Return on investment, net present value and cashflow analysis are critical when making decisions on how to run your digital goods business. We created a ROI calculator for digital sellers, and we’ll teach you how to use it.
Operating a growing digital products brand can be tricky business. The digital products market continues to grow annually and get more complicated. From operations to fraud to employees, running a digital business can be a balancing act. There are many things you can invest in as a business owner. You may think, “how can I tell which investments are worth it?”
ROI analysis is necessary if you are going to invest in your business or reorganize current expenses to gear up for growth.
In this article, we are going to break down how to perform an ROI analysis for your digital goods business and how an OMS can improve your operations.
**TLDR**: Return on investment, net present value and cashflow analysis are critical when making decisions on how to run your digital goods business. We created a ROI calculator for digital sellers and we’ll teach you how to use it. If you get get stuck, ZeroOne will help you assess your situation and use a more advanced version of the calculator - free of charge.
An Order Management System sounds like a tool only big businesses need to consider, but the benefits are universal for any business. Improving profit, cash flow, responsiveness and revenue, while reducing expenses are in everyone's best interest. Predispositions about investing in your business can blind us to the actual work of figuring out if business would improve based on facts and a few conservative assumptions about your digital products ecommerce operation.
1. Does this make money?
2. Does this save money?
3. Does this save time?
4. If I were to reinvest that time, how would that affect 1 & 2 above?
5. How does this compare with other potential investments?
Most entrepreneurs selling digital products are familiar with the common issues like:
1. Inconsistent inventories create problems (running out of stock and surplus stock)
2. Fraudulent transactions cost you inventory and chargebacks
3. Resolving repeat issues cost time and distract others from more important tasks, like growth, sourcing and customer care.
4. Inability for quick, customer service resolutions with consistent communication make for unhappy customers and less sales.
Using an Order Management System (OMS) may improve issues to help improve Return On Investment (ROI). Making a decision on whether you ought to make an investment in this area is easy to calculate once you know what to look for.
ZeroOne’s ROI calculator shows you how your business could improve its Return On Investment with an Order Management System. It will help calculate the costs of your business and how using an OMS (like ZeroOne) can turn to costs to cash.
Let’s break it down...
The number of orders per month or the volume of orders you are processing. Number of orders per month is used to calculate certain efficiency costs such as labor and product costs in the ROI calculator. Knowing where you are starting from is also useful when using assumptions, like how many minutes per order, or the percentage of orders that result in a chargeback.
As the phrase goes, “Time is money.” The amount of time in minutes measures labor efficiency of the distribution in the ROI calculation. Checking a new customer’s ID or texting them to confirm their identity takes time to perform. Time is the core piece to understand the cost. The more time it takes, the more it distracts a human resource from their core task. Also, it helps one understand milestones where you need to consider adding labor.
- People aren't great at calculating their own time. If you've ever been to the post office on Tax Day, you know what I mean. Just remember these words by Shoppenhauer, "The common man is not concerned about the passage of time, the man of talent is driven by it."
- Time to manage the best order vs. time to manage the worst order are at opposite ends of the scale. It's best to think in terms of averages and do the math (we spend 20 hours a week managing 100 orders per day = (20*60)/(100*5) = 2.4 minutes per order)
When calculating labor costs for order management, you have to take into account who is performing each of the tasks that consume the time above, and what the burdened hourly rate is for that labor. You can calculate this per task and person, but an average will do for most.
Costs that support that labor such as rent, computer time, utilities, taxes, healthcare, etc. will make the estimate more accurate and is called "fully loaded labor costs." These costs are calculated on longer timeframes and factored into the rate. To determine the fully loaded labor rate, add in those costs and divide by the total time worked.
The average full-time employee works 2040 hours per year (170 hours per month), and would include all other costs that employee needs to perform their job and retain that employee (e.g. office space + insurance + internet access + software + compensation) / 2040 = fully loaded labor cost per hour.
The average selling price of your digital products is the value of what you are selling. It is important to understand your business and your market to maximize the price ceiling. To calculate, divide the amount of revenue of all products sold divided by the total number of products sold.
The average cost determines the average profit once subtracted from the average sale price. Average product cost is the base for how much average profit adds to the revenue stream of each product. To calculate, divide the cost of product by the amount of products sold. Alternatively, subtract your average margin from the average selling price. Some prefer to do this for each category of digital product for even more granularity.
Chargebacks are reversals of sales which credits back the buyers and debits the seller the full price of the products. Chargeback fee is a penalty on top of losing your product, which can often be much more than your margin. We can use this in a couple ways: calculating time associated with remediating chargebacks, calculating frequency of occurrence for extrapolating lost product and fees.
Chargebacks typically run higher for digital products, and that can negatively impact your business without having the right tools in place.
The chargeback fee adds to the debit of the chargeback. Credit card companies add this penalty to the merchant to help recover costs incurred through handling consumer chargebacks. Depending on the card issuer, the fees vary and could result in various penalties including termination.
Fraud is highest for intangible goods because of the nature of what constitutes delivery. For some sellers, entering valid shipment tracking details unlocks partial protection from the marketplace and is worth the added cost.
Although the payment provider provides final resolution, this may be worth it for some, even if only for certain products and then, only at certain volumes.
If you answered "yes," regarding partial or complete protection, please enter your shipping cost per item. In this context, it's as if you are paying an insurance payment for each shipment. The burden of proof for digitally downloaded goods remains on the seller, but with added shipment costs, the marketplace may mitigate the chargeback.
If you have yet to start, check out our ROI calculator for digital sellers. Don’t be discouraged if you find it difficult. ZeroOne eCommerce is here to help you and your business sell more and run smarter.
If you'd like to take this farther, tell us what works best, and we'll schedule a consultation at no charge. We'll produce a thorough analysis and give you the spreadsheet so you can check our math.
Schedule your free ROI assessment with us today and make us show you why hundreds of digital product sellers choose ZeroOne eCommerce.
Often, the hardest thing about selling digital products, is finding a reliable source of products to sell online. ZeroOne Supply changes that - allowing sellers to purchase inventory directly from ZeroOne.
Digital product sellers lose 9.7% of profits to fraudulence. Single digit margins and fraud are a recipe for failure, unless you have the right tools to provide the best user experience.