Margins: The Most Important Metric for Your Ecommerce Business
Ecommerce businesses typically associate product margins with how much cash they can stash away in the bank. While product margins clearly lead to profit, this mindset needs to shift if you want to be set up for success.
No one would disagree that your product margin is one of the most important metrics in your business, but do you really realize HOW important it is? Your product margins are the essential fuel for a thriving ecommerce business. Get these right, and they will fund your effort in creating fans of your brand while providing healthy cash flow. Get these wrong and you will struggle to do the basic things required to acquire customers and grow loyalty.
90% of the time when we assess the health of a business, unhealthy businesses that are struggling will have poor product margins at their root. To make it worse, what you think are good margins may not actually be that great when you break it down
The purpose of product margins is NOT to create profit for your shareholders (that’s the job of your entire business). The purpose of your product margins is to be able to fund the effort of creating a long-lasting, monster brand with a loyal fan base (that then creates profit).
In this post, we’ll discuss the right way to think about margins, what the target markup should be for a business that is intent on being a long-lasting brand, and the ways you can use them to your advantage once your margins are in a healthy place.
What is a healthy product margin for ecommerce businesses?
When setting product margins, ecommerce businesses usually take two to three times the cost of goods, or just take a guess based on the market. We rarely see brands focusing on intentionally creating products with certain margins in mind. This is a mistake. In the product development and creation stage, you should be dreaming up products that will be able to have a healthy margin and be an extreme value to customers.
If you look at the fast-growing, successful ecommerce brands out there (often doing $100M+ annually), you’ll find they do this well. They intentionally focus on margins. How much? We recommend 5 to 30 times the cost of goods. Seem high? It’s really not. No matter how expensive your product is to make, 5x is really your bare minimum.
Can you think of any truly successful brands that actually have low margins? If they are successful, it’s not because of their compelling brand, amazing customer experience, or raving fans. People simply shop there because it’s cheap.
7 Ways to Use Product Margin to Create Raving, Loyal Customers
As we have already mentioned, margins are not just extra fluff for your bank account. It’s what you do with this profit that matters. The idea behind creating massive product margins is to invest it in your business to make the best experience possible for customers. That is the center for creating raving fans, and a strong fanbase is the secret to a successful ecommerce brand, and a successful business is what generates profits. See how it all works together?
The best businesses in the world plan to invest in the following things rather than treat them as an expensive afterthought.
In order to create a successful ecommerce business, you need a machine that allows you to PROFITABLY do the following:
1. Research & Development
We’ve said it before and we’ll say it again: If you’re not growing, you’re dying. And R+D is critical if you want to grow. We often see businesses put this off because it is not an urgent or time-sensitive need. But if you want to win, you must invest in R+D before you need it, which requires good margins.
2. Create great products
This should go without saying, but don’t sell bad products. Selling a great product is the prerequisite for creating a great brand. If you have a good product margin, you’ll have profit to be able to invest back into constantly improving your products. That means happy customers that shout about your brand from the rooftops and keep coming back.
3. Educate and acquire new customers
Brands of all sizes and stages will need to educate the public and acquire new customers through paid ads or other means. You’re never too big for this (I never thought I’d see Whole Foods advertise on TV, but what do ya know, they popped up on Hulu last night).
Among the wide variety of brands we work with, we typically see that products under $100 need to spend about $40 to acquire one new customer. That doesn’t change much between industries. Your product margins need to be large enough to support the cost of that acquisition.
4. Build a great team
The longevity and health of your brand are only as good as the team that’s steering the ship. If you intentionally create large product margins, you will be a healthy company that can afford to hire amazing employees and build an awesome team.
5. Invest in your brand
Building a brand that people can relate to and connect with emotionally is a long term play, not a short term money maker. You won’t see the ROI immediately, but selling people on your story and emotion is the only way to creating a brand that sticks around for a long time. Product margins are the easiest way to invest in this type of effort. For more on branding and what it takes to build lifelong fans, check out our article on The Holy Grail of Ecommerce Success.
6. Risk Reversal
If you’re familiar with Metacake, you’ve probably heard us talk about the 3 keys to an irresistible ecommerce offer that your customers can’t refuse. A key part of this offer is risk reversal, and if you position it right, it’s almost guaranteed to result in a purchase. This means backing your product with a lifetime warranty, a money-back guarantee, or something similar. The only way to make this kind of offer (and not go bankrupt) is by having product margins that support it.
7. Offer great customer service
Customer service is the front line of fan creation. Why? When a customer comes to your customer service team, they are usually unhappy and expect to be disappointed. If you take this as an opportunity to turn that frustrated buyer into a happy one, you could turn a one-time customer into a raving fan. Having the right product margins allows your customer service team to do whatever they need to in order to make things right for the customer. This could include sending customers the correct product hassle-free, refunding their money, or surprising them with an additional product.
Do you want to build a brand that matters?
If you want to run a successful ecommerce brand, you need to focus on growing a business that matters— using strong margins to invest in great products and exceptional customer service.
This isn’t just the smart thing to do, it’s also the noble thing to do. If you don’t invest here, the business becomes a price game very quickly. Low prices will be the only thing that sets you apart from your competitors and that is a quick race that never ends well.
A great example of a company that has invested in a brand that matters is one of our clients, GrooveLife. Groove sells silicone wedding bands and has quickly become one of the top brands out there for this product. They are also one of the most expensive (ranging from $30 to $50 for a ring). You could buy a pack of five silicone rings on Amazon for $5, but thousands of people are purchasing from Groove and RAVING about them. That is because with Groove, you’re not only buying the highest-quality silicone ring out there, but you’re also participating in its purposeful brand, relevant story, and top-notch customer service experience.
When you can use product margins to build a brand that matters and an amazing experience for your customers, you will find customers turn into fans right and left. And that’s the golden ticket to a successful ecommerce business.