In the current landscape of e-commerce, it is critical to understand something important. Revenue alone does not provide a complete picture of a campaign’s success. This is especially true within the fashion retail sector. Instead, focusing on profit per basket offers a more comprehensive understanding of financial health and cash flow. This paper discusses the importance of profit per basket over revenue per basket. It provides calculations to illustrate this concept. An example is an online fashion retailer’s Christmas Winter range of clothing.

The Business Problem

Online fashion retailers often face challenges in maintaining sufficient cash flow and profitability despite achieving significant revenue. This issue can arise from focusing too heavily on revenue metrics. Metrics like ROAS (Return on Ad Spend) and CPA (Cost Per Acquisition) may not fully reveal the actual profit margins. They might not provide a complete picture of profitability. These metrics may not give a complete picture of the products sold.

Profit Per Basket vs. Revenue Per Basket

To address this business problem, it is essential to shift the focus from revenue per basket to profit per basket. By evaluating the profitability of each basket, retailers can make more informed decisions. They can adjust product pricing. They can also refine marketing strategies and manage inventory more effectively.

Example

Let’s consider an online fashion retailer selling a Christmas Winter range of clothing, including coats, scarves, gloves, hats, and trousers.

• Basket A:
  • Products: 5
  • Average Product Value: £100
  • Profit Margin: 50%
  • Total Revenue: 5 * £100 = £500
  • Total Profit: £500 * 50% = £250
• Basket B:
  • Products: 5
  • Average Product Value: £80
  • Profit Margin: 100%
  • Total Revenue: 5 * £80 = £400
  • Total Profit: £400 * 100% = £400

In this example, although Basket A has a higher revenue, Basket B generates more profit. This demonstrates the importance of focusing on profit per basket rather than revenue per basket.

Implementation

To implement this approach, online fashion retailers can follow these steps:

Calculate Profit Margins

Determine the profit margin for each product by subtracting the wholesale cost from the selling price. For instance:

• Socks: Sales Price = £10, Wholesale Cost = £3, Profit = £7, Profit Margin = 70%
• Underwear: Sales Price = £15, Wholesale Cost = £5, Profit = £10, Profit Margin = 67%
• Shirts: Sales Price = £40, Wholesale Cost = £15, Profit = £25, Profit Margin = 63%
• Suits: Sales Price = £200, Wholesale Cost = £80, Profit = £120, Profit Margin = 60%

Categorize Products

Looking at profit by individual SKU (Stock Keeping Unit) can be complicated and time-consuming. Instead, categorize products to streamline management and implementation of the strategy. For example, categories could include:

• Clothing Items:
  • Socks: Average Profit Margin = 70%
  • Underwear: Average Profit Margin = 67%
  • Shirts: Average Profit Margin = 63%
  • Suits: Average Profit Margin = 60%
• Brand Names:
  • Ralph Lauren: Average Profit Margin = 55%
  • Saint Laurent: Average Profit Margin = 65%
  • Barbour: Average Profit Margin = 50%
  • Burberry: Average Profit Margin = 70%

Evaluate Baskets

Assess the profit per basket by multiplying the profit margin by the total revenue of the basket.

Adjust Strategies

Use profit per basket metrics to inform pricing, marketing, and inventory strategies.

Potential Groupings

To further simplify the process, consider grouping products based on similarities in audience and customer personas. For example:

1. Seasonal Collections:
   • Winter Range: Coats, Scarves, Gloves, Hats
   • Summer Range: T-shirts, Shorts, Sandals, Sunglasses
2. Price Tiers:
   • Budget-Friendly: Products with lower sales prices and moderate profit margins (e.g., socks, t-shirts)
   • Premium: Products with higher sales prices and higher profit margins (e.g., suits, luxury brand items)
3. Customer Personas:
   • Fashion Enthusiasts: Trendy and fashionable items from high-end brands
   • Practical Shoppers: Functional and versatile items with good value for money

By categorizing products in this manner, online fashion retailers can more effectively manage and implement their profit-focused strategies. These groupings align with audience and customer personas. This alignment makes it easier to tailor marketing and inventory decisions to specific customer segments.

Online fashion retailers can gain a more accurate understanding of their financial health by shifting focus. They should look from revenue per basket to profit per basket. They can make better-informed decisions to improve cash flow and profitability. This approach gives a clearer picture of a campaign’s success. It also ensures sustainable growth in the competitive e-commerce landscape.