MarginDriver White Paper

Despite the emergence of ecommerce as insurgent force in an otherwise mature retail industry, none of the existing accounting systems were designed to handle the complex flow of financial data or provide order-level profitability reporting and analytics for all multichannel transactions. Enter MarginDriver - a sophisticated, user-friendly cloud application that provides the speed, functionality and universal access needed for internet sellers to thrive in today’s competitive ecommerce market.

Accounting and Financial Analytics in the Ecommerce Industry

The ecommerce industry is an international growth juggernaut that shows no signs of slowing down.  The global number of internet users continues to steadily increase as does their access to online marketplaces designed to meet their every shopping need. Likewise, ecommerce companies have enjoyed a proliferation of software platforms and cloud applications designed to make reaching those customers quicker and easier. Most of these tools are heavily focused on expanding internet retailers’ reach and boosting sales and revenue, as well they should be. But what about after the sale? What about digging into the numbers to understand margins and true profitability or loss? What about easing the headaches of gathering all multichannel financial data in one place allowing for in-depth financial analysis and simplification of ecommerce’s complex accounting. Here the market has so far failed the ecommerce merchant.

It shouldn’t be this way. Today’s ecommerce accounting systems should not only be able to address the financial challenges unique to ecommerce, but in this data-driven world these systems should also deliver robust financial reporting and data analytics tools designed to identify problem areas, measure the financial reality of decisions and record accurate and real time profitability at the individual order level.  Unfortunately, these solutions are lacking. Most of the ecommerce accounting software currently available on the market takes the easy path of recording results through cash payment statements instead of the much more timely and complex route of tracking orders at the time of sale. The industry is in desperate need of a tool that collects and presents meaningful data to sellers in real-time.

As a former CPA with 30 years of experience running a private equity company, I have always stressed the importance of a sound accounting system providing easy access to key performance indicators (KPIs) backed by accurate financial data. Guidance by a superior management team has always been the most essential ingredient of any business venture in which I was involved, but even the best management team staffed with the most talented people still needs timely access to financial reporting and KPIs to guide its decisions. This can only be achieved with a strong financial infrastructure and accounting system that automates the retrieval and processing of the necessary data.  

Several years ago, I invested in a friend’s ecommerce startup. I was also asked to draw on my background to design a financial reporting and accounting system based of the kind that had proven so successfu in my private equity ventures. In the digital world of ecommerce, we expected to find no shortage of business intelligence and financial reporting software solutions created to help internet sellers tackle these problems. But the glaring absence of such tools was both surprising and disappointing. Despite the emergence of ecommerce as insurgent force in an otherwise mature retail industry, none of the existing accounting systems were designed to handle the complex flow of financial data or provide order-level profitability reporting and analytics for all multichannel transactions.

The eCommerce Challenge

Financial reporting in the ecommerce sector presents unique challenges generally not encountered by traditional brick-and-mortar retail operations. Companies that sell on multiple sales channels and target different countries present an even greater challenge. A U.S.-based merchant can sell a product to a customer in Australia in an instant but have no idea as to the gross profit or loss of filling the order which was paid for in a foreign currency and needs to be packaged and shipped halfway around the world. To truly understand the profitability of this one online transaction, the seller not only needs to know the cost of the product sold but also the cost to ship the product (including any customs fees), the marketplace selling and/or credit card transaction fees and the applicable currency exchange rate (as well as any charges for currency conversion). Furthermore, in the age of automated repricing, the selling price for a product can differ for each order causing profit margins on the same product to fluctuate every few minutes. Not until all this data is located and collected under the same transaction ID will the seller know how much gross profit was made on the order or if the order actually resulted in a loss (it can easily happen!).  

Ecommerce moves at lightning speed compared to the brick-and-mortar world and internet retailers need complete order data in as close to real-time as possible. Waiting for only partial information, to be revealed in periodic settlement statements from partners such as Amazon, is simply too little too late to support prompt and intelligent decision making.  Processing this data in batches from payments received and then posting to the seller’s general ledger at the end of the month is not an acceptable accounting or analytics solution.  

Accounting Systems in Transition

In recent years, major accounting software systems like QuickBooks have begun to transition away from more robust desktop systems in favor of more simplified and financially lucrative online general ledger-focused systems. This approach depends on business operators to design and develop accounting software to capture and process original financial source data in a given industry (in our case, ecommerce) and transfer only the summarized results to the online general ledger system. The upside for business operators is the emergence of numerous software and cloud applications designed to meet the specific financial reporting needs of individual industries and business sectors. The ecommerce industry was clearly overdue for such a tool and we took it upon ourselves to build it with the needs of multichannel retailers first and foremost.

Our Journey to Financial Clarity

Our initial efforts to create this system were hampered by the sort of challenges that most readers are probably quite familiar with: data siloed in different platforms and formats; multiple currencies; payment statements for orders straddling two different months; endless spreadsheets, importing, exporting, vlookups, cutting and pasting. In time we managed to improve our efficiency and analytical capabilities by utilizing Excel macros and then a Microsoft BI cube to crunch the data. These tools generated gross profit reports on every order and summarized the data by sales channel for the month. The summarized monthly results were then placed in journal entries and posted to our QuickBooks general ledger replacing the old system of posting numerous manually prepared batch entries.

These developments signified real progress with our accounting challenges and provided us with many of the answers we were seeking in terms of analytics and business intelligence but since our system of using Excel and BI cubes was not totally automated it was still somewhat labor-intensive, error-prone and slow. The lag made it difficult for us to generate timely KPIs and track our business in real-time. Moreover, our appetite for faster and more powerful order analytics aimed at improving our margins and profits only continued to increase. It was at this point we realized that the specific accounting system and financial reporting we, and frankly the entire ecommerce community, desperately needed was not going to be part of any accounting software company’s strategic plans. It would be up to us to make it a reality.

Our Solution - MarginDriver

Thanks to years of dedicated hard work by our talented team we have developed MarginDriver- a sophisticated, user-friendly cloud application that provides the speed, functionality and universal access needed for internet sellers to thrive in today’s competitive ecommerce market. Data import is done programmatically leveraging integrations with various source system APIs (including order data, shipping data, live currency exchange rates, marketplace fee, etc.). MarginDriver currently pulls new order data from all channels and updates the database every 15 minutes. Detailed reports revealing the gross profit for each order are readily available as are summaries by sales channel, day and month, with only monthly totals being posted to the general ledger. These reports are now so reliable that we use the MarginDriver accounting system for our supporting documentation and permanent financial records. The hard capabilities are topped off by a business intelligence dashboard, featuring a host of constantly updated KPIs, and a suite of analytics tools (see below for more). We now have access to the kind of data, analytics and functionality we once only dreamed of as well as a unique accrual-based accounting tool that has simplified our back-end operations and saved us significant money on bookkeeping and accounting fees. As a result, our ecommerce business is smarter, leaner and more efficient with increased margins and gross profit.  

MarginDriver’s Analytics at Work

In today’s online shopping world dominated by competitive marketplaces, it’s easy for online merchants to find themselves uncompromisingly chasing top-line revenue. Many operators see it as the number one most important metric of success in their online business. And while it is certainly fundamental to the growth of any business, unrelenting focus on revenue growth can also be one of the fastest ways to go out of business. It often creates a false narrative for those without timely access to complete financial data on every order. Even if revenue is steadily increasing and the warehouse is filling orders around the clock, your company may simply be maximizing capacity, but not margins and gross profits. On marketplaces like Amazon and Walmart the strongest determining factor to winning the coveted Buy Box is price, causing merchants to operate on razor thin margins just to continue to sell their products to the masses. With shipping costs and fee structures varying across categories and marketplaces, this could spell disaster for those companies unable to determine their exact gross profit, or possibly loss, on each order.

We learned early on that chasing revenue growth must be carefully measured and constantly monitored so we developed a solution within MarginDriver to help us grow responsibly and sustainably. There are several notable ways that MarginDriver has improved the financial performance of our business through analytics and more informed decision making:  

Deficient Orders

The first is through our ability to identify orders that do not meet our minimum gross profit threshold. We know our average cost in overhead of labor and materials to pick and pack an order and get it ready to ship, as all businesses should know this cost. Any order filled at or below our gross profit threshold (at a loss when considering the cost of labor and materials to fill the order) simply doesn’t make sense for us to pack and ship; an easy decision when considering not having fulfilled that order at all would have made us a slightly more profitable company. Repeat this process and eliminate a couple hundred unprofitable orders each month and ‘slightly’ turns into ‘significantly’.  

We call these orders Deficient Orders and there are numerous filtering options in this feature providing users the ability to define their own parameters. This critical information allows us to react quickly to identify and take the appropriate action to correct these orders with problems saving us an enormous amount of time and money every month. It has turned us into a company that works smarter rather than harder and we are a much leaner outfit as a result.

Decision Model

To stay ahead of our competition we’re constantly testing and tweaking pricing strategies by vendor, brand, product weight, sales channel, fulfillment method, etc.; all in an effort to determine the optimal sales price for each set of defined criteria. With nearly all competitive sellers on the major marketplaces using dynamic repricing software, it can be an endless chore to accurately and sustainably identify margins and profitability at the order and SKU-level. Within a day, and sometimes within hours, we can evaluate what impact a ceiling or floor price change is having on our gross profit and gross profit margin, an impossible task without MarginDriver. We always knew reducing prices would generate more orders and revenue, but now we know almost immediately if it generates more or less gross profit.

We also use the Decision Model feature to test price changes on sales channels other than Amazon that do not utilize dynamic repricing. We compare the gross profit and other metrics for a specified time period (usually one week) before a price change is made to the week after the price change is implemented. It is extremely interesting and valuable information to see the actual unquestioned objective results that such price changes can have on our company’s bottom line. Often we find that even though increasing prices results in fewer orders it will actually produce more gross profit for the tested time period by increasing margins on the products sold and eliminating losses on some products.  We play with and compare different prices to reach the ideal price points to optimize our total gross profit for the time period being tested.

So Far Today

This feature calls on the ChannelAdvisor API every 15 minutes allowing MarginDriver to keep us up to date on our order and related gross profit progress throughout the day. With a quick glance at the graph, we can monitor the hourly movement in orders and gross profit and promptly investigate any negative or unusual changes. If we see a movement that calls for us to see the details behind the graph displayed on the screen, we can go to So Far Today in the Order Detail feature and look at the supporting details for every order included in the hourly graph.  

With MarginDriver analytics, we are identifying problems, finding solutions and taking appropriate action much quicker than our competitors. In today’s lightning fast world of ecommerce this can be the difference between the success and failure for an online business.

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