Step 1 – Forecast gross sales
So, let’s start with gross sales. Remember from above, this is units sold x price. In this example, assume all units sell for $30.
So, here, if you look under the P&L at the volume forecast, we’ve estimated month by month how many items we believe we can sell.
For simplicity, we’ve kept it to 2 skus, but it could easily be more. Each sku will have a different sales pattern, so here, Sku 1, we expect to be more popular than Sku 2. We make an assumption that the first few months sales will be low. It takes time to build awareness of the store, and to generate demand from customers.
So, in this example, we’ve only sold 80 units cumulative in the first 3 months. That’s less than 2% of what our forecast for the total year is. We’ve made an assumption that those early customers come back and buy more later. And, that we get more sales through word of mouth and the cumulative impact of our marketing efforts. By month 12, we’re forecasting 2,000 units a month.
Of course, there are a number of variables to consider.
So, for example, you might see more demand at seasonal event times like Christmas and Easter. Your product may be seasonal and sell more in winter or summer. You might decide to boost your advertising at certain points, and would look to forecast more units sold.
In this model, we’ve assumed a relatively stable price with no big price promotions. But, we could have easily decided to include price discounts in certain months and increase the number of units.
Step 2 – Calculate deductions to identify net sales
We’ve assumed a 10% sales tax rate, and an initial 4% per order credit card and transaction fee charge. So, for months 1 to 6, 14% of our gross sales number is taken off to reach the net sales number.
However, we’ve assumed that as sales start to take off, we might be able to negotiate a better deal on the credit card and transaction fees. Especially with payment gateways, they will often offer volume discounts. The larger the number of orders you put through them, the smaller the percentage they will take per order.
So, in this case, as we start to generate more sales, we’ve made an assumption in months 6 to 12, we can reduce the credit card and transaction fee to 3%, so the total deductions drop by 1% to 13%.
There will be no change in the sales tax, as this is non-negotiable.
Step 3 – Cost of Goods, Warehousing and Delivery (Variable costs)
Cost of Goods will vary widely between products and categories. But, as a general rule of thumb, your selling price should be at least three times your cost of goods, to give you enough ‘space’ in your P&L to cover the other costs associated with selling, and to still make a profit.
Given the unit numbers are relatively low, we’ve assumed Cost of Goods stays constant. But, it is possible if you generate more and more sales, that you might find economies of scale to reduce this percentage. You might be able to negotiate savings on buying raw materials by buying larger quantities. Or, you might be able to do longer production runs to deliver efficiencies.
Warehousing and delivery costs usually vary depending on the amount of volume you put through them. There may be some fixed costs with warehousing, such as rent or paying for utilities. But, for simplicity in this model, we kept both costs variable.
Similarly to the fees percentage reduction above, you may be able to negotiate better deals with warehousing and delivery suppliers, when your sales start to take off. It wouldn’t be unreasonable to factor in a small percentage cost saving once your sales hit a certain level.
In reality, your deals with warehousing and delivery suppliers would be more likely to be on an annual basis. So, any better terms would come in Year 2.
Step 4 – Advertising, Development and Overheads (Fixed costs)
Your final set of costs relate to more indirect costs that you pay for, irrespective of whether you sell no units or 1,000 units.
You need to account for marketing costs to spend on advertising and digital media to bring people to your store. It’s safe to assume you might spend most of this when you launch your store. And, then continue to drive activity through the year.
So, in this example, we spent $3k on our initial launch. And then kept our monthly spend at a percentage of our forecast sales. We started at 20% of sales into advertising, and gradually rolled it back to 10% by the end of the year.
For newly launched stores, this would be a common shape of spending on advertising. 20% of sales going back into advertising would be expected to drive significant growth. And, once you are more established, 10% is a more common percentage to drive steady sales growth.
For more well-known online stores with a stable demand, we know of cases where the percentage of advertising to sales can even drop down to 5-7%. Though, anything less usually isn’t enough to drive enough sales.