I didn't realize product mix, delivery costs, and variable rebates would affect our profitability so much

We have over 100 customers and sell the same set of products to each of them, yet some are profitable and others aren’t. I really don’t understand. They all get the same products for the same price. We have volume discounts and rebates but we show them a separate line item and can track them.

My husband’s friend works for an analytics company and took a look at our sales figures and accounts. The first thing he saw was there were significant differences in the mix of sizes between sales outlets. As the smaller sizes have higher margins it is the mix of sizes and not just the volume that affects profitability. The next thing he found was that different outlets had different thresholds where the rebates kick in. On some accounts the threshold was $45K in revenue, on others it was $65K, and one had $80K. So while we can track the total rebate we pay, we start paying earlier and this affects profitability. Finally, he said that delivery costs were assumed to standard costs, but the distance from the warehouse to the outlet varied from 1 to 150 miles. Moreover, we collected returns from some but not all outlets.

This made me realize that all revenue is not the same. I was shocked that our profitability was so affected by product/size mix, how we set rebate thresholds, and by underpricing delivery.

Will simplifying my business reduce my costs?

My mentor told me that the only source of cost in a business is activity. He also said that complexity was the biggest drivers of cost. Is that right? Does this mean if I drive complexity out of my business, i.e. do things simply, my costs will come down?

The more stores we open, the more money we will lose

We decided to enter the market with a multichannel strategy. We would have traditional retail shops and a website to sell our products. We only had three products when we launched. Each came in three sizes and three scents which was 27 skus. This meant we couldn’t have full retail shops but needed to rent boutique spaces or stores within a store.

We wanted to have a sales assistant in each store and needed 15 stores to cover the bulk of the market in the capital city, which is 45% of the volume of our retail sales. We built a traditional website which accept credit cards and direct payments by mobile.

We aimed for 60% online sales and 40% in store. Our costs, however, were 70% in-store. They were higher due to rent and labor costs. The average transaction value online was higher than in the store because people bought the larger sizes. We figured that people tried it in store and then bought online. The mix of sales by channel was critical.

We projected the profit and cash from the first three months data and it could never make a profit. The stores consistently lost money. We signed three years leases and each store requires our own sales staff. The more stores we open the more we will lose.