If you’re a paid subscriber to BowTiedBull, you can close the browser right now. If you’re not a paid subscriber to BowTiedBull, you should be. On my way back from the gym tonight, I was reminded that my audience on Twitter isn’t the same audience here. Many of you might not have heard of Bull at all.
Hi Opossum. Thanks for responding. I'm reading all of your articles day by day. Great content.
It's most likely that I understood it wrong, but the part that confused me is that inventory cost and fixed cost function in the same in terms of how units sold scales that cost.
If I have $10k in overhead and 10,000 units in storage (with cost of $1k inventory per month let's say) each incremental sales via ads reduces both of those numbers on a per unit basis. The inventory storage cost is not the same as a variable pick and pack fee as an example.
In this case, you have to pay for it either way so look at it in terms of fixed costs. Or just spread that $1k across 10k units at $0.10 per unit because the more inventory you buy to sell, the more your storage costs go up. You're trying to look at this like a normal P&L. Stop doing that. You have to flip your thinking to
"If I sell one more unit, what incremental cost will I have to pay to get one more unit, ship it out the door, and acquire the customer?"
I’m facing this exact scenario. I need to reread this but if I understand correctly you wouldn’t use inventory cost per unit in contribution margin? That’s hard for me to grasp because while inventory per unit declines with each incremental sale with ads, if we exclude that cost then we are potentially bleeding money as still have to pay that cost. It sort of feels like you want the ideal balance of units moving and unit profitability. For example 2000 units = 4 dollar inventory cost, 4000 units = 2 dollar inventory cost. But if we chase the 4000 units because it’s profitable less variable cost then we could bleed a lot of money.
I don't know if I wrote a certain sentence wrong or you read it wrong but you absolutely do need to include inventory cost on a per unit basis. You include all variable costs (inventory is a variable cost) and exclude fixed costs in your calculations.
Hi Opossum. Thanks for responding. I'm reading all of your articles day by day. Great content.
It's most likely that I understood it wrong, but the part that confused me is that inventory cost and fixed cost function in the same in terms of how units sold scales that cost.
If I have $10k in overhead and 10,000 units in storage (with cost of $1k inventory per month let's say) each incremental sales via ads reduces both of those numbers on a per unit basis. The inventory storage cost is not the same as a variable pick and pack fee as an example.
In this case, you have to pay for it either way so look at it in terms of fixed costs. Or just spread that $1k across 10k units at $0.10 per unit because the more inventory you buy to sell, the more your storage costs go up. You're trying to look at this like a normal P&L. Stop doing that. You have to flip your thinking to
"If I sell one more unit, what incremental cost will I have to pay to get one more unit, ship it out the door, and acquire the customer?"
Thanks! Arriving a bit late.
I’m facing this exact scenario. I need to reread this but if I understand correctly you wouldn’t use inventory cost per unit in contribution margin? That’s hard for me to grasp because while inventory per unit declines with each incremental sale with ads, if we exclude that cost then we are potentially bleeding money as still have to pay that cost. It sort of feels like you want the ideal balance of units moving and unit profitability. For example 2000 units = 4 dollar inventory cost, 4000 units = 2 dollar inventory cost. But if we chase the 4000 units because it’s profitable less variable cost then we could bleed a lot of money.
I don't know if I wrote a certain sentence wrong or you read it wrong but you absolutely do need to include inventory cost on a per unit basis. You include all variable costs (inventory is a variable cost) and exclude fixed costs in your calculations.
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Motivating read, Opossum. Thanks for all you do!
Great article as always.
Just subscribed. Absolutely loving your content
Nice write up. Enjoyed reading it on BTB earlier today. Looking forward to next weeks.
Epic as always.
Nice article Opossum. Glad to see this come through on BTB too.
Thanks! Are you already a paid subscriber to BTB? Want to be?
Already a subscriber
Golden content as always Opossum. Working through the Shopify series currently to make sure my site is up to scratch!
Thanks! Are you already a paid subscriber to BTB? Want to be?
Not a paid sub, I'm subbed though and read their free posts. Sure thing
Neatly written article. Provides lots of value
Thank you. I spend a lot of time making things as clear as possible for people new to ecom.