With the turbulence of the past few years, protecting your e-commerce profit margins is more important than ever. Many brands and business owners tend to focus on total sales volume and revenue as levers to control profits. The problem with this strategy is it only scratches the surface of profitability and often leads to lackluster results.
Let’s take a look at the four key ways you can increase your revenue and protect your e-commerce profit margins: reducing costs, increasing sales, maximizing productivity, improving efficiency.
In financial terms, if you want to have more, you need to spend less or make more. Profitability is no different, and between those two options spending less is the one you have more immediate control over. That said, with costs rising on every front, reducing spending less can seem like a daunting task. Yet if you want to protect your e-commerce profit margins and ensure long-term profitability, it is the crucial first step, especially when it comes to fixed expenses.
Here are a few key areas to evaluate to help improve your e-commerce profit margins:
- Supply Chain Costs
The goal here is not to slash all costs to a bare minimum but to find the most cost-effective ways to continue to operate at your highest potential. This could mean consolidating inventory, looking for manufacturing facilities closer to your distribution network, reducing seller fees on Amazon, renegotiating contracts based on current and projected needs, or developing more strategic advertising campaigns.
Reducing costs allows you to remain profitable regardless of what’s happening in the world by instantly increasing your profit margin without raising prices. And when a price increase becomes necessary, brands who have taken the time to reduce their costs enjoy even more profitability.
Your second option in the have more profit equation is to make more. If you are familiar with the 80/20 rule, you know there’s a very real probability that around 80 percent of your profits are generated by only 20 percent of the products you sell, and the same rule often applies to your customers.
Using this knowledge, you can reliably boost sales in one of two ways: sell more to existing customers or find new customers to sell to. Usually, products sold online fall into one of four categories:
- High volume, high profit
- High volume, low profit
- Low volume, high profit
- Low volume, low profit
Looking at these categories, it’s easy to see that high volume, high profit is the ideal spot to be in, although brands who sell high-profit items can still remain profitable even with low volume sales. The key is to identify your most loyal customers, understand what they are looking for, and know when they make purchases. From there, you can design ad campaigns and new product launches to either sell more products to those customers or attract new customers with similar needs.
It also goes without saying that any products in the low volume, low profit category are likely not profitable. Revamping these products to make them more appealing to customers or removing them entirely can help with profitability.
From an economic standpoint, productivity refers to how much output can be produced with a given set of inputs. Increasing productivity means finding ways to create more output from the same set of inputs.
Put in real-world terms, this means evaluating your overall operational productivity. Key questions to ask in all areas of your business are:
- Are all available resources (materials, distribution networks, man hours, etc.) being used to their full potential?
- Are there ways to increase output with the resources available?
- Are manufacturing, shipping, warehousing, staffing, and advertising efforts right sized for your business?
Productivity can also be measured by defining and monitoring key performance indicators (KPIs) for your business. Examples of KPIs that directly affect e-commerce profit margins include:
- Average Order Value (AOV)
- Conversion Rate (CR)
- Shopping Cart Abandonment Rate (CAR)
- Shopping Cart Conversion Rate (CCR)
- Cost of Goods Sold (COGS)
- Customer Lifetime Value (CLV)
- Churn Rate
The KPIs you choose to monitor should reflect the goals of your business and must be measurable and actionable to increase productivity.
Efficiency and productivity are often used interchangeably, but there is a key distinction that sets these two terms apart: Productivity is a measure of quantity, while efficiency is a measure of quality.
Put another way, productivity is performance, and efficiency is how well you perform. For example, if Jack makes 100 sales a day and Jill only makes 20, Jack is more productive. But if each sale only nets $2 for Jack, while Jill makes $20 per sale, then Jill is more efficient. While productivity measures total output, efficiency is about achieving the best possible outcome of that output.
Productivity also doesn’t take underlying costs into account, and efficiency does. If 100 customers purchase Product A only to have 20 send it back because it didn’t meet their expectations, while the 50 customers who purchased Product B are all satisfied, Product B is performing more efficiently than Product A.
Efficiency is also about using resources wisely. If most inflatable pool sales occur in June, July, and August but are virtually non-existent in November, December, and January, it’s much more efficient to ramp up advertising efforts in months leading up to summer than it is trying to drum up business in the dead of winter.
Look for ways to improve efficiency on a regular basis. This could mean promoting certain products seasonally or addressing common questions and concerns before customers make a final purchase. Look for underlying costs (high returns, high churn rate, etc.,) to help identify inefficiencies that are cutting into your e-commerce profit margins.
Tips for Increasing E-Commerce Profit Margins
In addition to the four ways to increase profitability listed above, there are several additional steps you can take to reduce spending and improve profit margins:
- Decrease waste – this can be anything from eliminating surpluses and decreasing storage time to improving supply chain efficiency and forecasting inventory needs
- Create budgets – budgets do not have to be strictly financial and can provide limits on the amount of time, money, and resources spent, encouraging new processes and innovations.
- Develop a Brand Identity – Strong, identifiable brands are usually associated with quality and reliability, which means they can often demand higher prices for their products.
- Increase Product Prices – One of the most obvious ways to immediately increase profitability is to simply increase prices, especially if production costs are stable.
- Increase Dollars Per Transaction – Use common strategies like up-selling and product bundles to increase the amount spent on each transaction.
- Focus on Loyal Customers – customers who consistently purchase from your brand are more profitable and more likely to purchase additional products.
- Create New Opportunities – Expand into new regions, create new products that complement existing bestsellers, and look for new customers who match your existing customer base.
- Give Customers What They Want – when a product is highly valued, price becomes less of an issue. Pay attention to customer feedback and create or promote products that fit their needs.
- Control Distribution – carefully monitor who has access to your products, where they are sold, and how much competition exists.
- Manage Your Channel – unauthorized sellers wreak havoc on pricing and can even devalue your brand over time. Maintaining a clean selling channel gives you better control over profitability.
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