How to Calculate Marketing Cost of Sales20.1.2022
A relatively common problem for the owners of e-shops is calculating the level of fixed costs. Only a small percentage of people know how to correctly calculate the percentage of marketing costs. Do you know how to correctly set up and calculate cost levels in your e-commerce business? In this article we’ll take a look at this together.
Calculating the level of expenses and the marketing percentage
When analysing and correctly setting up operations costs, it is important to begin by calculating the so-called marketing percentage. How is this done?
1. Margin calculation
We begin by calculating the margin that we generate on the sale of products and that we have agreed with a specific supplier. At the same time, with this calculation we obtain a realistic overview (simply put) of how much money we can generate from sales.
Recurring problems for e-shop owners include not knowing basic concepts in the area of operations costs. So, for the sake of certainty, let’s take a look at them.
- Margin – this represents the percentage difference between the sale and purchase price compared to the sale price – stated simply, it tells us what percentage of the sale price makes up our revenue
- Trade price markup – this indicates the percentage difference between the sale and the purchase price compared to the purchase price – thus it tells us how much the purchase price is increased from the original
- Discount – this expresses the percentage of the direct discount given to us by the supplier off the list price
For a better understanding, we’ll offer a simple example: if we buy a product from a supplier for 40 euros and then sell it for 50 euros, the margin is 20% and the markup is 25%. You can easily calculate the amount of the margin and the trade surcharge on a special calculator.
2. Level of fixed costs
Calculating the level of fixed costs is also important. Put simply, fixed costs are those expenditures that we have to pay every month, regardless of sales revenues. It’s necessary to have an idea of what percentage of fixed costs will be in the overall level of sales revenues from the very start. That is, they represent all the costs on a monthly basis that we must pay and which are not easy to minimise or optimise – for example, the cost of rent, servers, IT capacity or warehouse equipment. Subsequently, once we have calculated the level of fixed costs, we can define the minimum level of turnover the e-shop needs to cover its fixed costs.
3. Variable part – operating and marketing costs
The third step is the so-called variable part of the costs. If the level of turnover starts to grow from the point at which it covers our fixed costs, we can then determine what percentage we can devote to the variable part of the costs. These are all the costs that increase along with the volume of the e-shop and include more logistical kinds of costs, such as postage and packaging, but also, for example, employee wages (as the number of employees increases), and marketing costs.
Result as a marketing percentage
When we have thought through all three points well and we begin to speak about concrete numbers, we can calculate the total level of individual costs, which is best expressed as a percentage of total turnover. The marketing budget thus represents the difference between the generated margin after deducting fixed costs and after determining the coefficient for variable costs. From this we can then say what percentage we are able to invest in marketing and advertising. If the e-shop wants to generate a profit, the percentage that will be directed to the profit is then deducted from the marketing percentage.
Where do I find this information?
You don’t know where to get the data needed for the calculations presented above? The best sources for determining the level of margin are direct accounting or an overview from your accounting software (e.g. Pohoda, Money, Cross, etc.). When determining all the different types of costs, a combination of several resources can be used (e.g. accounting servers and platforms such as Google, Facebook, etc.).
Simple theory, problematic practice
It seems simple enough at first glance, no? In practice, however, e-shop owners come across many problems or errors that they make in such calculations. Which of them are the most common?
- What a margin is and what its level is – although this may sound unbelievable, many e-shop owners are not clear about these concepts and don’t know how to calculate the level of their gross margin. The solution may lie in practicing the calculation of the level of accounting margins (what percentage of margins they achieve).
- Low overview of cost – sometimes one thing applies here, elsewhere something else, and then determining the complete overview can be problematic. Then the marketing percentage or cost percentage may not be the relevant and crucial number, since the reality is often different. Investments in marketing outside the calculated marketing % may easily be as high as 4–7%, which is no small amount and could be used elsewhere and better.
- Badly managed accounting base – if the e-shop already uses an accounting system with a functioning categorisation, we can easily determine and calculate the above-mentioned data. Many e-shops, however, don’t use an accounting system at all or it is used by only one dedicated person – an accountant.
- Untuned cash flow, high marginal costs and bad logistics data tracking – e-shops face a variety of problems that need to be addressed on a daily basis. Do you know what not to forget when growing an e-shop and how to properly automate and optimise? You’ll learn more in our text on the technological background of e-shops as they growth.
What next with the marketing percentage?
Once we know the individual numbers, several scenarios immediately exist where the e-shop can move this data.
Improvement and optimisation
After calculating the marketing percentage and individual costs, owners most often switch into the so-called optimisation mode. If the calculations show that the e-shop has holes in it, e.g. in the amount of transport, personnel or marketing costs, a solution and improvements are implemented in the optimisation phase.
- If, for example, we find that our transport costs are too high, the next step may be to discuss better terms with the carriers.
- In the case of high personnel costs, it is important to consider whether or not we can do the same job just as well with fewer people.
- Marketing costs can also be a problem, when it is important to monitor the marketing percentage in more detail and save costs on individual platforms.
There is room for improvement even if the costs are balanced
If the cost values are correct, then you can proceed according to one of the following scenarios.
- We can deal with savings from the range. Briefly, we try to determine how we could increase turnover while maintaining the same cost percentages. This means that at the level of costs, we can lower the percentage of fixed costs by increasing turnover. In practice, this can, for example, look like this: if at the existing warehouse costs we are able to fill 1,000 orders but we would be able to fill 1,500 without a cost increase, then we will try to achieve the new target.
- If we get ourselves in a situation of having high turnover and reasonable cost levels, but we are still, nevertheless, at zero or in loss, margins may be a problem and negotiations for better terms (such as better prices or discounts) with suppliers should follow.
When we know the costs, we can invest in marketing and we are able set targets and subsequently key performance indicators (KPIs). You can read more about their classification, importance and impact on the company in our article Regular KPI performance monitoring.
Other, less common, but still effective scenarios are long-term replacement by better suppliers or the creation of your own brand.
- Finding suppliers with better terms. Stated simply, with the product portfolio that we currently sell in some volume in the e-shop, we can look for suppliers who for the same product will offer us better terms in the purchasing prices.
- Another option is to create your own brand, particularly for products that sell well and do not have a high affinity (do not belong to a specific brand). In both cases, this is a long-term process, since the products need to be chosen, ordered and stored, and the e-shop descriptions prepared, which can take as much as half a year to a year of work. This is an effective method, however, since at given levels of cost and turnover, we can generate much higher margins and can grow faster and be profitable.
Do you already know how to calculate the value of your margin, and do you have a sufficient overview of all costs? Although our explanation of calculations is universal, each e-shop is individual and requires a specific approach. Do you need help calculating your marketing percentage and setting the right strategies? Don’t hesitate to contact us!