Want More Profit? Start With Expenses.

In order to gain clarity around how your eCommerce company makes or loses money, you must first understand how it spends it. Only then can we take the analysis to the next step, which is to understand how to calculate, and manipulate, contribution margin (don’t be afraid of this term, it’s where the magic happens!!).

Fixed Expenses

A fixed expense is an expense that exists inside a business whether or not the business generates income. Unlike a variable expense, which exists only when the company generates income (see below), these expenses are seen on the Profit & Loss statement (P&L) each month and are critically important to understand.

If unclear whether or not an expense is fixed, ask yourself this question, “Do we have to pay this expense even if the business doesn’t generate income?” If the answer is yes, it’s fixed.

Examples of fixed expenses are:

• Office rent
• Utilities
• Recurring software
• Insurance (health, business, etc)
• Payroll and associated taxes and fees
• Interest on debt

Adjusting your fixed expenses is one of the only things you have control over as a business.

Variable Expenses

A variable expense is one that is related to the generation of income. Think of this type of expense as one that only exists when the business generates income — unlike a fixed expense, which exists regardless of whether the business generates income.

If unclear about a variable expense, ask this question, “Does the cost of this expense relate to the company generating income?” If yes, the expense is likely variable (excluding paid media/ad expenses that can be increased or decreased within 24 hours, see below).

A few examples of typical variable expenses are:

• Cost of Goods Sold (COGS)
• Credit card processing fees
• Shipping and fulfillment expenses (in-house or with a 3rd party fulfillment service (3PL))
• Affiliate or referral fees
• Website fees related to sales (i.e. Shopify)
• Marketing agency fees
• Sales commissions

Ad Expenses/Paid Media

We look at Advertising Expenses a bit differently within Pentane. Yes, these are sales related expenses so considered variable, but we find that advertising/marketing expenses that can be changed quickly are more impactful to categorize separately.

So, within Pentane, we call an Advertising Expense one that can be increased or decreased within 24 hours. This short timeline is important as it creates clarity around how to control the growth and scale within a business (i.e. How can we pour more fuel on the fire?).

Examples of these advertising expenses are:

• Facebook
• Instagram
• Twitter (X)
• Pinterest
• LinkedIn
• TikTok
• Snapchat

While other marketing expenses are certainly considered “advertising”, the Pentane system looks at ad expenses that we cannot increase or decrease quickly as variable expenses, instead of classifying them as “advertising expenses”. Examples of these types of expenses, which we’ll classify as variable, not advertising, are:

• Influencers (typically planned out, can’t be increased within 24 hrs)
• Affiliate programs
• Marketing agency fees
• Bus benches
• Urinal cakes (yep, urinal cakes)
• Billboards