| In our Company, when we consider possible new employees, we give them a math test that uses logic, Excel and the creation of formulas to calculate standard operating metrics like breakevens, profit/loss, response rate and average orders. The majority of people who take it do not do very well.
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| As an industry, we have gone from boom days when all we needed to focus on was how to support our growth, to much shakier times when the stakeholders in our companies are looking carefully at the bottom line and asking "Is this business profitable? Is it healthy?" Those are not questions that can be answered without careful analysis of many metrics that measure not only performance but the relationships among various cost centers and the effect that a change in one department has on the results of another.
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| In the direct multichannel world, we have access to a lot of quantitative information and if it is used properly, it can help us build truly effective and responsive marketing plans. We make decisions based on reading results and trends. One needs to be confident that the numbers are as precise as possible and give the best view of the business model with all the relevant costs. It is our ability to view the business from both the top and bottom line as well as understand the importance of all the math calculations—returns, cancels, cost of goods sold, fulfillment, call center, shipping, G&A, breakeven—and how those individually and collectively affect the company. |
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| Not only is it important to do the math, but it is necessary to identify the correct focus of the calculations. For example, when looking at a payback analysis, we often see companies negotiating with vendors for a lower cost, but is there a guiding rationale for that negotiation, or just the assumption that the first cost has got to be too high. It would be better to start with the question: "Is this product/service necessary and at what cost is it no longer of value?" At that point one can determine what the real leeway is in acceptable pricing. |
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| Over the years we have worked with many companies that do not have standardized business rules for evaluating operations. A good starting point for those business rules is industry benchmarks. Relevant and up-to-date industry standards can be used to help guide a company through cost structure and business model strengths and weaknesses. |
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| Here is a list of some industry guidelines against which you can benchmark your operations: |
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| Metric | Benchmark | Comments |
| EBITDA(Earnings before interest, taxes, depreciation, and amortization) | 5% to 8% | Average (today's market) |
| 8% to 10% | Good |
| 13% to 15% | Ideal |
| G & A (General and administrative expenses) | 8% to 10% of Net Sales | |
| Internet Fees | 1% of Overall Revenue | |
| Gross Margin | 55% to 58% | |
| Advertising Cost | 25% to 32% | |
| Fulfillment Costs | 8% to 10% | Ideal |
| 11% to 15% | Average |
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| The concept of Do the Math is to show whether or not the business model can work or scale based on key variables and the changes to those variables. One other critical factor here is a report card of trends and factors derived from the data. Call us to get a list of these factors and how we use them to judge trends and determine market factors. Using them in conjunction with the various metrics will provide a comprehensive picture of the health of your company and where the opportunities for improvement are.
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