Museum Stores: Managing Ecommerce for Profitability

Managing Ecommerce for
Profitability
ARTS & CULTURE DIGITAL | JANICE YABLONSKI-HICKEY

AGENDA
1. The Realities of Museum Store Economics
2. The Foundations of P&L Planning and Use
3. P&L Examples—What Affects the Numbers
4. Making Money / Losing Money. What to Do?
5. Key Ecommerce Metrics
6. Q&A

• Ecommerce and interactive marketing firm
• Serving museums and cultural institutions since 2012
• 23 years at The Metropolitan Museum of Art
• Head of ecommerce 13 years—$12 million business

Are You Embracing Ecommerce?
• New technologies have
made online stores
affordable.
• Continued growth in
ecommerce fuels
investment.
• Technical know-how and
effective management
can be a challenge.

Ecommerce Growth Trends
Sales are
expected to grow
to more than
$400 billion In
the next several
years

Growth Rate and % of Sales Increasing
In 2016
ecommerce
will grow 8%
and represent
10% of sales.

Your Path to Profitability
Does it look like this?

Or does it feel more like this?

THE REALITIES OF MUSEUM STORE ECONOMICS
• Some museums consider their shops and the web visitor
amenities.
• Shops are often allowed to operate with a financial
“safety net.”
• For-profits have rent, utilities, insurance, legal fees,
equipment, interest, depreciation—these may not be
applied to museum store P&Ls.

Negative Effects of the “Safety Net”
• Profitability is not required.
• Lack of regularity with accounting
practices.
• Budgets not routinely prepared.
• Industry benchmarks not followed.

All Museum P&Ls are
Different
Accounting Software
• Different systems provide
varying capabilities.
• Ease of use and ability to
get information varies.
Independence
• Retail departments
sometimes required
to use museum
accounting buckets.
• Budget and review
periods are often
different.
Competence
• Varying levels of shops
staff ability (or interest) in
performing retail
accounting functions.
• Lack of understanding by
museum finance about
retail practices.

THE FOUNDATIONS OF P&L PLANNING AND USE
3 Key Steps to Developing a Solid P&L:
1. Understand accounting
2. Be disciplined
3. Schedule everything

#1. The Accountant is Your Friend
• Make friends with your accounting
department. Be partners, not enemies!
• Learn their responsibilities, timetables,
terminology.
• Collaborate. Ask for new lines to be
opened on the General Ledger to help
you track expenses more discretely.
• Explain retail practices if they have
limited store experience.

#2. Discipline Pays Off
• Be sure you book your expenses carefully, in
well-organized buckets that match your P&L
categories. This is an essential time saver.
• Resist the temptation to lump things into 2
or 3 budget codes and “figure it out later.”
• Let your staff know that proper record
keeping and bill paying are as important as
visual displays, PD or customer service.

#3. Run Like a German Train
• Schedule everything. Set up times
and dates for your financial tasks the
way you do for product or staff tasks.
• Report sales and ecommerce metrics
weekly, monthly, and yearly. Report
expenses monthly and yearly.
• Make time to go over the results with
your team. Make these meetings
routine.

Your Reward? A Solid P&L
If you follow these 3 steps you will get a standardized,
useful P&L—one that you are not embarrassed to show
management.
At least twice annually—end of season and
end of year—you should present your P&L to
your CFO and President or Director.

Presenting Your P&L
This is a golden opportunity for you to demonstrate your command
of the numbers and impress management.
Tips:
• Don’t try to hide weak areas. Point out
concerns with your plans to address them.
• Write a brief narrative to accompany the
numbers. Highlight influencing factors such
as a blockbuster show, a closed shop or,
the introduction of a new product line.

ECOMMERCE P&L EXAMPLES
--Revenue
of $50,000.
--Profit of
$37,000.
--Expenses
of $32,400.
--Net Profit
of $4,500.

Ecommerce P& Examples
--Revenue of
$500,000.
--Profit of
$404,500.
--Expenses of
$352,000.
--Net Profit of
$52,500.

P&L Category Definitions
• Revenue—Also Sales or Gross Sales. The value of merchandise sold, not including tax
or shipping.
• COGS—Also Cost of Goods or Cost of Sales. The product expenses of all the items sold,
including freight, royalties, and all direct charges.
• Gross Margin—Net Sales minus COGS. The value remaining after subtracting the
product expenses from Sales (where sales has been adjusted for Returns & Allowances
and includes markdowns and discounts).
• Gross Profit—Gross Margin dollars plus any other earned income, such as shipping.
• Operating Expenses—All non-product costs; the costs to run the business, including
salaries, materials, and services.
• Net Profit—The value remaining after subtracting all Operating Expenses from Gross
Profit.

Profitability Targets
What is the Ideal profitability range? Profit varies by vertical and size.
For-Profit Companies:
• Many lose money!
• Amazon may only reach 1% operating margins. Often negative.
• Apparel leaders Nike and Ralph Lauren achieve 10%. Gap 8%.
• The average is 6%-7%, and 17%-20% at the high end (Lululemon).
Museums:
• As operations scale, they can reach higher profitability.
• $75,000 is generally the threshold for online sales to outweigh
operational and staffing costs. Under $75,000 aim to break even.
• $75,000-$150,000, aim for 3%-7% Net Profit.
• $150,000-$750,000, target 8%-15% Net Profit.
• Above $750,000, look for 16%-20%. Over $1 million, 25% or more.

Common Reasons For Low Profit
• Prices too low
• Too many promotions and coupons
• Offer free shipping / eat the cost
• Technology expense too high
• Marketing too broad or poorly managed
• Poor expense control
• Participation in marketplaces that have revenue share
• Investments that don’t produce incremental sales

Online Costs Museum Shops Don’t Incur
• Customer Acquisition—visitors present for museum visit; no marketing
• Fulfillment—cost of a warehouse and packing supplies adds to every order
• Returns/Re-Ships/Fraud—damages, mistakes & other losses greater online
• Technology Services—multiple systems required to run the business
• Support—customer service needed for questions and returns
• Toll-Free Number or Call Center—extra phone charges if this is offered
Which is why profit can be lower online than in-store

MAKING MONEY / LOSING MONEY. WHAT TO DO?
If my online business is profitable I can:
• Assign more staff members or time to ecommerce to improve presentation.
• Invest in a new platform or functionality (ex: a gift registry, personalization) to drive sales.
• Buy new product lines to add depth to popular categories or test new ideas.
• Increase marketing spend on search engines or in print to expand reach and
build brand recognition.
But only spend up to the amount that you have as Net Profit!

If my online business is not profitable I should:
• Cut expenses and decide if certain activities are warranted. The frequency of design
changes, blog posts, addition of new product, etc.
• Add new items only if they are strong sellers, not for novelty. The 80/20 rule.
• Generate more top line sales. Increase prices and use low-cost tactics such as email to
create more volume.
• Increase shipping fees, add oversize surcharges, and change more for gift wrap.
• Improve automation and efficiency to save on staff time expense.
• Increase your margin. Sell more high margin items online. Limit discounting.
• Re-negotiate your shipping services contracts to reduce shipping expense.
Decide how much of a reduction makes sense—don’t gut the business.

Is It Time for a Major Investment?
5 Key Reasons to Request Ecommerce Investment:
1. Current platform converts poorly despite staff effort. No further way to improve.
2. Identification of a program or feature enhancement that will greatly increase
revenue.
3. Marketing opportunity to drive significant volume and associated sales.
4. Additional staff required to manage volume or expansion.
5. Increases in level of customer service and support become necessary.

The Benefits of a New Platform
Technology is an expense, but also a means to improve the bottom line.
• Improved conversion rate
• Ability to offer new features to drive loyalty and retention
• Automation to save manual effort and decrease time spent on
operations.

Conversion Rate Increase
Example:
Site revenue of $180,000 with 3,000 orders. AOV = $60.
3,000 orders/43,000 visits = 7% conversion rate
Increase conversion rate by 20%. 7% x 1.2 = 8.4%
43,000 visits x 0.084 = 3,612 orders. The incremental 612 orders x $60 = $36,720.
Now revenue is $216,720. No additional product, no marketing, no new traffic,
AOV is the same, just more of the visitors convert.

Those Who Didn’t Buy
Consider:
If your conversion rate is 3%, then
97% of your visits ended without a
purchase.
Work on closing sales with those
customers.

KEY ECOMMERCE METRICS
You can’t fix what you can’t measure
There is so much data. What are the critical KPIs?

Income & Expense Metrics
• Revenue
• COGS
• Gross Margin
• Gross Profit
• Net Profit /Operating Income

Sales & Order Metrics
• Orders
• Returns
• Average Order (AOV)
• Sales by Category
• Gross Margin by Category
• Ecommerce % of Total Retail

Site Performance Metrics
• Conversion Rate
• Bounce Rate
• Cart Abandonment Rate
• Time on Site
• Pages per Visit

Operational Metrics
• Acquisition Cost Per Order
• Operating Cost Per Order
• Total Cost Per Order
• Profit Per Order

Shipping Metrics
• Shipping Income Per Order
• Shipping Expense Per Order
• Shipping Profit Per Order

Metrics are helpful, BUT...
Do not engage in analysis paralysis!

Remember, ecommerce is still about the customer

You Still Need the 4 Ps of Marketing
• Product
• Price
• Placement
• Promotion

And You Still Need Great Service
A web site can’t give you that.

Questions or comments to
janice@artsandculturedigital.com
Thank You

Museum Stores: Managing Ecommerce for Profitability

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