…

is obviously the second one that we would make sure that’s in place. So accounting software and sales reconciliation from A to X and having a strong hand on your inventory, whether that be through an external IMS or through the likes of your Amazon and Shopify’s. Awesome. A lot of the financial metrics that we’re going to talk about today live on the profit and loss statement. So I think

you know, probably the best way to get us started here is to provide us with a 10,000 foot view of what a good profit and loss statement looks like to you and the Kelly+Partners team.

A good profit and loss is always everything has its place and everything has its bucket, I guess is the best way that we describe it. And I would say 10 times out of 10, if you know, well, let’s say nine times out of 10 to be kind, but most of the time, whenever a client comes on board, they have a P and L that’s, you could print it out and make a book. It’s so long. The, know, categories are…

sort of all over the place. We don’t have a handle on being able to quickly see what’s cogs, quickly see what’s staffing expenses, quickly see what’s marketing. So everything having its bucket and everything being capitalized and named correctly is, my team love getting review points from me when I’m like, can you put a capital letter on that please? But yeah, making sure it’s really clean and easy to read is the quickest way that we can get to having a meaningful conversation with the business owner, which is really what we want to do.

And so putting everything in place to be able to show the P and L to the business owner and, know, have it clear, easy to read from someone who isn’t an accountant. It’s easy for us to say, because it’s what we do, you know, but making sure that the business owner can read it and pull the same, you know, conversation points that we would have as a sort of a finance or an accounting professional is our goal. think, like I said before,

you know, numbers of the language of business and like Rach is saying, it’s kind of our job to help translate that in the most easy way possible to the client so they can actually understand the numbers and metrics of the business that they’re operating. So many, so many micro decisions and details month to month go into running of the business. This P &L is essentially the scoreboard of all those decisions at the end of a month. So we want to make sure that they’re actually getting the scoreboard and then they can see what the decision making.

how that’s what’s impacted by that. And, you know, take some time and a bit of education, but that’s essentially our job is to help translate that and get that in a way where they can run that report by themselves in Xero, read those numbers and actually understand what the business is telling them from those thousands of micro movements and decisions every day that happen at an operational level. And speaking of reading the book, how often would you recommend a business owner look at their profit and loss statement?

We normally do it monthly just because we have a, obviously they keep track of their sales and their metrics from other sources, but usually we have like a, we would recommend a month end process be in place so the business owner can be given reports and financial reports that they know have been, you know, book-kept correctly and then, you know, looked over by the likes of us.

And then we usually prefer to have the conversation monthly with the client and just it’s, it’s reps, right? It’s just repeatedly having the same conversation about like, right, how’s the, how’s this month affected your GP, you know, was your OpEx too high? It’s just constantly having that conversation. And, but, you know, usually our clients would get to a stage where they don’t need to have it monthly because they’re, as Sunny said, they’ve learned the language. We’ve got the reports that make sense.

But yeah, usually monthly. But as I said, that doesn’t mean that they don’t pull their data from other sources and look at it weekly or what have think as a business just in general, not ecommerce, just business over the world, we’re looking at that full scoreboard monthly. Like, yes, get me my report, make sure that full data is clean monthly. We have to have a close period, and a month’s a good close period for most people. But then daily or weekly, they need to have different KPIs that they’re monitoring and managing that could be

marketing spend over sales or something like that on a daily basis. But yeah, the full P &L is monthly. And just a quick follow up question for the ecommerce businesses watching this video. What should they expect from their accountants and bookkeepers in terms of number of days post month end to have their books ready to go to review and accurate? I know that this is a loaded question, an important one as well.

Although Rachie does that work, not me. So let her commit to this number. Yeah, I feel like it’s a difficult one to give. We always say the 15th. By the 15th, the business owner will have a, or should have a report. The one thing that tends to always hold that up is the inventory piece. Just because as Dani said, it still requires too much manual input for most businesses.

Yeah, usually that’s what takes the, I guess, the longest to get the numbers over the line. Um, but yeah, we always say the 15th, it sort of, you know, it gives them long enough to react before the end of the next month. Um, if there’s anything that they want to switch up or change or that they’ve noticed, for instance, it usually gives them enough time to react. Um, to the data that they’re looking at. Yeah. there’s a wide number. There’s obviously a lot of days between the first and the 15th and not everyone’s getting their report on the 15th, but we have to.

Yeah. You’re playing a schedule, but it’s largely based on the sophistication of the owner. The more software and systems in place that allow us to pull the data without input from other people means that we can run things faster. But if we’re waiting for someone to reconcile something or do a report, you know, business owners are busy being business owners, not always reconciling numbers. So we have to kind of build buffers around that. I think the cool thing about working with a practice that specializes in ecommerce is that, those windows.

15 days as an example, are more than possible. And to your point, potentially even shorter with the right technology and the right input, where I think like, if you were working with a more traditional accounting practice that might not have that experience in ecommerce, you could potentially expect either longer delays or maybe even inaccurate data. I think like you could get it fast. you,

The truth is you could go to a firm that doesn’t specialize in ecommerce and we could do it and we could get it to you in one day. It’d be super fast and you’d get a report. Accurate. It’s like the more accurate we want it, the longer it’s going to take. And so you’ve got to find that balance between speed and accuracy. And, know, obviously even at 15 days, it’s not going to be a hundred percent accurate. It’s probably 95 % accurate, but the cost of that extra 5 % isn’t worth it. The time cost of the extra 5 % isn’t worth it. So it’s finding that.

trade-off and its materiality. It’s a really good point. And the reason I asked the question is it comes up quite a bit, right? Like in terms of an expectations standpoint. So I really appreciate you answering and you’re right, like 15 days for 95 % accurate data, I’ll like, I’ll take that trade off any day. Yeah, yeah, yeah. So Rachel, you talked about what a great profit and loss statement looks like. And that’s a combination of accurate data, appropriate capitalizations. I did not miss that. And categories.

Let’s start to talk about the metrics within it. So I’d love for us to go over gross profit, which is an incredibly important metric in ecommerce. It was number one on your metrics list. Do you mind giving us a brief description of what gross profit is and then a decent understanding of what a good gross profit margin looks like? Yeah. So your gross profit is basically your sales minus the cost to make that sale.

And so in product based businesses, what goes into that cost of goods sold is the cost of the product that you’re selling, any freight to your customers, merchant fees are a big one in e-com. So those are the bits and pieces that go into your cost of goods sold, but yeah, your GP is your sales minus the cost basically to make that sale. And then your GP percentage is just that over your total sales.

The, we usually work off the basis that, you know, you need at least 50. We see a wide range though. It’s so dependent on product and product type. So if you take the beauty industry as an example, quite often the beauty industry is small products, low cost and low freight. So the GP on the beauty industry or things that you sell through the beauty industry are usually quite high.

And so you may have a higher GP. However, if you look at like the likes of clothing, know, higher cost, you know, not necessarily cheaper and free it and high return usually, because of sizing issues and what have you, usually their GP is slightly lower. So when we do benchmarking and we look at an individual client, so throwing back to when we talked about what does a client ask you and where they sit against their peers.

We wouldn’t usually compare someone that sells a beauty product to someone that sells bikes because it’s a completely different product and it works differently. Their P &L looks completely different. So yeah, usually we try to benchmark against like product versus, you know, putting everyone in e-com in the same bucket. And to go like, just to explain a little bit more, like obviously the, not obviously, but the higher the gross margin.

percentage, the better for the business. The reason why it’s better, it means we’ve got more money left over to spend on marketing, ⁓ et cetera, like other growth items of the business. ⁓ But largely we use it on marketing or most business owners use it on marketing to grow the brand. Clients, as we said at the start, like people are often quoting revenue numbers as they beat their chest of how they’re winning, but really they should be quoting their gross profit numbers as how they’re winning because that’s actually the money we have left over after.

selling our product to actually spend on growing the business. And that’s what really matters. like, yeah, we’re harping on it a lot in this convo, but we harp on it lot with business owners because it’s like, they have no idea, they talk about sales and we just have to like ram down their throat the importance of getting this margin up by one or 2 % or whatever they can. And like Rachey said, like 50 % is our kind of baseline for own brand products that we like. If you don’t have 50%, it’s gonna be really hard to make money.

after you have to spend on marketing people, et cetera. When you get the accurate data and you get those insights, how often do you see people below 50 % and suppressed?

We do, but usually it’s for, I was actually having a conversation with a client of ours yesterday. Usually it’s for a variety of reasons. And when you have the data and you have everything that’s in different buckets and you know that everything’s like neat, it’s actually really easy to pick up on what that is that’s causing it. And so we do see it. We don’t necessarily see it super often that it’s less than 50, but I think the most common conversation I have is it’s less than I thought it was.

almost a more difficult conversation to have because obviously the business owner has an expectation for how their business is operating. so yeah, less about it being less than 50 more about it being I thought it was higher. And if and if we had to talk to like the variance piece, it’d be often one of two things or maybe a couple of a couple major ones, but like discounting is a huge problem that they don’t actually realize the impact of their discounting on their margin. They just look at it as a, I bet I got more sales.

but it has a huge impact and it’s not truly understood. Things like foreign exchange and freight, like they don’t mentally realize again, as their orders values are increasing, the impact of the dollar movements between Australia and we’re in Australia, Australia and USD. The sales tax, GST, like import duties, et cetera, like these all come into that number and they’ve just thought about the price that they got the t-shirt made for and they don’t think about all these other pieces.

freight costs in the last 12 months have gone through the ⁓ comparable to the 12 months before. So again, it’s not necessarily in their head space. Such a brilliant point. And it kind of comes back to the main point. You need accurate data to be able to understand literally where you can make up this difference or where the difference is coming from in the first place.

And then why just be a combo of like, your 20 % discount store wide needs to change. Like we just have to look at it. Your marketing strategy needs to change because of this and that one is your margin 2%. Yeah. Charge five bucks more for shipping or something. Yeah. Yeah. being more thoughtful. Discoint the products that you should be discounting. That’s a really big one as well. So the sort of like ABC analysis of what you should actually be discounting is huge. Like on Black Friday, for instance, it’s really big. Obviously it’s huge. And.

you know, getting all the right products and discounting that by the same amount that you’re discounting your C products is like a cardinal sin. Like it just, happens and it happens all the time and it just eats into people’s margins so much. essential component of gross profit is obviously your cost of goods sold. ⁓ So Danny, do you mind kind of walking us through what’s included in cost of goods sold and why it’s so important for gross profit? Yeah. So Rach touched on this when she was talking about gross profit and trying to get gross profit at 50%.

the 50 % of costs that are included in that are our product costs, like our direct item that we’re buying or selling in order to sell, our merchant fees. So every time we get a sale, have to pay Shopify payments, drive after pay, someone decides they’re taking a clip of our revenue, our logistics costs. So our inbound cost often goes into our product costs, our outbound costs to get it to the customer is obviously a cost we incur every time we sell an item. They’re kind of the three.

major ones. Probably the other piece is like, if we’re manufacturing our own products, like, you we do it with some jewelry clients where they make their own jewelry, that production later builds into our inventory and our cogs. Yeah, so basically anything that we that we incur to sell our product, that we only incur if we sell the products and merchant fees is the easy way to understand that they’re the things that should go in at cogs and the total of those items we’re trying to keep below 50%. Totally makes sense. And Rachel.

You talked a lot about early on people coming to you with incorrect numbers. What mistakes do you see a lot of clients make when they come to you in the way that they calculate their cogs? Usually what we see is that it basically goes off when cash is paid for inventory. So on your P &L and your cost of goods sold from a bookkeeping perspective, if they…

buy 100K of inventory that they’re not going to sell until, you know, it’s March now, they’re not going to sell that until June. And we would see that reflected in March cost of goods sold, which causes just crazy fluctuations month to month basically. And, know, the seasonality, the flow that the business gets into purchase inventory, you you start to see just big fluctuations in their GP month to month.

It usually evens out on an annual basis, but, and yeah, on a month to month, we see huge fluctuations there. We focus on what goes into cost of goods sold is only reflective of the SKUs and the goods that they sold that month. So it’s one thing to get accurate, Cogs, and I’m assuming that’s why a lot of clients decide to work with you, but I’m actually most curious, what do they do with that information now that they actually understand what their cost of goods sold are? Yeah, the one example I can think of as a business owner that we brought on that we

like fixed up her reporting and she was like very new to, you know, reading financial reports and she was very open about that. She really had no expectations, but when we showed her that she was under recovering on her shipping and she ended up changing her shipping strategy and now she over recovers and she came up over that’s about nine months ago. So she actually makes money on her shipping rather than, you know, it being a cost to the business because she just didn’t know.

She didn’t have the visibility and she just switched up her strategy with her team and now she over recovers. So it’s not an expense really. the, and then, even just like, much can I afford to spend on marketing? Like what’s my margin that I make per customer? What’s the lifetime margin on that customer? If I’m spending X dollars on marketing, is it worth it to acquire that customer? You can’t have that combo without knowing the percentage of margin you make on a customer.

And what I love about the examples that you provided is sometimes accounting and finance can feel so academic, right? It’s just kind of giving you a picture of what’s happening. But Rachel, in terms of like the over recovering on shipping, you can now make a strategic decision during a holiday period to offer free shipping and know that it’s not going to be a hit on your business, right? Like it actually gives you the information that you need to pull on certain levers to increase sales or something is so cool. love, I really love that story.

Okay. So let’s continue peeling this onion. Danny, I noticed that you like that analogy. We talked about gross profit. We, we got into cogs. Let’s talk about another big one, which is net profit. ⁓ Rachel, do you mind kind of breaking it down? Like what’s included as part of net profit and how do you calculate it? Yeah. So after you have your sales minus cogs, obviously that gets to your GP, but everything that sits below that GP line.

are all your other operational expenses that, ⁓ go into running your business. And after you take those away is where you get to net profit. So what sits in between the GP and the net profit is the likes of, you know, your marketing spend, your wages, your rent and other, you know, subscriptions to huge one for econ businesses, for instance. And that all sort of sits below the GP line and then gets us down to our net profit. And advertising is by far the biggest.

and in terms of percentage and importance. it’s, yeah, it’s the biggest one to push sales from an econ perspective. So it’s yeah, it’s it usually sits at around the 15%. And I hate to use the word sometimes, but like, it really does depend to bring it back to the product. And it really depends on how much they have to spend. And it also depends on the sort of lifecycle of the business as well. We typically see that businesses will really push paid media at the start trying to

really, really, really push growth, then they might try to pull back their reliance on that as their business sort of hits a more mature, you know, well-known brand. And so can fluctuate hugely. We have clients that spend 40 % on marketing, but they make 20 % net profit. And so it really, really depends on that GP to see how much you can spend below that line. I think, I think largely to that point, like we’re

We’re not here to dictate and say like, can only spend X amount. We work with the client to understand some benchmarks with a target profit number in mind. But strategically, like as part of the conversation, if we’re like, hey, like your margin’s 50%, we need to be spending this much on marketing to make a 20 % profit. But they make the decision to be like, no, actually I’m gonna overspend on marketing because I wanna grow faster. I know that that’s gonna eat into my profit. I’m deliberately making that decision knowing the outcome.

Like that’s all, that’s what we’re looking for. We’re looking for that knowledge and conversation. What we’re, what’s often happening is the owners are spending money and the end result, the net profit result just is what it is. They don’t actually go there with a plan of how they can now achieve it. So largely it’s like, here’s a framework. Let’s build a budget off that framework. Then let’s make decisions on where we want to flex to get a different strategic result. So I’ve absolutely loved nerding out with you all on financial metrics, as well as benchmarks.

Let’s get into marketing for a little bit. You’ve identified a marketing efficiency ratio and customer acquisition costs as incredibly important metrics. Can we start by defining these metrics, how to calculate them and what their benchmarks look like? Yep. So marketing efficiency ratio, like once upon a time we used to run marketing with ecommerce brands. We’re accountants by the way, so we’re not marketers. So I’m not going to pretend that we are, but we, cause we spend so much time here, we have to learn this stuff.

Once upon a time we’d sit down and we’d be like, Hey, like what’s your return on ad spend on your Facebook channel or your Google channel or, you know, try and get into the details on a channel by channel basis. think, I mean, maybe it was two years ago now when Apple done their update that removed the like attribution tracking, which made, you know, Mer as an idea, I only started hearing about again, like two years ago before that we were always in detailed channel analysis. But as we’re getting worse data on an individual customer basis,

We’ve now started to work with business owners on marketing as a whole. So you can no longer look at it. It’s very difficult to look at marketing and attribute channel-based costs to a return. So it’s like, all right, well, let’s go a step higher and just say, we spend $100,000 on marketing. What does that look like as a percentage of sales? So, so we’ve gone to a world where we’re just glumping all marketing together, because that’s the data we’re getting. Our marketing efficiency ratio is simply that. like, how much am I spending on marketing?

What am I making in sales divided by how much am I spending in marketing to give me a number? The higher that number, the better my results are. The lower that number, the worse my results are. ⁓ And there’s a sweet spot, like depending on your margin of your business and we’ll talk about customer acquisition costs and touch a bit on lifetime value, but there’s a sweet spot. it is, you can be spending not enough on marketing where you need to be spending more to be able to drive more customers. Like you’ve got that margin to spend.

So yeah, we’re often in the detail on like, well, what’s that number? And then should that client be pulling back or increasing? It does tie into the percentage very similar, but just, know, again, we’re not dealing with accountants, we’re dealing with brand owners, creatives, people that spend their time in marketing. So we try and speak their language as well. ⁓ And then if we start to think about customer acquisition costs as the next kind of metric, what we’re looking at is like, how much are we spending on marketing per…

customer that’s coming to the website on a transactional order basis. Again, the reason why it matters is like, there’s no spend, if we’re only making, you know, average order values, a hundred dollars, we make a 50 % margin. means we make $50 per order. If it’s costing us $60 to acquire that customer, we’re losing $10 every time that customer orders. So it’s an easy way to get to the unit economics of an order and to be able to have a conversation with the client to go, well, should we spend

$60 per order or $40 per order and understand happening to your dollars on an order basis. Obviously looking at one order is short-sighted and we need to look at the lifetime value of a customer against our marketing spend and think about how long, how many times that customer is gonna come back. But again, it still rolls into the same thing. It’s like, what’s our cost per order versus what’s the lifetime average margin that we make on that customer to make decisions on should we ramp up our marketing spend or pull it back?

And it’s not, it’s again, the business owners aren’t necessarily having these conversations all the time until we present the data to them in the report where we’re like, Hey, this is what it’s costing you to acquire a customer. You think you’re making a hundred dollars a sale because they’re not even taking into account the margin, let alone the marketing costs. we, once we go the a hundred dollars turned into 50, the 50 turned into 10 because you spent $40 to acquire that customer. You’ve only got $10 left to pay for all the overheads of the business. This is how many transactions you have to make at that metric.

to be able to pay your rent this month. It kind of really gets them to understand their business in number of orders and then go a step further and go, well, how many visitors do I need to get to the website to get that many number of orders? If we’re talking about now conversion rates to get that much dollars to pay my rent and just break that business down into the things that the owner can control, which is, do I spend money to get more visitors to the website? That was great. And honestly, ⁓

I don’t know if you’re going to take this as a compliment or as an insult, but that is probably the one of the best marketing answers that I’ve heard from an accountant very long time. So I appreciate the fact that you’ve kind of gone into the weeds and tried to put yourself in the shoes of your clients. So this is awesome. Rachel and Danny, I really appreciate your insights up to this point, especially as we’ve, you know, double clicked on a lot of really important individual metrics, as well as their benchmarks.

I’d love to put this into context in a different frame and ⁓ look at these individual metrics as it relates to three publicly listed companies as well as their financial reports. Rachel, do you mind giving us a breakdown of the performance of Booktopia, Step One, and Adore based on everything we’ve discussed up to this point? Yes. so looking at the three different businesses,

kind of bring it back to when you’re benchmarking, you need to benchmark against like businesses. And there is a specific reason for that. And it’s, really clear here. So for context, Booktopia and Adore are two businesses that, that resell. So they don’t, they don’t sell their own brand or manufacture their own brand. They resell others. And you can immediately see that that has a really big effect on GP because the cost of the product that they’re buying is,

is higher than the likes of those who would manufacture their own. And those who manufacture their own brand is the likes of step one. So you can see the distinct difference between sort of resellers that are selling other brands versus those that are manufacturing their own. Step one is smaller. And you can see that by sales, it’s the smallest out of the three. But.

It’s got the highest valuation, which is going back to what you were saying before about the revenue being a great number, obviously. And it’s nine times out of 10. It’s not actually a sign of the health of the business. You can quite clearly see there that step one, December 23 at the 45 million, but its GP was 66%, which is three times that of Booktopia.

but Booktopia had doubled the revenue. So it’s really clear whenever you put it in context and side by side of different types of businesses, ⁓ you can, you can see the distinct difference. The funny thing about it as well is that Booktopia and Adore would be better known, I would say. So if you say those brand names in Australia, people will be like, yeah, like I know Adore and yeah, it’s huge, but it’s actually performing worse than, than one that’s probably lesser known.

Going back to the conversation that we were having earlier about that GP, really being the determining part of what you can spend on marketing and other parts and other operating expenses for your business. That’s really clear with staff one, if you use that as an example, having 66 % GP, its marketing spend as a percentage of that total revenue is significantly higher than the other two businesses. It sits at the 34%. ⁓

That is probably out of different life cycle, different stage. That’s one thing that we talked about earlier that some businesses are more likely to overspend on marketing while they’re trying to get their brand name out there. But the second part of it is that they can afford to do it because their GP is higher. They have more to play with. And so they can really funnel money through into marketing to grow it and to grow it profitably is the most important thing here. Because then if we go down to the operating profit.

You can see that staff one sits at 24 % operating profit versus, you know, there’s a loss obviously for Booktopia. It actually went under. They were saved, but they got delisted off the Australian stock exchange because obviously their performance couldn’t uphold their growth. And Adore obviously sits at that 2 % as well, which is significantly lower than staff one. And then, yeah.

If you then go look at their valuation, you can see that step one is then valued higher, despite it having, you know, half the amount of sales of really both of, both of the other businesses. And like this is public data. So if I’m an ecommerce owner running a brand, I’m running these reports. Like I’m finding the ones that relate to me and I’m running those reports every six months when they get released to the market. Cause if you go read step one’s most recent report, like December 24, they’re talking about

having lower marketing spend and focusing on getting that marketing efficiency back up to drive the margin, to drive even more profit. And Adora talking about building out their own product range to get their margin up. Like the things we spoke about today, these brands are strategically putting in place as well. And you can learn that stuff from reading their reports and what they’re doing.

Yeah, it’s awesome. It really puts this conversation into context and demonstrates the importance of understanding each of these individual metrics and ensuring that you actually have accurate data for them as well. Okay, well, this was fantastic and massively helpful. Rachel and Danny, I really appreciate you taking the time and having a discussion with us about the most important financial metrics as well as core planning benchmarks for ecommerce.

I think it’s clear that you both have incredible domain expertise here and that if you are an ecommerce business owner and you want to get clear about your financials and get more clarity so that you can make informed decisions and build strategy against it, I highly recommend working with the Kelly and Partners team based out of Australia. Dani and Rachel, thanks again so much and we hope to see you soon. Thanks for having us. Thanks so much.