How to Increase the Profitability of Your Ecommerce Store
Ecommerce profitability is critical to the success of any DTC business’s online channel. Unfortunately, it’s not uncommon for ecommerce brands to become so revenue-focused that actual profit doesn’t get the attention it needs. Whether the business model is simply not profitable, or those in charge are focused on other things, many get so caught up in the topline numbers that they miss the most important one.
Of course, profit will be needed to sustain a successful, lasting business so that’s why we’re addressing it today. In this post, we’ll show you how to increase the profitability of your ecommerce store with seven practical strategies.
Is Your Ecommerce Site Making Revenue But Losing Money?
We talk to companies all the time that look like they are extremely successful from the outside but are actually struggling to come out on top. An ecommerce store might be making tens of millions in sales each year, but when the expenses add up they barely break even. It happens all the time.
The truth is, a smaller business with higher profit is better than a larger business with less (or no) profit. A large business naturally comes with a lot of complexities and expenses to keep it running. Not to mention, if you ever want to sell your business, buyers and investors will look at profit, not revenue.
What is Your Profit Benchmark?
Before we get into how to increase your profits, we need to establish what a good amount of profit looks like.
In general, your net profit should be 25 to 30%, with 30% being the ideal scenario. If your store makes $1 million in a year, after all business expenses and payroll are taken out, you need to plan to net $200-300k. Without this profit margin, your company will not have a way to invest in continued growth.
For reference, many ecommerce companies sit closer to 10% or lower. In these cases, they are often losing money and might not even realize it. This is a dangerous place to be.
Important caveat: If your business is in a growth phase, and you’re spending and investing more in order to grow, you may intentionally choose to be at a lower profit for a period of time. That is fine as long as it is purposeful, planned, and not for the long term.
7 Strategies to Increase the Profit of Your Ecommerce Channel
At a very basic level, there are two ways to increase your profitability: increase price or lower expenses. That’s it. Here are seven mindful strategies that can help you do just that.
1. Dial-in gross margin.
Product margin is a golden multiplier— a key metric— for the success of an ecommerce company. If you want to offer a risk-free guarantee or some type of warranty, amazing customer service, exclusive offers, and more, your margins give you the cushion to be able to offer that. And you definitely should offer all of those things— these are what will create brand fans and increase the lifetime value of your customer.
Therefore, the margin on your products should be no less than 80% or five times the cost of goods. In fact, the more successful ecommerce brands we’ve seen have margins that are anywhere from ten to 30 times their cost of goods. This may sound extreme, but it’s actually what is necessary in order to create a great customer experience.
A few tips for increasing your margins:
- Negotiate your product costs
- Cut back on expenses in the business that do not reduce the customer experience or product quality
- Develop new products that have higher margins
- Plan ahead so you can place bigger orders and use slower freight. This can help lower the cost of shipping from the manufacturer to you.
2. Start Negotiating
There are a few things that you could look into negotiating in order to increase your profitability. There are many costs associated with running an ecommerce store such as credit card rates, platform costs on your store, shipping rates, and packaging costs. For many of these, as your store increases in size and therefore your volume of customers, products, and sales, these rates can change. We recommend assessing all of these costs quarterly (definitely yearly) so that you make sure you’re getting the best and most efficient rates as you grow.
3. Use More Efficient Marketing
If you’re looking to increase your ecommerce profitability, becoming more efficient in your marketing can be very helpful. The first step is to rein in your advertising costs. If your marketing team is not tracking a ratio of daily ad spend to revenue, have them set up a spreadsheet for this ASAP. Ideally, daily ad spend should be 35% or less of daily revenue.
Next, take a look at your conversion rate. If you are paying for traffic, let’s make sure your store is converting as many visitors into customers as possible. Check out our guide to conversion rate optimization for tips on how to improve the conversion rate on your site.
Another critical element is your email marketing strategy. Email is very low-cost (just pay the platform fees) and has the potential for very high ROI. In fact, email has the potential to contribute upwards of 30% to your store’s revenue by engaging with customers at scale and increasing their lifetime value.
Speaking of which, increasing lifetime value is another great way to make marketing more efficient. If you’re spending ad budget to acquire a customer, let’s make sure they make multiple purchases so you make that money back and then some. Email is the primary strategy for increasing lifetime value, but customer service, promotions and sales, and new product releases also play a role.
Finally, don’t forget about marketing opportunities such as SEO or working with ambassadors and influencers. These typically take longer to see results, but they are important to be working on so that over time, you can rely more on organic efforts than paid advertising for traffic.
4. Assess Your Expenses
Are your internal teams and the processes within your business operating as efficiently as possible? Assess this and identify areas where systems, technology, or SOPs could be implemented either to reduce the number of team members needed or to make sure your team members’ time is spent in the right places. This can help get your payroll down and improve ecommerce profitability.
We also recommend assessing your recurring expenses quarterly to ensure everything you are paying for is actually needed and being used regularly.
5. Raise Prices
You might also try split testing price increases to see how customers (and your store’s conversion rate) respond. If you do so, there are two important things that will help create value for your customers (and therefore help your price make sense).
1. Work on your offer. Creating an irresistible offer is more than just the product with the price tag. It’s how you position this product, the description you provide, a guarantee or warranty to de-risk the sale, the urgency involved, and more.
2. Dial in your brand. This includes communicating your brand’s “why” as well as what makes you different from others on the market. It’s the story you tell and how you make your customers feel seen, understood, or inspired.
6. Increase Your Average Order Value (AOV)
Increasing your average order value (getting more per customer) means more efficient ad spend, more revenue, and therefore increased profitability. This is mainly accomplished by offering complementary products, product add-ons, or bundles via cross-sells and upsells. Consider offering cross-sells or upsells after a customer clicks “add to cart”, or set up post-purchase upsells using tools like Zipify or Bold Cashier.
7. Utilize Both Insourcing and Outsourcing
Finally, take a look at the roles and teams within your organization and determine whether anything internal would be more cost-effective if you outsourced the work (and vice versa).
Some roles are much more efficient and effective in-house, such as customer service. However, other teams might be more cost-efficient with a hybrid model— some in-house, others outsourced. We often find this to be the case with marketing teams. If you keep ecommerce marketing in-house, you’ll either have to hire a jack-of-all-trades marketer, or hire multiple specialists (likely full-time). It tends to be more cost-efficient to contract this work out to outside specialists to handle Facebook ads, Google ads, and other channels separately while your internal marketing manager sets the overall strategy.
Deliver Extreme Value & See Massive Profit
Profit is key to any brand’s success long-term, but many don’t focus on it as much as they should. It may not be as glamorous or encouraging as tracking massive sales day after day, but it will be the number that protects your business for the long haul. It is possible to deliver extreme value to your customers and still profit, so start by following the tips covered here today. And if you need help scaling your ecommerce business using healthy, sustainable strategy, we can help. Just reach out to us below.