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PAG and SKU-Level Profitability – Return on Podcast Ep. 34

PAG and SKU-Level Profitability - Return on Podcast Ep. 34

The following is a transcript of Episode 34 of Return on Podcast, the show where we help e-commerce sellers improve their ROI in business and in life. For more episodes, subscribe to our YouTube channel or listen on Podbean, Apple Podcasts, Spotify, and Amazon/Audible.

Tyler Jefcoat:
All right. I’m Tyler Jefcoat, and I wanna welcome you back to the Return on Podcast miniseries entitled From Pain to Profit in 2023. So again, for those of you guys who normally listen to this podcast each week, first of all, thank you, or maybe watch the videos on YouTube. Normally we’re interviewing the most successful e-commerce entrepreneurs. We have a longer form 40 to 45 minute show each week, but for the end of the year here, as we come in for a landing, I wanted to do something different. I wanted to put together this, I think it’ll be a seven part series on how to get ahold of your finances and make better executive decisions on your portfolio and your profitability.

Session one was about planning and vision, and I hope you’ll go back and consume that content for five minutes. It’s really, really well put together, I think. Second video, the one from the most recent week, was related to how to get your books in order. You can’t, you and I can’t have an intelligent discussion about driving profitability or better cash flow or better performance of your portfolio unless you know where you currently stand. So I give you some nuggets on how to get your books in order, and then I give you some resources that can help you get it done if you need help.

And so now today, in this third episode, and again, I just wanna acknowledge again that a lot of you guys might be listening to this through the audio feeds, and I am going to have some visuals again here today. So I hope I can make the concept of PAG clear enough that even if you’re just listening to it, you’ll get value from it. But if you don’t, if it’s confusing, go to the YouTube channel from Seller Accountant and check out the short video companion. That’ll help walk you through the examples.

And today we’re gonna talk about PAG, Post Advertising Gross Profit, right? Your books are in order at this point. You can look at your profit and loss statement, and you actually have numbers that are believable, and I want to help you think about gross profit a little bit differently. And if you happen to be watching this on YouTube, I now have on the screen an example of a profit and loss statement.

But if you’re listening to this, that’s okay. Imagine your P&L, right? You have your sales, and then down in the Cost of Goods Sold section, you have your product cost, you have your Amazon fees, and you’re left with this growth profit number. And my thought as a CFO is that gross profit defined the way it normally is, what I just said, is a fairly inadequate way to understand how successful an e-commerce brand is at driving profitability. We have to go down one line further on the P&L and capture those advertising expenses. That’s why this metric is called PAG, Post Advertising Gross Profit. All we’re doing is taking GP post advertising, right?

And so the example on the screen here shows a gross profit, which again, is just sales minus COGS, minus Amazon fees of about 35%. We had 10% that we spent on advertising. 35% minus 10% leaves us with a PAG or Post Advertising Gross Profit of 25%. That’s how you calculate it.

By the way, a question I get all the time is, what is a good PAG? What is a good contribution margin? And 25 percent’s kind of an industry standard for what I would say is pretty good, in case you were wondering. So if I can go pull up my profit and loss for some meaningful amount of time, maybe it’s a month, maybe it’s the last 12 months, and I can see what are my actual margins after product COGS, after Amazon fees, and after advertising refunds, of course will be added in there too. What am I able to keep after those key metrics? If I’m able to keep more than 25%, I’m probably in pretty good shape.

The second question I get is, okay, but this is on a macro level. How do I do this on a micro level? And so again, if you’re listening, hang with us. If you’re watching, I have an example of an Amazon fee preview report that if you wanted to do this the old school way, pull out each of your SKUs, you can add your Cost of Goods Sold, add some advertising data, and then come up with your PAG, your post advertising gross profit per SKU, per product.

And I would say this is really an important exercise to do because this is almost always the case. The example that we’re looking at here on the screen shows an overall peg for the last 30 days of only 10%. That’s really low, that’s unsustainably low. That’s a real problem. But as is always the case with our clients here at Seller Accountant, there’s two or three of these individual products that are killing the entire portfolio, right?

If we could just get rid of the bad guys and focus on the good guys, we would see the profitability of the entire portfolio go way up. And so it isn’t enough just to get your profit and loss in order and understand what that PAG number and percentage are over time. Although that is helpful, it’s, you have actually have to take it a step further, and whether you’re gonna do it manually through the fee preview report, or frankly use the profitability tools of Teikametrics or Helium 10 or Seller Labs or whatever the, Sellix, whatever the tool is that you’re already using to drive your ad strategy, go ahead and upload those landed Cost of Goods Sold figures so that you can get a true profitability for each of your products and hold those products accountable.

Now, something that you guys all know if you’ve tried to do this before is that occasionally, the profitability for an individual ASIN will be a little bit wacky because it’s a child ASIN and the advertising dollars, eh, should have been shared among the green one and the red one, but they all went to the red one, right? You guys have seen this happen. If that’s the case, just make sure that you’re calculating your profitability by SKU on a parent level, right? I wanna understand what the profitability is across the entire product.

And then again, I just wanna prioritize my best products. I wanna make sure I don’t stock out of the ones that have the highest PAG. I wanna make sure that I do meaningful activities to nurture my struggling products to where they have an acceptable PAG, and then I may have to kill them, right? I may have to take it out behind the barn and let it go if it’s a product that can’t meet my minimum requirements for profitability.

And so I think for today’s discussion, I want to end the video there, or the podcast if you guys are listening to this. But just know: we have to manage post advertising gross profit. It’s not enough to look at just gross profit as we would have it in an American profit and loss statement. We had to go down one line further. We’ve gotta grab that advertising budget so that we can understand what our true contribution margin is for our portfolio and then for each of our individual SKUs, and then we need to be very intentional to prioritize our best SKUs, nurture the ones that are struggling, and kill the ones that we can’t get right.

In our next session, in next week’s episode or video, however you’re consuming this content, I wanna dig into the two elements of PAG that we have the most control over and that are the most important. Those are advertising and landed Cost of Goods Sold. How you should view your product strategy based on exactly how those two metrics are measuring for you and what to do about it if you’re not happy, how to improve it, and how to prioritize your new product launches based on advertising and Cost of Goods Sold.

So for today, let me end the video, but hope you’ll come back next week and catch the next session on how to manage ads plus COGS. Take care, guys.

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