How to Model Sales Volume and Profits in E-Commerce
Modeling sales and profit can be done in different ways, depending on your needs. You can model them quickly with a certain degree of error, or in a more reliable and accurate way by spending more time. If you have limited resources, a quick and simple method is better than nothing. A quick estimate can be useful, for example, for a B2B business, where you can simply estimate the efficiency and costs of your sales managers, summarizing them. The following data is an example of what data you need to be able to model sales and profit:
- How many leads are generated per manager per unit of time;
- How many phone calls per sales manager per unit of time;
- How many meetings per manager per unit of time;
- How many sales are there per manager per unit of time;
- Estimate the cost of acquisition (e.g. marketing budget over time).
This data will allow you to calculate the amount of income and the amount of expenses per manager, so you can understand how much profit they will bring over time. A similar super-fast and simple method can be used for online business, taking into account the following data:
Once you have created an estimate like the one above, be sure to double-check it from top to bottom; estimate your market share and see how realistic it is. If you have a limited sales throughput, say 200 sales per month, you won’t be able to have more than 200 sales, even if your model shows 250 sales per month.
How to Model Sales and Profit
Another important factor you need to consider, and something you really need to know about your business, is your cost structure. This typically includes the purchase price, as well as all the fixed costs associated with each sale. On top of that, you also need to determine your target gross profit.
Excel is very useful for plotting sales versus price and profit versus price, as well as sales/profit versus time. Remember that the values are not constant.
They change over time as the market evolves and internal and external factors change. For example, for some charts to provide useful information, you may need to have multiple prices for each SKU in your data set. This could be a standard price and a discounted price that you can switch between.
Why Using Averages Is Not the Best Way to Model Sales and Profits
The mean is a simple statistical figure taken from a list of numbers to represent them. It can be calculated in different ways depending on its use. The mean is generally used to describe statistical populations that follow a normal distribution (a bell-shaped curve), such as population growth.
The arithmetic mean (AM) is calculated as the sum of all the values divided by the number of values in any data set. There are also other types of means such as the geometric mean (GM) and the harmonic mean (HM) which have the mathematical properties of AM ≥ GM ≥ HM in any data set. From now on in this article, we will discuss the use of the arithmetic mean (AM) and simply refer to it as the mean. If a population data set follows a bell curve, the AM has the property of being equal to (the most common data point in the data set) and the median (the 50th percentile in the data set).
CA should never be considered as the only statistical figure when making any decisions because of skewness. In a data set where the vast majority of values are small, enough large numbers can skew the data set and shift the value to the right. If you assume at this point that you are dealing with an unskewed normal distribution, your decisions will be wrong. The same scenario is true in the opposite situation, where most of the data points are large and a significant number of small numbers will skew the data to the left.
