DTC and E-Commerce Brands Are Shifting Focus Towards Profitability
With the financial markets now demanding that DTC firms move from growth to profitability, DTC and e-commerce brands are adjusting current strategies to try and achieve profitability faster. In order to support this effort, companies need to move their marketing objectives from conversion metrics and focus on optimizing their spending on Contribution Profit.
What is Contribution Profit?
Contribution Profit (CP) is non-GAAP so it’s often not explicitly called out in financial statements or earning reports, but it is what operators use to understand the profitability of their business and manage the metrics that impact their ROI, e.g. – payback, CLV: CAC, etc. DTC and e-commerce companies can use CP to track how profitable the business is prior to accounting for fixed costs and can be measured down to the brand and individual product level. It provides guidance on the profitability of sales after accounting for COGS, return rates, transaction fees, holding costs, shipping costs, unit taxes, and customer acquisition marketing spend.
The popular sports betting company, DraftKings, uses CP to measure the progress of their state expansion playbook. The playbooks outline a plan to achieve profitability in a state in 3 years time, or less. A state that is CP positive means that DraftKings has acquired a sufficient number of customers in the region, is operating profitably, and their marketing expenditures in those states can be turned down.
Calculating Contribution Profit
CP is similar to Contribution Margin (CM) but is represented as a number where CM is typically a ratio.
To calculate CP, you need to first determine your Gross Profit which is defined as the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services:
Gross Profit = Revenue – Cost of Good Sold (COGS)
For an e-commerce company, COGS is the hard costs you spend to actually acquire and sell the product. This will include the cost to acquire supply, costs to ship and hold the product in inventory, cost to deliver the product to the consumer, return rates, restocking fees, taxes (net of payment by customer), and transaction fees.
CP is then calculated after subtracting variable expenses (ex- marketing) from Gross profit:
CP = Gross Profit – Variable Expenses
Optimizing ad spend towards Contribution Profit
It’s common for brands to structure their ad campaigns to optimize towards metrics like CAC, ROAS, etc. These metrics give you a good idea of how efficient a particular ad channel, campaign, tactic, etc. is at acquiring customers or driving sales. They are also easy to measure because the data inputs needed to compute are readily available. However, in e-commerce the profitability of an order can vary widely. Optimizing to ROAS, which is usually defined as Revenue/Ad Spend, results in overspending for some customers and missing the value of others which severely impacts profitability.
In order to measure and drive profitability, most brands will likely have to upgrade their current reporting and analytics system and integrate specific features that enable them to effectively optimize their ad spending towards Contribution Profit. Example:
- The system should automate workflow to ingest and centralize all CP data inputs. Metrics like CAC, ROAS, etc. require only marketing related data inputs, whereas CP leverages data from all areas of the company- e.g. shipping costs, return rates, holding costs, customer service expenses, non-marketing opex, and other variable expenses. Manually gathering these inputs for computation would be an inefficient use of resources and prohibit marketing from using data to optimize campaigns in-market. Brands need a system that automates this process so that they can calculate CP by tactic, brand, product, etc. in seconds.
- The system should create CP optimization signals for ad channels. Once the system is equipped to automate the computation of CP it should be able to feed optimization signals back to the brand’s ad channel(s) so they can optimize their campaign tactics, segments, creative, etc towards profitability.
- The system should be interactive and customizable. As new challenges and opportunities arise, DTC and e-commerce businesses evolve and change, and the way they determine their profitability can change too. Their system should allow brands to easily ingest and add any new custom data input for their CP calculation as new variables arise.
Zeenk helps brands optimize their business towards profitability
Zeenk is a new data analytics platform built for DTC and e-commerce brands. Our new Contribution Profit Analytics feature seamlessly integrates all necessary data from a customer’s sales channels and marketing channels into the Zeenk platform, with the key data from the Customer needed to compute Contribution Profit. Our analytics provide a summary and drill-down capability to deliver end-to-end visibility of Contribution Profit by brand, product, etc. including:
- Interactive pivots for easy analysis of financials by organization, brand, product, and advertising channel
- The ability to add custom formulas in the BI system to compute COGS per order, return on profit, and measure progress against specific financial goals for the business at the product, channel, and brand level
- URL addressability for easy sharing of saved reports
This new feature empowers brands to better optimize their marketing spend, and their business to achieve profitability faster.