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Lots of merchants like you place a strong emphasis on acquiring more leads and converting more sales. However, in order to scale up in the long run, you should know that you have another ultimate goal – increasing your eCommerce profit margins.
Therefore, in this article, we will show you 6 tactics on how to increase profit margin for your eCommerce business.
Let’s dive right in!
What Are ECommerce Profit Margins?
Profit margin is a profitability indicator used to measure how many cents of profit a company generates for every dollar of sales.
While there are several types of eCommerce profit margins, when people are talking about ‘Profit Margin’, they usually refer to ‘Gross Profit Margin’, and ‘Net Profit Margin’.
1. Gross Profit Margin
Gross Profit Margin is calculated by dividing gross profit by total revenue, which will show you how much you can keep per dollar of sale after subtracting product costs.
Gross Profit Margin (%) = [(Revenue – COGS) / Revenue] * 100%
Gross profit is your revenue subtracted from Cost of Goods Sold (labor + material costs). So, a low gross profit margin indicates that you may want to look for another supplier or invest more in infrastructure to cut down on labor costs.
However, just because you have a healthy gross profit margin doesn’t inherently mean that your Net Profit Margin is healthy too.
2. Net Profit Margin
Net Profit Margin is calculated by dividing net profit by total revenue, which will show you how much you can keep per dollar of sale after subtracting all the costs. By “all the costs”, we mean your COGS, operating expenses, sales & marketing costs, etc.
Net Profit Margin (%) = [(Revenue – COGS – Operating & Other Expenses – Interest – Taxes) / Revenue] * 100%
The higher your net profit margin is, the more money you have to reinvest to keep scaling your business. If your Gross Profit Margin is healthy but your Net Profit Margin is poor, then you have to manage your operating expenses, and marketing & sales expenditures more wisely.
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What Is A Good Ecommerce Profit Margin?
Whether your profit margin is healthy or not depends on your store’s niche.
According to the latest data from NYU Stern School of Business on eCommerce profit margins for US-based businesses by industry, the average Gross Profit Margin and Net Profit Margin of online retailers are 41.54% and 7.25% respectively.
So if you run an eCommerce business, a net profit margin of around 10% is average, 20% is high and 5% is considered low.
6 Tactics To Increase Your Ecommerce Profit Margins
Now that you know how to calculate profit margins and your margins compared to the average ones of your niche, let us show you 6 tactics to increase your eCommerce profit margins.
#1. Raise prices
This is the fastest and easiest way to increase your profit margin for sure. However, lots of merchants are freaked out thinking of this tactic.
They thought by increasing their product prices, they would lose their customers to the competitors.
However, if you have a lot of orders and customers but still suffer from low eCommerce profit margins, consider raising the prices of the products in demand (aka your best-selling items in the last 3-6 months).
And if you have a strong brand identity, don’t be afraid to increase your product prices a bit. According to a recent study by Investopedia, businesses with a strong brand identity have an ultimate power- charging more for the same products that their competitors are also offering.
#2. Increase average order value
Without a second thought, one of the best ways to round up your bottom line is to increase your average order value.
There are actually various ways for you to encourage your customers to purchase more. Here are some proven-effective cross-selling and upselling strategies that you may want to adopt for your business:
- Frequently Bought Together: Add a Frequently Bought Together section on your product pages to incentivize your customers to buy in combo instead of separate items.
- Quantity Breaks: Give customers sweet discounts the more items they buy per purchase. (e.g: Buy 2 Items, Get 5% Off > Buy 3 Items, Get 10% Off).
- Add-ons: Consider offering free shipping if a purchase meets a certain value (e.g: Buy $45 more for Free Shipping). Or if you sell souvenirs, for instance, offer gift wrapping or prioritized shipping at $1 during holiday seasons.
- Post-purchase Upsell: Offer your customers post-purchase upsell without disrupting your customer buying journey.
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#3. Cut down on operating costs
Since your net profit is revenue subtracting from costs, besides increasing your revenue and average order value, you should find ways to cut down on unnecessary operating costs.
You should first do an expenditure audit and then use the audit to spot the expenses that you can reduce without putting your product quality in jeopardy.
For instance, if updating your store profits and losses swallows a lot of your team’s time, causing inefficiencies, then you probably want to automate the task with a powerful profit-tracking tool like TrueProfit.
#4. Expand your shopping channels
Though expanding to new eCommerce sales channels isn’t easy and time-consuming, if you succeed, you’ll grow much more sales and this will definitely help boost your eCommerce profit margins.
Not to mention that, as the saying goes ‘you shouldn’t put all your eggs into one basket’, by diversifying your sales channels, you’re diverting risks, allowing your brand to be more stable and resilient.
Think of global social commerce channels like Facebook Shops, TikTok Shop, Instagram Shopping, or marketplaces like Amazon, Etsy, eBay, etc.
#5. Focus on retaining your most profitable customers
One of the most cost-effective ways to improve your eCommerce profit margins is to invest more in acquiring and retaining the customers that help you generate the most profit.
If you have a large pool of customers, taking good care of them all seems like a daunting and impossible task. This means you should allocate your resources to acquiring and retaining the customers that are more important to your business’s bottom line.
#6. Run a loyalty program
Did you know that the cost to acquire a new customer is 6 times higher than the cost needed to retain an existing one? Not to mention that, according to research by Frederick Reichheld of Bain & Company, boosting customer retention by 5% increases profits by 25% – 95%.
Therefore, running a loyalty program can be a cost-efficient way to improve your eCommerce profit margins.
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However, in order for your loyalty program to succeed, make sure that you put your customer experience first and transactions second.
And since running a loyalty program means you have to offer customers discounts and benefits, don’t forget to keep these expenses from not getting too high, or else, you will hurt your eCommerce profit margins.
Ready To Supercharge Your Ecommerce Profit Margins?
All in all, eCommerce profit margins are crucial metrics since they help you have a better understanding of how much profit you can still retain per dollar of revenue after subtracting all costs and expenses.
And we hope our article could help you understand what profit margin is and how to improve your eCommerce profit margins.
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