The Side Hustle 09: Here's How to Lose Money This Cyber MonthSep 10, 2023
Reading time: 2 mins 30 seconds.
Arguable the least exciting period of the calendar year is nearly upon us - Black Friday and Cyber Monday, or BFCM, or Cyber Week. It should probably be called Cyber month though for some retailers.
Ah yes, the month where bad businesses pretend they're good for a few weeks...
I'm developing a bit of a dislike for this period, as you can probably tell. Don't get me wrong, I hope you make stacks of cash during this period (notice I said cash and not sales?) but the chances are, some of you reading this probably won't.
Across my various ecommerce related ventures, I have access to a lot of online retailers' performances, and I can assure you, there are plenty who are making higher profits in October than they are in November - and there are also plenty who are losing money during November.
Cyber week is the easiest week of month of the year for consultants like me, or marketing advisors and gurus, whose strategy primarily consists of advising clients on what sort of discounts or promotions strategy they should use, and how much to spend on Facebook ads.
"Have your Facebook ad strategy ready" is what I'm hearing - but who really cares, Facebook ads isn't a strategy anyway - that's for short term businesses, what we're trying to build are legacy businesses!
I can't wait till this period is over and the great businesses continue to shine - just like those ones that didn't grow any faster than normal during Covid, but didn't stop growing when it ended. I love those ones. Predictably profitable.
So why don't I like it?
Here's the problem:
Cyber Week teaches online retailers how to be lazy, and gives them a false sense of success. It goes against literally everything I talk about:
- Try not to train customers to wait for discounts
- Opt against using price as a differentiator in your business
- Look out for your profit margins
- Build a consistent, predictable business
It concerns me how many online retailers are going through the bulk of the year making little to no profits, banking on a big November/December to pay the bills. What an incredibly risky business - and not a very valuable one at that. I really see no point in running a barely successful online business for 11 months of the year - what happens if someone puts a pin in Cyber Week?
There is one simple reason why some businesses lose money, or make smaller than expected profits in that month - scaling up marketing spend while scaling down gross profits through discounting.
If you're planning to offer 20-30% off during this period, why on earth would you need to spend more, or even the same percentage on marketing to do it? Surely, you can afford to spend less as a percentage than you usually do, if you're on sale - in fact you probably have to to keep profitable.
If you're a business that sits below a 20% net profit in normal months, if you spend the same percentage of your revenue on marketing in November, than you spend in other months, and the bulk of your sales are coming from 20-30% discounts, then you're in dangerous territory.
Here's a dummy business that makes $300k in a month at full price, then makes $400k the next month at an average discount of 25%.
The numbers below are pretty average, neither great nor terrible, but the numbers assumed are common.
You can see in the BFCM period, despite sales being $100k higher, the net profit shrinks to $10k. This is a pretty realistic scenario. Here are my assumptions:
- Normal period sales achieve $300k for the month with no discounting, and a 70% margin on the products (or 30% COGS).
- Other cost of sales (COS) equate to 20%, bringing the Gross Profit Margin down to 50%.
- Operating expenses (OPEX) sit at 40% of revenue.
- Net profit comes out at 10%, or $30k.
Now, let's look at the same business, with an average discounted on gross sales of 25%, to achieve $400k in sales.
- The gross profit comes down to 43% after the discounting, the OPEX stays at 40% because they've increased their marketing costs, and some wages to handle the order volume, and the net profit drops to 3%, or $10k.
So, higher sales for less profit, at the end of the day.
Of course the problem is, many online retailers don't factor in COGS, they judge their success by how full their bank account is, albeit temporarily. In other words, they don't know their gross profit, therefore their net profit. Easily over 50% of businesses I've worked with are recording COGS incorrectly, giving them a wildly fluctuation net profit (does this sound like you? If so, check how you're recording your purchases - they aren't COGS).
The bottom line is (no pun intended), that if you intend to discount during Cyber Week, you should probably 1) know the impact on your gross margin, and 2) pull back your marketing spend as a percentage of revenue, to allow for the discounting.
Remember, your owned channels should be doing the heavy lifting this Cyber Week - think email subscribers, organic socials, SMS lists etc.
Don't be a one hit wonder, build a consistent 12 months of the year sort of business, and if you have to go on sale to cover your overheads, or make the year work out ok, you probably need to rethink your business, brand, or product.
So, this Cyber Week, instead of talking about record sales, switch to talking about record profits, and remember, the easiest way to grow profits in your business, is to scrutinise the numbers.
Till next week,
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