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Unit 5: Closed Loop Marketing

3. Gross Profit: The price paid by the customer minus the cost of the product. Notes
4. Cost of Sale: The cost the merchant incurs to make the sale. For an individual transaction,
this is called “cost per quote” or “cost per order” or “cost per sale.”

5. Net Profit: The gross profit minus the cost per sale. This is also known as operating
income.
As an online retailer, you will likely track all of the above. Your Cost of Sale is potentially
difficult to measure – you will probably have a mixture of variable costs and fixed costs that can
be allocated to the cost of sales.

1. If you pay US $1,000 per month to host your eCommerce website (making sales possible)
and you make 1,000 sales per month, you could allocate US $1 per sale as a cost per sale.
2. If you pay 2.5% of the price collected to a credit card processing service, and you sold a
product for US $100, you would incur a US $2.50 cost per sale for that transaction.
A financial analysis of your business will involve aggregating all of the revenue and costs, and
calculating the total operating income (all revenue minus all costs) for a period of time. Since
you sell different products (with different costs) at different prices, any given transaction will
have a different net profit. As part of managing your sales and pricing, you may also measure
1. Average Revenue per Order: 100 orders for a total US $1,500 in revenue would yield and
average revenue per order of US $15. Calculated as Revenue/Number of Orders – in this
example US $1,500/100 = US $15.
2. Average Gross Profit per Order: 100 orders at US $1,500 in revenue with US $1,100 in COGS
would yield an average gross profit of US $4 per order. Calculated as (Total Revenue –
Total COGS)/Number of Orders – in this example (US $1,500 – US $1,100)/100 = US $4.
3. Gross Profit Margin (Percentage): a product purchased for US $100 for which the retailer
paid US $60 to acquire the product has a gross profit margin of 40%. Calculated as (Revenue
– COGS)/Revenue – in this example (US $100 – US $60)/US $100 = 40%.

Economics of Cross-selling

Cross-selling is when you convince a customer (who is in the process of buying something) to
buy an additional product. When you successfully cross-sell a product, you are increasing the
revenue for the order. This results in an increase in average revenue per order. The sale of the
additional product will also increase the average gross profit per order. The cross-sell may
increase the gross profit margin of the order, or it may not. When the product originally being
purchased is less profitable than the additional product being cross-sold, the margin is increased.
When the original product is more profitable than the additional product, the margin is decreased.

If your current operations strategy involves increasing your profit margins, you need to make
sure your cross-sell activities only recommend additional products with higher margins than
the products against which they are being cross-sold. When your strategy is prioritizing growth
over profitability, your cross-sell activities should focus on conversion – increasing the percentage
of the time are you successfully cross-selling additional products.
Economics of Up Selling

Up selling is when you convince a customer (who is in the process of buying something) to buy
something else – specifically, something more expensive. This replacement of the original item
with a new item is known in economics as product substitution. Since the products are not
identical (one is more expensive and presumably “better” than the other), the products are by

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