Profit Margins Ecommerce

How to optimize your ecommerce brand’s profit margins

If you read the Metrilo blog often, you’ve noticed we preach profitability and sustainable growth for ecommerce companies. We see so many companies go out of business not because they don’t have sales, but because they don’t make any money! Yes, that’s right. Sales don’t automatically mean you earn money.

How much do you make on a sale?

Gross Profit Margin Formula

That’s the gross profit margin formula, this is what you make from each product.Net Profit Margin Formula

This is the net profit margin formula, what you earn after all costs and expenses of the business.

Now, we are not experts on interest rates and taxes, so we can’t give you advice on how to lower those. But we can help when it comes to sales, marketing and how to optimize it to get better profit margins.

Important note: The overwhelming advice you’d hear when looking to increase profit is to lower costs. This is wrong. You cannot lower costs to bare minimums and hope to keep getting new customers and keeping the old ones happy. It’ll simply mean your product and service have become worse for the same price. It’s an unsustainable solution for serious brands looking for healthy growth.

That’s why we’re going to talk about how to increase revenue, a.k.a. prices, in order to increase the profit margin. True, some measures will incur an increase in costs as well, but being able to charge more for your products ultimately settles things.

The bottom line is you don’t need to be competing on price and barely keeping afloat with low margins when you could push things up a bit and breathe with more comfortable margins. Here’s how to add value to your offerings and earn more.

Why margins matter

Here’s what healthy profit margins let you do and afford:

  • Can afford costlier acquisition marketing because the resulting sale won’t be at a loss
  • Can develop new products, fund inventory, expand to new markets, afford offline presence
  • Makes you more stable in the face of seasonal fluctuations as cash flow is positive
  • Can offer better customer service since you’re making money even on the first sale (and high customer retention promises even better margins once CACs are irrelevant)

So optimizing profit margins helps:

  • Marketing budgeting
  • Cash flow management
  • Customer service
  • New product development
  • Expansion strategy

Having more money to reinvest back in the business will speed up your growth without the need of outside investors. Not to mention the premium brand image that comes with certain positioning and price point.

It all comes down to what kind of a brand do you want to be?

In what cases low margins are not a problem?

  • You operate on a big market and sell a mass product (not niche), so you rely on volumes sold.
  • Customer acquisition is cheap so even low margins don’t incur loss.
  • No big investments in expansion or new product development needed.
  • Low cost of goods and dispensable suppliers.

If you’re not such a brand, though, let’s look into optimizing your margins.

How to increase product margins (for brands already in business)

Here are ideas on how to raise your prices and get better profit margins as a result.

Push bestsellers by margin, not by the quantity sold. Make your most profitable products your frontrunners in promotions, on website, in visual marketing materials, in influencer campaigns and features in the media.

Start using a premium quality raw materials, maybe from a specific place or made by artisans in order to be more exclusive. When applicable, running your own farm is great for both the supply chain and marketing.

Add more high-margin products to your range and get rid of low-margin items to make sure all your efforts score high. Clear your stock through bundles with high-margin items.

Break away from discounting. Run other types of promotions (refer a friend, user-generated content, etc.) rather than price reduction in order to get your audience accustomed to paying the full price and not waiting for sales. This keeps the brand image premium and frees you from the expected reduction in profits.

Read more: How to avoid price wars?

How to set high profit margins from the start (for brands about to launch)

Here are a few ways to offer more value, position your brand at a more profitable tier right from the beginning and skip price matching altogether.

Use premium materials and fair labor and make sure customers know and choose you for it. Yes, those raise costs, but also position the brand up.

Include extras in the price – guarantees, maintenance, some supplies, add-ons with every order (e.g. a case for every toothbrush). This adds value to your products and seems a better deal even at a higher price point.

Provide top-tier customer service by hiring enough people and leave no customer feel ignored. Accessibility and openness are traits of a company that has nothing to hide from its customers and the human touch is greatly appreciated.

Rothy's Branding

Rothy’s shoes are example for innovative material and living up to high values that attracts buyers no matter the price.

Your turn now

If you don’t have it ready, go ahead and calculate your gross profit margins by product. Which ones are bad? What measures can you take to change that?

Then, calculate your net profit margin (you have it in your balance sheet, cash flow statement and income statement (US) or similar documents). The easiest way to evaluate if it’s enough is to take your goals for the next year and see how much they’d cost, then see if net profit from the previous year covers them. If not, you’d better start optimizing.

 

About the author

With experience in FMCG and marketing, Dimira writes to help the brands of tomorrow succeed and believes passion is a key ingredient in any business.

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