Management Accounting for Internet Companies

Daria Bashkeeva Melanie Gabauer

Lilia MartynovaKhristina Ripak

E-commerce E-business Internet commerce Electronic commerce Electronic business

What changes? Consumers are able:

to derive more information from the Internet to compare prices instantly communication between buyer & seller becomes

instantaneous

almost a perfect competition market

Pre- and post- customer service becomes very important

New ways of cost saving Ex: airline bookings, internet banking

More costs are indirect

Internet Company

Company generating 50% of it’s sales via the Internet (Dow Jones Internet Composite Index)

Types of e-commerce

E-business storefront Amazon, eBay, Dell

Infomediary Yahoo, Travelocity

Trust intermediary VerySign, TradeSafe

E-business enabler FedEx Virtual Order

Infrastructure provider

Key cost objects

Manufacturing firm

Product

Service firm

Service

Retail firm

Department

Internet Company

???

Cost object - customer

Customers are different in terms of profit

What happens if we don’t pay attention to customers? We lose most profitable ones

How to determine profitability of a customer?

Customer profitability

total revenue

- cost of goods sold

- customer service costs

= customer profitability

ABC-costing

Activities

Resources

Customer

ABC-costing: identify activities

Activities (direct costs) Sales and direct marketing costs

Routine customer visits Generate and take orders Resolve order discrepancies

Order processing and order fulfillment

Shipping orders to customers and accounts receivable

Locating the order, checking for accuracy

Moving and loading ordered units

Paperwork (AR & Shipment documents)

Cost drivers• Revenue (customer’s size)

• Delivery locations

• Number of items

• Order frequency

• Number of purchase orders

• Number of shipments

ABC-costing: identify activities

Activities (indirect costs) Purchase and warehousing costs

Identify manufacturer Negotiate rates Maintain supplier account

Raising purchase orders to manufaturers

Receiving shipments from manufacturers

Receiving the order and checking for accuracy

Moving and unloading items Paperwork (AP)

Warehousing space and capital cost

Cost drivers Number of units

Number of purchase orders to suppliers

Number of shipments Number of items in order

Dollar amount of inventories Number of units

Customer profitabilty

total revenue

- cost of goods sold

- customer service costs (direct + indirect)

= customer profitability

What can you do?

Build customer profitability profile Gross profit margin (TR-COGS)

- Service costs

= Net profit margin

Focus on most profitable customers

Adjust pricing policy

Non/Financial Information

Cost reduction: Number of support calls, cost of call/revenue Cost per order dollar Total dollars spent on met-ready initiatives

E-economy growth Online sales dollars Number of transactions completed online

Customer satisfaction and reach Numbers/percentage of return visitors Online customer satisfaction survey score

Operations Most requested pages/areas Quality control metrics

Extension – Google.com

Google

Key product/service: search Can it be cost object? Does it generate revenue?

Source of revenue: advertising Cost object: customer/advertiser

Google’s business model

Search, Gmail… Revenue: CPC AdWords

bid for keywords keywords relevant for

search terms, content

Costs: Sales & Marketing Bandwidth & Data Centers

Content providers Revenue: CPC AdWords+AdSense

bid for keywords keywords relevant for

content

Costs: Revenue split Sales & Marketing Data Centers

2005 FinancialsRevenue 6,138.6

Google sites 3,377

Network sites 2,688

Licensing and other 73.6

Traffic acquisition = Revenue split 2,115

Cost of net revenue (bandwidth, data centers) 456.5

R&D 484

Sales & Marketing 439.7

G&A 335.3

Stock-based compensation 200.7

Contribution to Google foundation 90

Income from operations 2,017.4

Customer profitability

CostPerClick ($0,6) * N of clicks

- Revenue split- Customer support- Marketing support

- Billing of customers- Bandwidth

- Data Centers

= customer profitability

Unit-level

Customer-sustaining

Channel-sustaining

Example: Customer A

Google: 0,6*5600=3377

Network: 0.6*4480=2688

Total revenue: 6065

Revenue split: 0.5*4480=2115

Sales & Marketing: 439.7

Cost of net revenue: 456.5

Profitability: 3053.8 or 50.3%

Assume 25% of sales were fraudulent:

Google: 0,6*5600=3377

Network: 0.6*3360=2016

Total revenue: 5393

Revenue split: 0.5*3360=1586

Sales & Marketing: 439.7

Cost of net revenue: 456.5

Profitability: 2910.8 or 54%

Thank you!