Your E-commerce Brand Is Losing Millions Because Of This!

The Mistake That Cost Us Hundreds of Thousands

In 2021, I made this one mistake that probably cost us hundreds of thousands of dollars. My mistake was that I didn't understand the concept of efficient revenue, or contribution margin. My top-line revenue data from all of my channels, like Amazon, Shopify, etc., was not painting a clear picture, and so I made guesses that cost the company a lot of money.

Hey guys, my name is Jared Ward. I'm the founder and CEO of Luminous. Luminous is an easy-to-use, scalable ERP system for the modern e-commerce brand. Follow along for weekly videos, tips and tricks on how to scale your e-commerce business, and also how I'm building Luminous to be the next billion-dollar SaaS company.

What the Smartest Brands Are Doing Right Now

Nowadays, just about every e-commerce company is multichannel, meaning they sell on Shopify, Amazon, big-box retail stores, maybe even Etsy or Walmart.com. As a recession looms, there are two things the smartest brands are doing right now to prep for it.

Number one is identifying the most profitable revenue-driving channels and SKUs, doubling down on those profitable SKUs and channels, then killing everything else that doesn't have the best contribution margin.

Number two is hyper-focusing on organic content and their brand.

At Luminous, we've seen a lot of companies' revenues dipping in 2023. Consumers are just a bit more skeptical about spending their money this year. While this may look negative, I actually think it's an excellent opportunity for brands to build a more efficient, data-driven business model.

How Brands Grow Into the Problem

Before 2023, I saw tons of brands focus so much on adding new products and new channels. It normally looks something like this: “Hey, I invented this super amazing drink formula that I can sell direct-to-consumer.” Then I launch with two SKUs on Shopify only, and they pop off, and sales go through the roof. I have a TikTok video that went viral on my launch, and it really boosted my sales. I also figure out how to get a great 5x ROAS on these two SKUs with my Meta ads, or my Facebook ads.

Next, I might see my competition is selling an amazing cherry limeade mix, and I'm like, “Let's sell a freaking cherry limeade mix.” Then on top of that, I'm like, “I just did a million dollars in sales on Shopify alone. I'm just going to send 3,000 units to FBA. Let's see what happens.” Also, I have a friend who knows the Costco buyer for our category, so I'm going to see if I can get a PO from Costco.

Before you know it, you're across three different channels and three different distribution centers. And when the dust settles, you and your finance person are looking at the year-end data, and you're like, “How were we less profitable this year with twice the revenue?”

The Answer: A System of Record

Here's what I'll say: the answer is actually pretty simple, but you don't have a way to see it. Most e-commerce companies don't have a system of record where they can easily pull the contribution margin of their SKUs and channels. That's it. It sounds so simple, but it's a massive issue plaguing e-commerce companies.

If they did have a system of record, they would normally see their data telling them things like, “Hey, this product actually isn't profitable across all channels. It might have a contribution margin of 10%. You might want to kill that product off.” Or, “Hey, you might find a channel that isn't very profitable and might actually be cannibalizing the revenue of your other, profitable channels.”

These are common issues. But because you have no breakdown of your margins across channels and SKUs, nothing is showing you that you're losing money. You don't even know where, and you don't even know how.

A Story From My Last Company

So here's a quick story. At the last e-commerce company I ran, we had 2,000-plus SKUs, we did about $15 million in revenue, and we sold across seven different channels. When we finally got a system of record implemented, we realized that 10% of our products were driving 80% of our revenue.

A big realization was that certain cutting boards were actually completely unprofitable on Amazon. Yes, they had a negative contribution margin on Amazon. In our other channels, the same product had a 40% to 50% contribution margin. On top of that, the Amazon sales were actually cannibalizing our profitable sales channels.

This isn't the case for every brand. I'm certainly not saying don't sell on Amazon. It's actually a pretty complex discussion whether or not you should totally exit a certain sales channel.

How to Solve It

So what's the answer here? How do you solve this? A system of record that shows you contribution margin by channel and by SKU. It's not an easy solution to implement. You need to get your inventory numbers correct. You need to know what revenue is coming from each channel, and your cost of acquisition on each of those channels. You need a system of record that easily tracks landed cost and the other variable costs that go into your product.

Why I Built Luminous

This is actually why I built Luminous. I was an e-commerce CEO in the thick of it, and I felt this pain very strongly. I built a system of record that can hopefully bring clarity to your data and allow you to cut underperforming SKUs and channels, so you can have a well-oiled, data-driven e-commerce company and know where to put your energy and your money. You can put it toward growth: the most profitable channels and products.

If you resonate with any of these issues, I'm happy to chat with you. Go book a demo at joinluminous.com. Thanks, everybody. Peace.