One significant risk of an approach that relies solely on these metrics is that all costs associated with the online presence are allocated to the e-commerce Profit & Loss (P&L). Meanwhile, a considerable portion of in-store revenue is driven by customers who initially engage with the website, yet these sales are not reflected in the online P&L. This disconnect can distort the true value of the online channel, undermining its role in driving both digital and physical sales.

To address this complexity, a more holistic approach is needed — one that analyzes the customer journey across all channels, with a special emphasis on online interactions. This journey can be visualized as a funnel. The following analysis focuses on the upper part of the funnel, often identified as the product discovery phase.

PRODUCT DISCOVERY CHANNELS

During this stage, customers explore the brand’s product catalog. Success occurs when customers identify products that align closely with their needs, prompting them to move closer to purchasing.

Product discovery takes place through multiple channels:

• Physical Stores: Visiting a store in person or browsing its window displays.
• Offline Marketing: Channels like billboards, magazines, public transportation ads, and similar media.
• Brand Website: A central touchpoint where many e-commerce journeys begin.
• Brand Mobile App: Delivering a personalized, on-the-go shopping experience.
• 3rd Parties Partner Platforms: Third-party websites or apps, such as concessions and marketplaces.
• Other Online Channels: Social networks, digital ads, and other web-based platforms.

In luxury fashion, where careful consideration is a key part of the purchasing process, multiple channels are often involved for a single customer. According to the RACE framework for marketing, some channels align with the Reach (or Awareness) stage, while others support the Act (or Consideration) stage. However, all channels contribute to helping customers identify and select the right products.

It’s important to clarify that, while several channels operate online, this analysis focuses specifically on website performance, as it is the primary driver of e-commerce activity. For simplicity, the term “online” will be used throughout to refer exclusively to the website.

CHALLENGES WITH TRACKING

At first glance, tracking might seem like the solution to understanding how the brand’s website contributes to overall business performance. It offers the potential to seamlessly follow customers across the website, stores, and other touchpoints, such as mobile apps, to build a comprehensive view of their journey and revenue impact. However, this approach comes with significant challenges, particularly for luxury brands.

In the early stages of the customer journey, it is crucial to maintain the high-end experience by minimizing intrusive tracking methods. Preserving the brand’s exclusivity and sophistication is essential to building trust and loyalty. As the relationship develops and a personal connection is established — often through a client advisor — tracking becomes both more practical and less invasive.

Additionally, the luxury sector’s distinct characteristics present further complexities. Aspirational purchases, gifting, and the high-value nature of products mean that luxury brands often deal with a higher proportion of first-time customers. This reduces the effectiveness of conventional tracking strategies and CRM tools typically used in more transactional businesses.

In the absence of precise tracking, it becomes crucial to identify the most effective leading indicators of successful online product discovery. In other words, which KPIs specific to this stage of the customer journey can be monitored to predict future conversions, regardless of whether the transaction ultimately occurs online or in-store?

PRE-PURCHASE BEHAVIORS

When analyzing website visitor behavior, two distinct patterns emerge. Some users show little interest in exploring available products, exhibiting high bounce rates or minimal interaction. Others are more engaged, spending time navigating search results (SERPs), product listing pages (PLPs), and ultimately product detail pages (PDPs). Among those considering a purchase, users typically fall into one of three categories:

1. A2C (Add-to-Cart) CTA (Call-to-Action): These users clearly demonstrate intent to purchase by adding a product to their cart.
2. Other CTAs: These users interact with alternative buttons, such as checking product availability in physical stores, contacting customer support, or adding items to their wishlist. While not directly adding to the cart, these actions indicate interest and movement toward a potential purchase.
3. No CTA: These users do not engage with any buttons on the PDP but may still be considering a purchase. Their actions might include taking screenshots of the PDP, saving the product link, or doing nothing explicit. While there’s no visible interaction, these users may return to the product later, perhaps during an in-store visit or after consulting a client advisor.

Customers who intend to make an online purchase typically fall into the first category, as the Add-to-Cart action is required to enter the website’s checkout process. For this reason, traditional e-commerce often views the A2C Rate as the most reliable leading indicator of an upcoming transaction.

However, research shows that the A2C action is often used to save products for later rather than to proceed immediately with a purchase. According to Baymard, 42% of customers who want to save a product for later consideration go through the A2C button. This makes A2C an unreliable signal of a confirmed transaction. The challenge is even greater in luxury markets, where many in-store transactions occur without a prior A2C action online. In addition, for luxury brands aiming to drive as many transactions as possible in-store, the A2C step is optional in the ideal customer journey they envision.
Consequently, relying on A2C as a primary performance indicator in this industry can be even more misleading.

Referring back to our earlier discussion, it becomes clear that optimizing the product discovery journey solely to maximize the A2C rate risks undermining overall business performance. While online metrics may improve, in-store transactions could suffer — potentially outweighing the online gains. In systems thinking terms, a high A2C rate might represent a local maximum, whereas the true goal is to achieve a global maximum that benefits the entire business.

From a tracking perspective, the first two user categories (A2C and other CTA interactions) provide actionable data. However, the third category, which plays an important role as a bridge between online and offline experiences, occurs without detectable interaction, and therefore it’s neither trackable nor measurable.

All these considerations highlight why the step marking the closure of the upper funnel, just before customers enter the purchase journey, cannot reliably indicate the success of a product discovery activity. Even when expanding beyond the single A2C metric to include alternative behaviors, this stage remains insufficient as a comprehensive measure.

To develop a meaningful metric for upper funnel success and a strong predictor of future revenues, it is essential to step back and examine how customers discover the products they eventually choose to buy. A deeper understanding of this discovery process is key to accurately evaluating and optimizing the product discovery journey.

INTRODUCING THE ENGAGEMENT RATE

Healthy activity in the website’s product discovery area — PDPs, PLPs, and SERPs — is the best signal for upcoming purchases.
As in a mall or a supermarket, the volume of the crowd, the time spent in the lanes or in front of the windows, and the interaction with the products on the shelves indicate healthy conditions for those businesses. Similar observations can be considered for a brand website.
In a single term, Engagement is the behavior to measure, and the associated metric should be used as the north star metric for the product discovery stage of the funnel.

This approach aligns with Google’s recent updates to its Analytics product, which introduced more advanced methods for measuring website activity. Among these updates is a new metric called Engagement Rate, which goes beyond basic metrics like button click ratios. It aims to capture the qualitative aspects of user interactions, such as time on site, actions taken, and deeper navigation patterns, offering a richer understanding of genuine user engagement.

In GA4, a session is classified as “engaged” if it meets at least one of the following criteria:

• The session lasts longer than 10 seconds.
• The session includes at least one conversion event.
• The session involves two or more pageviews or screenviews.

A high Engagement Rate indicates that users find the content valuable and are actively engaging with the site or app. Companies can leverage this metric to optimize user journeys and improve conversion rates.

Furthermore, the individual metrics that contribute to the Engagement Rate definition — such as time spent on the site or the number of pages viewed — can be further analyzed for deeper insights.

Brands should establish a tailored definition of Engagement Rate, either adopting Google’s standard or customizing it to reflect better the unique characteristics of the online product discovery journey for luxury goods. For instance, users interested in luxury products tend to engage for longer periods than the typical duration suggested by Google.

Once defined, this customized metric should act as a guiding north star for upper-funnel activities, informing all experiments related to Conversion Rate Optimization (CRO). As customer behaviors evolve, the definition of this metric should be revisited and refined. The underlying assumption is that a high Engagement Rate signals the brand’s success in capturing and maintaining customer interest, encouraging deeper exploration of the catalog, and ultimately increasing the likelihood of future purchases, whether online or in-store.

IS LONG TIME SPENT ON SITE ALWAYS A POSITIVE INDICATOR?

A common critique of using metrics like time spent on site as an engagement indicator is that longer durations could imply either customers are actively exploring the catalog and evaluating products they plan to purchase or, conversely, that the site lacks relevance, leading to frustration and difficulty in finding desired products. This distinction is why, when introducing the Engagement Rate, the focus was placed on defining the activity as “healthy” to ensure the metric accurately reflects meaningful user engagement.

There are several ways to address these concerns. One effective approach, particularly in this context, is to use a mutually destructive pair of metrics: alongside the Engagement Rate, another metric can be tracked to ensure that customers are deriving real value from the discovery process. This secondary metric, often referred to as a health metric, is not intended for primary optimization but serves as a safeguard. For instance, brands might monitor the A2C Rate or interaction rates with CTAs within the PDP, establishing a threshold to detect a potential drop in engagement.

Another approach is to identify key elements that ensure the intrinsic health of engagement. For luxury brands, a positive customer journey typically involves significant interaction with product galleries, particularly images. This interaction rate can be integrated into the custom definition of Engagement Rate, providing a more accurate measure of genuine engagement.

It’s important to note that the Engagement Rate, as defined above, does not provide an absolute measure of the quality of the product discovery segment in the funnel. Given that different brands may have varying definitions of this metric, it’s not easily applicable as a benchmark against industry standards or competitors. Instead, its value lies in tracking changes over time — specifically, comparing the metric before and after a particular experiment or website update. Drawing from the Toyota Kata approach covered in the previous discussion, the Engagement Rate should act as a measurement system that captures trends and ensures that changes in the website are consistently moving toward the vision.

WRAPPING IT UP

While traditional e-commerce can effectively rely on the Add-to-Cart Rate to measure the performance of the product discovery stage, brands that favour an omnichannel experience cannot rely on it as a sole metric. This is because it doesn’t provide a comprehensive view of customer journeys that span both online and in-store experiences, which are crucial for luxury brands.

The Engagement Rate offers a more sophisticated and relevant metric for assessing the health of the upper funnel, acting as a guiding north star for improvement plans. However, defining and applying this metric requires careful consideration and customization to align with the brand’s specific strategies.

Optimizing the product discovery phase of the website based on the Engagement Rate can deliver holistic benefits, regardless of where the customer ultimately decides to make the purchase — whether autonomously online or by visiting a physical store.

In the next article, we will explore the lower stage of the e-commerce funnel, examining the key differences and commonalities in dynamics between luxury brands and transactional or traditional businesses at both ends of the funnel.

M.P.

For luxury fashion brands, traditional e-commerce KPIs — such as Add-to-Cart Rate, Conversion Rate, and Digital Revenues — are typically adapted from transactional models. This KPI framework works indeed well for companies that are e-commerce-driven. For example, Amazon is built around selling physical products, but its business is fundamentally driven by e-commerce, with KPIs focused on online transactions. On the other hand, platforms like Udemy and Epic Games, which sell digital products such as courses and games, rely entirely on online sales without the need for physical inventory or logistics.

For fashion brands like Zara or MyTheresa, where the in-store experience is less central or the physical presence is minimal, these KPIs are also effective.

However, luxury brands present a more complex picture. For them, e-commerce is just one part of an integrated, immersive brand experience, and conventional KPIs may not fully capture the richness of customer interactions, brand perception, or loyalty — key elements of success in high-end retail.

UNIQUE ASPECTS OF CUSTOMER JOURNEYS

Several factors uniquely shape the luxury customer journey. First, competition among luxury brands is far less intense compared to the mass-market segment. When a customer chooses a specific handbag from a brand, a slightly subpar online experience is unlikely to drive towards another brand. The switching barrier is much higher than in transactional businesses, where seamless online interactions often dictate customer loyalty.

Moreover, luxury brands have long been anchored in the in-store experience. They are neither web-first nor web-only businesses. E-commerce was introduced not to replace but to complement their brick-and-mortar presence, enhancing overall performance rather than serving as the primary sales channel.

It’s also essential to recognize that these brands don’t sell digital products; their physical products are meant to be part of a larger experiential journey. The nature of luxury goods makes the in-person element particularly crucial. Customers want to feel the fabric, admire the craftsmanship, and immerse themselves in the brand’s ambiance. These tactile interactions are a vital part of the decision-making process, much like test-driving a car before purchase. In this context, a luxury purchase transcends a simple transaction — it becomes an emotional and immersive experience.

A central figure in delivering this immersive experience is the client advisor, whose role extends far beyond facilitating a purchase. Acting as brand ambassadors, client advisors are instrumental in establishing meaningful relationships with customers, understanding their unique preferences, and providing personalized recommendations. Through attentive and knowledgeable guidance, they help transform each visit into a memorable experience, fostering loyalty and encouraging repeat visits. In luxury retail, the client advisor’s expertise and attentiveness are not just service enhancements; they are pivotal to achieving lasting success.

Finally, the high price point of the goods often makes customers hesitant to buy online without first experiencing the product in person. They want to ensure that key aspects such as size, color, and material meet their expectations, while also gaining confidence in the overall quality and feel of the item.

Taken together, these factors make it clear that in the luxury industry, online and offline experiences are deeply intertwined, making it difficult to assess e-commerce performance in isolation with conventional KPIs.

IS “E-COMMERCE” THE RIGHT WORDING?

These observations highlight that customers often prefer to include a store visit as part of their purchase decision-making journey. Brands, in turn, actively encourage this by steering customers toward the in-store experience, where deeper, long-term relationships can be cultivated, rather than prioritizing a quick online sale.

Transaction data underscores the importance of in-store engagement: despite offering the same products, metrics like Units per Transaction, Average Unit Retail, and, consequently, Average Order Value are consistently higher in stores, while Return Rates are lower. This highlights how online and offline channels play distinct, complementary roles, creating a seamless, integrated luxury shopping experience.

Given the close integration of online and offline experiences, it’s worth reconsidering whether “e-commerce” is even the right term. A more fitting description might be “online presence”, as digital channels in luxury retail aim to complement, rather than replace, the immersive in-store experience that defines the brand.

E-COMMERCE KPIs AND SYSTEM THINKING

When revisiting the discussion of primary e-commerce KPIs, it becomes evident why traditional online-centric metrics fall short in capturing the full complexity of the luxury brand ecosystem. While metrics like Add-to-Cart Rate, Conversion Rate, and Digital Revenues can still provide useful insights in certain contexts, they are not suitable as “north star” metrics for a strategy that emphasizes the offline experience.

A well-regarded approach to optimizing system performance is the Toyota Kata method, which focuses on assessing the current state and conducting iterative experiments to gradually move toward target conditions aligned with the broader vision. The success of this approach depends on a measurement system that captures trends and ensures that changes are consistently moving in the right direction.

Take the example of a racing car: reducing the car’s weight might seem like an easy win for increasing speed, but if the measurement system focuses solely on weight as a leading indicator for velocity, replacing the engine with a smaller one might be viewed as an improvement. However, this could result in a slower car due to reduced power.

Similarly, adopting e-commerce Conversion Rate as a “north star” metric poses the risk of optimizing for a local maximum. Enhancing the online experience could inadvertently draw attention away from store visits, leading to diminished overall business performance. While improved digital metrics may align with better company results in some cases, this is not guaranteed. To use a fitting geographical analogy, relying on such a metric is like navigating with a compass that occasionally points north and occasionally doesn’t — hardly the kind of tool you’d trust to guide your journey.

WRAPPING IT UP

At this stage of the discussion, a crucial question emerges: if the traditional e-commerce KPI triplet falls short, what is the better alternative? Unfortunately, there’s no simple answer. The challenge with conventional KPIs is that they attempt to isolate the digital segment, whereas for luxury brands, the online and offline experiences are deeply intertwined. Any improved approach must offer a holistic perspective, though this inherently makes such KPIs more complex to calculate than straightforward metrics like the online Add-to-Cart Rate.

In the next article, we’ll take a deeper dive into the e-commerce funnel and introduce new indicators that are better suited for a comprehensive analysis.

The good news is that while the north star metric should be holistic, the action plan can still focus on specific areas. However, for optimal results, the strategy will likely need to integrate digital actions, in-store initiatives, and a combination of both.

M.P.

The P&L it’s a tool that allows the managers of a company to track the performance of a channel in relation to its targets and make decisions for future actions.

For the managers of a channel it’s an essential tool to plan how to make money.

Author: Enrico Fantaguzzi
Co-founder and Director
Digital Fashion Academy

Former Gucci, Yoox, Tod’s
PMP(r), Prince2

The ecommerce income statement or P&L answers some essential questions such as:

• Did we make a profit last year?
• Are we going to make a profit this year?
• How is the performance of This Year vs Last Year?
• How much is our Gross Profit?
• How much are we spending in logistics, shipping, customer Care?
• How much are we spending in Marketing?
• What is the percentage of marketing spend on Net Revenue?

As you can see, the P&L of Ecommerce gives you answers to some very important questions.

When we use the P&L of two years of more, we can also answer questions regarding the trends of your ecommerce business, for example:

• This year our gross margin decreased by 5% vs LY
• Last year our average discount rate increased from 10% to 12% vs Previous Year (PY)
• Next year the cost of shipping is expected to increase from 5% to 6% on net revenue 

How to manage an ecommerce P&L and make it profitable

When you manage an ecommerce website or you own a business that sells products online you need to have very clear how the P&L of Ecommerce is structured. Controlling every single line of the ecommerce P&L is essential to ensure the profitability and the growth of the ecommerce channel.

In this article we describe the essential revenue streams and cost centers that need to be accounted for and that determine the profitability of your ecommerce. You also find an example of ecommerce P&L the illustrates all the profit and cost items.

If you need to learn P&L Management for your business, you can enrol on our course, P&L Management for Ecommerce.

The calculation of ecommerce sales (the top line)

The correct calculation of ecommerce sales is the first essential step in the creation of the profit and loss statement.

Ecommerce sales are divided in:

1. Gross sales at suggested retail price taxes excluded
2. Gross sales net discount
3. Net sales (sales discounted of the value of returns

1. The gross sales at suggested retail price represent the theoretical amount of money that you would have made if you sold your products without discount. This metric is important because it allows you to calculate how much discount you are giving to your customers
2. The gross sales at actual price are the money you have received from your customers excluding sales taxes and before you refund the customers for any return. This metric is important because it is considered an indication of the potential “demand” and because it impacts on the costs of logistics.
3. The Net sales are the actual number that represent the revenue that you will be reporting in the ecommerce financial statement. This is the money that you make by selling the products, if you charge your customers for shipping, this revenue stream will be reported on another line of the P&L.

The calculation of e-commerce sales with the standard cost + mark-up method

If we calculate gross sales with the standard cost + mark up method, for example, we can accurately estimate sales before discounts. While if we calculate sales based just on the money received we lose information on the discount applied.

The income statement of the e-commerce channel generally looks like this:

NOTE: when fashion brands in Europe calculate the retail price using the mark-up formula: wholesale price * markup e.g. €100 * 2.7 = €270 the price is considered VAT included. This is mainly because the law in European countries impose retailer to show the price including taxes on the price tag. For this reason when you calculate the sales for a financial statement, that never include VAT, you need to take out the VAT component. In this example able the sales price to be reported in the financial statement, considered a VAT of 20% it would be €270/1.2 = €225

Buy the full template for Ecommerce P&L inclusive of marketing budget for marketing cost calculations. The file includes 2 sheet one fo Ecommerce P&L and one for Marketing budget with traffic generation estimates.

Reporting of returns in the ecommerce P&L

E-commerce returns can be reported in the financial documents in two ways:

• by the date of receipt of the return in the warehouse or
• by the date of issue of the invoice or sales receipt.

The first approach does not require estimating the quantity of returns that will be received in the period, as the returns are recorded in the accounting system after the physical receipt of the product. While with the second method it is necessary to estimate the returns that will be received after the expiry of each tax reporting period. This is called an accrual.

Let’s take an example to explain this second method of calculating returns which is the most accurate:

imagine you are managing an e-commerce of physical goods, let’s say fashion products, you are on December 1st and you decide to extend the return period for all orders received from 1st to 31st December to the end of January of the following year.

By doing so you are in effect influencing the operating result of e-commerce by artificially reducing returns for the current period by moving them to the first quarter of the following year.

My operational recommendation is therefore to calculate the average return rate of the site and apply the average return rate in the calculation of returns when closing the balance sheet of the e-commerce channel.

Video podcast about P&L of Fashion Ecommerce

Watch this video interview where Enrico Fantaguzzi explains the P&L critical factors and growth strategies for fashion brands

The e-commerce income statement, a simple model.

The ecommerce P&L compared with the P&L of a bricks and mortar store

In the table below we compare the P&L of an online store and a bricks and mortar store for a clothing direct to consumer brand. The brand sells both via directly operated stores (DOS) and B2C ecommerce.

In the comparison table you can notice some cost items are very important for ecommerce and non relevant for the bricks and mortar stores i.e. the returns. 

On the other hand you’ll notice that the bricks and mortar store have many relevant cost items that make the physical P&L difficult to break even, while the ecommerce costs are less complex.

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The costs of e-commerce in the fashion industry

The calculation of COGS Cost of Sold in e-commerce

From an accounting point of view, the cost of goods sold is any cost directly related to the product sold, i.e. we are talking about a cost that occurs only if the product is sold.

For the correct calculation of the cost of goods sold we must take three factors into consideration:

1. E-commerce buying: the assets of products that we purchase and allocate on the e-commerce warehouse with the aim of selling them over the course of one or more seasons and their degree of depreciation
2. COGS are costs when we sell products and are revenues when we receive returns. This is a fact, you just need to remember to calculate them correctly.
3. If the availability of goods that can be sold on the e-commerce channel is not allocated exclusively to the e-commerce warehouse but is the sum of several warehouses, the cost of goods sold cannot be calculated on the value of the e-commerce purchase or order.

Which costs should be included in the COGS in the income statement?

A possible rule is to follow the costs directly linked to the sale of the product, therefore the raw materials used and the cost of the labor used to create the product. But what do we do with credit card fees and sales commissions? These are also expenses that only occur if a product is shipped, but are generally reported lower in the e-commerce income statement.

The general practice is to report sales commission expenses lower in the income statement, because if we included all sales expenses in the cost of goods sold (COGS) we would obtain a lower gross profit and gross margin. If you are a listed company, having a significantly lower gross margin than your competition can create valuation problems.

In conclusion, the best way to determine the components of the cost of goods sold is to look at what the leading companies in the sector do in the reference market and ask for information from the auditing companies (auditors) who will be able to give sufficiently clear indications and leave the choice up to you. where to place some cost elements. Once this choice has been made, it is best to maintain it for several accounting periods to have the possibility of making year-on-year comparisons and determining trends.

For further information: Steve Bragg podcast episode 323 the cost of goods sold

What we didn’t consider

Fixed costs and variable costs –> projection
KPIs such as average discount rate
VAT and taxes
Indirect costs: business costs such as offices, accounting, general management

The Free cash flow explain

The free cash flow is essential to survival of fashion brands as it represents the ability to pay current costs and debts.

How is free cash flow calculated? Let’s see a simple example. Let’s suppose we sell 1 luxury bag at 1.000 USD

Capital investments in e-commerce

Capital investments are often considered less important than operating costs, but that’s not how it works in e-commerce.
Analysts often look at the EBITDA i.e. they stop at the level of operating costs to determine the sustainability of the income statement of the e-commerce channel. This means that investments in infrastructure are overlooked, for example the creation of the e-commerce platform, are considered below EBITDA and therefore only fall within the calculation of EBIT otherwise known as profit before taxes and interest on capital.

In e-commerce, unlike physical bricks and mortar channels, investments in infrastructure are continuous because technology continually evolves, therefore you need to look at the EBIT to really understand the financial sustainability of an ecommerce.

Ecommerce Revenue streams or “channels”

Direct to Consumer (DTC) E-commmerce

DTC ecommerce is your brand website, usually it’s a brand.com website or localised e.g. brand.co.uk. This is your main domain on which is installed an ecommerce platform

Digital Wholesale Ecommerce

The relationship with e-tailers such as Net-A-Porter or Yoox. When you sell at wholsale price and in bulk to retailers or etailers that resell your products

Marketplaces P&L

Fashion Online Marketplaces are ecommerce websites that features a multitude of brands and products. The marketplace doesn’t own the products that are on sale, it may stock the products or sell them in drop-shipping. Fashion brands sell on marketplaces for different reasons and goals e.g. to increase online sales and reach new customers in different markets.

Examples are Farfetch, Zalando, Miinto, but also many retailers and etailers have implemented the marketplace model on their website. This means that some websites are both etailers and marketplaces e.g. Breuninger, Galeries Lafayette, Yoox. Also brands can convert their websites into a markerplace allowing third party selllers to sell on your website. Read more about fashion online markeplaces management.

When planning the business strategy for selling on marketplaces you need to create a profit and loss statement for the marketplaces. The difference between the P&L of the DTC ecommerce and the Marketplaces P&L is mainly related to the commission fee that you’ll need to pay to the marketplace.

In the table below we see an example of how the profit and loss of ecommerce can be different from Direct to Consumer to Marketplaces

Digital in store

With the integration of online and offline channels, also called omnichannel, you can sell digitally from you phisycal store. You can use story telling apps on mobile phones, in this case there is an interaction with the sales personnel of the store, or you can install kiosks in store where the customers can order digitally from the store.

Flash Sales

Flash sales are events online with a duration of a few days when the customers can buy with a high discount. These websites are for example Veepee or Privalia or Best Secrets. It’s a good solution for brands who need to sell out remaining stock from the past season that is still in good conditions to be sold but it’s not suitable for the official stores.

Cost centers

Digital Supply Chain

The digital supply chain is the activitiy that consist in the creation of the photos, videos, descriptions, translations of the products.

Logistics

The logistics is typically the wharehouse where you stock your merchandise, it can be directly operated by the brand or a service that you rent, in this case is a Third Party Logistics 3PL.

Cost of Technology

Ecommerce needs serval technological applications that need to be integrated to manage all the data flows: products, stock, prices, orders, customer data.

Cost of Goods

Cost of Goods Sold is the first “cost item” that you find in the ecommerce P&L, the Net Revenues – the costo of goods sold determines the Gross Profit. Gross Profit / Net Revenue = Gross Margin which is an essential KPI for the profitability of fashion brands.

Legal and Administration

The costs that are not specifically generated by ecommerce such as the cost of top management, finance and administration and HR are spread over the profit centers in a proportional manner. For example the cost of Administration is divided by Retail, Wholesale and Ecommerce department proportionally to the revenue generated by each sales channel

Cost of Personnel

Ecommerce teams are made of few or hundreds of headcounts depending on the size of the business. Typically you have an Ecommerce Manager or Director and you have a Store Manager, a Buyer, a Visual Merchandiser, a Graphic Designer, an Operations Manager to oversee Logistics, Customer Service and Operation, you may have an IT person within your ecommerce team and one or more Customer Service operators.

Digital Marketing Budget with P&L

Digital Marketing is one of the essential investments that need to be made to sell online, the investment in Digital Marketing is essential to generate traffic. While in bricks and mortar stores the traffic is generated by the location, online you need to invest in digital marketing to create traffic. You can invest in paid traffic for example advertising or you can create content the organically attracts visitors, this is also called content marketing.

Marketing P&L example

The Marketing management team is responsible for driving traffic to the ecommerce website, that converts in orders, at a reasonable cost.

It’s not sufficient for the marketing team to generate visits on the website, because these visits or visitors may not be interested in the products we sell and therefore they will not buy i.e. they won’t convert.

It is well know if you work in the ecommerce industry that different marketing channels have different conversion rates. Therefore when you are working on creating your digital marketing budget, it’s best practice to break down the traffic by media channel as shown in the example below.

Ecommerce P&L Example

This is an example of a full profit & loss statement for an ecommerce that sells fashion products. You can notice the profit and cost centre structure on the left. In the first 4 lines of the P&L you have the P&L Items that determine the Net revenue or Net Sales: Gross Sales (Sales) – Discounts (Sales Discounts) – Returns in Value (Sales Returns).

Differences in ecommerce P&L from company to company

It is important to understand that there is no single way for writing an ecommerce P&L, as it depends on the financial standards that we follow. Even at an accounting level there are different standards that companies can use and, depending on the standard used, the formatting of the income statement of the e-channel commerce or other channel may be different.

The important thing is to maintain consistency on how we calculate the revenue and cost items in the ecommerce P&L from one year to another, this allows to highlight trends in performance indicators over time that are consistent with each other. For example, if we calculate the cost of goods sold in one way in one year, we must calculate it in the same way the following year to be able to compare it. Here some more examples:

• This year our gross margin decreased by 5%
• This year our averaged discount increased from 10% to 12%
• This year the cost of shipping went up from 5% to 6% on net revenue 

Ref. https://www.accountingtools.com/articles/2017/5/5/purchase-price-variance

Co-founder of Digital Fashion Academy

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E-commerce financial terminology

• Gross sales or gross revenue: These are sales before returns, other deductions and without Value Added Tax (VAT) or Sales Taxes.
• Net Sales: Gross Sales minus Deductions (like Discounts) and ECommerce Returns
• Net revenue = Net sales + Additional ecommerce revenue e.g. shipping costs paid by customers.
• Top-line: revenues or sales
• Operating profit: Earnings Before Interests and Taxes (EBIT)
• Bottom line: Net profit
• COGS: Cost of Goods Sold
• Standard cost: it is a way of calculating the cost of goods sold based on the cost of the product components: cost of the material used + cost of processing = cost of the product.
• Depreciation of warehouse products: each product tends to lose value if it is not sold and remains in warehouse for a long time. For this reason, conventions and practices are defined for the devaluation of warehouse products. These values are entered as costs in the income statement of the ecommerce channel.
• Tracking e-commerce sales: gross sales vs. net sales
• Very often sales in e-commerce are called with the English term Sales or Revenue to which the prefixes Gross and Net are added.

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9 Steps to Make Your Ecommerce Profitable While Investing in Growth

It’s a common justification (or rather, an excuse) to claim that your ecommerce isn’t profitable due to various investments—whether in marketing, advertising, or new ecommerce platforms. The reality is that these investments are here to stay: you’ll continuously need bigger budgets to cover rising advertising costs, and every few years, you’ll have to upgrade your technological infrastructure.

So, how do you achieve a profitable ecommerce business?

1. Create a Roadmap: Design a comprehensive roadmap that outlines improvements from both business and technological perspectives. This roadmap could include technical enhancements, user experience upgrades like new ecommerce features or payment methods, and business expansion plans, such as entering new markets. Plan your roadmap over a 3 to 5-year period, assign target uplifts for each improvement, and stick to the plan (as much as possible).
2. Early Budgeting Process: Start your budgeting process for the following year early, ideally between July and September. Involve the entire team using a bottom-up approach. Ask team members responsible for different areas to provide estimates of costs and expected performance for the coming year. This collaborative approach will help you fine-tune the budget and adjust your roadmap accordingly.
3. Set Realistic Sales Targets: When estimating your sales, base your projections on past trends and realistic growth in website traffic. Don’t rely on simply buying traffic, as paid traffic often has lower conversion rates. This ties into the next point.
4. Define Your Digital Marketing Budget: For each media channel (e.g., organic search, paid search ads, organic social, paid social), estimate the number of visits or sessions you expect to generate. Assign specific conversion rates and average order values to each acquisition channel.
5. Target Sales for Each Initiative: Assign sales targets to each initiative you plan to execute throughout the year, whether it’s launching a virtual fitting room, expanding to a new market, or improving website loading speed. Estimate the expected uplift from each activity. The same goes for commercial activities: how many days of Black Friday will you run? Are you launching a new loyalty program?
6. Evaluate Promotional Activities Carefully: For each promotional effort, consider three factors: the uplift in sales, the reduction in gross margin due to discounts, and the likely increase in returns. Remember that new customer acquisition often leads to a higher return rate.
7. Control Costs: If you’re forecasting growth in sales volume, renegotiate contracts with suppliers to reduce costs—whether it’s shipping, customer service, or platform commissions. Aim for supplier deals with fixed costs so that as your business grows, your margins increase.
8. Collaborate with Your Finance Team: Your financial team—administration, CFO, or controllers—are invaluable allies in maintaining financial control. Leverage their expertise to implement best practices that will help you grow both your top and bottom lines.
9. Accurately Allocate Ecommerce Costs: Ensure that all costs associated with digital marketing are correctly classified in your ecommerce P&L. Misclassifications can skew your profitability analysis.

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