Net profit margin is an important indicator of a store’s financial health and profitability. It helps you understand the overall success of your small eCommerce business and identify areas where expenses can be reduced or sales increased.
Additionally, you can get a better understanding of how to maximize profits, reduce costs and make informed decisions about investments.
Due to these tremendous functions, the net profit margin is one of the most crucial factors that sellers frequently think about and find ways to improve the situation.
Don’t worry as this blog will help you solve some of the most common inquiries surrounding net profit margin, such as what it is, how it is calculated, and some strategies to increase the profit margin.
What is Net Profit Margin?
The net income or profit generated as a percentage of revenue is expressed as the net profit margin, or simply net margin. Although the net profit margin is frequently expressed as a percentage, it can also be given in decimal form sometimes.
In addition, the net profit margin is also one of the most crucial measures of an eCommerce business’ financial health. An online site can determine whether its existing procedures are effective and estimate earnings based on revenues. It can be conducted by monitoring growth and reductions in the store’s net profit margin.
What is reflected in the net profit margin?
Net profit margin makes it easy for store owners to compare the profitability of two or more stores regardless of size. That’s because most stores represent their net profit margin as a percentage rather than a monetary value.
To enable profit comparison between stores, net profit margin takes into account all aspects of your store operations, such as:
- Total income
- Additional sources of income
- COGS and other operating costs
- Interest expense on debt obligations
- Income from investments and secondary operations
- One-off payments for unanticipated circumstances like lawsuits and taxes
According to this, store owners can determine whether their management is making a sufficient profit from sales and whether operational costs and overhead costs are being kept under control.
What is a good net profit margin?
Now, you might be wondering, “What constitutes a decent profit margin?”
In general, a 10% net profit margin is regarded as typical, a 20% margin as high (or “excellent”), and a 5% margin as low.
However, remember that these rules differ greatly by industry and store size and can be influenced by a wide range of other circumstances.
How is the net profit margin calculated?
To know how the net profit margin is calculated, first, you will need to know some of the metrics used in the calculation.
Revenue is the total amount of money your business brings in during a given time frame. The price of your goods or services is multiplied by the quantity or amount sold.
Cost of goods sold (COGS)
The direct cost of the labor and materials used to make your product is referred to as the “cost of goods sold (COGS)”. It means the term “cost of goods sold” covers the price of:
- Receiving raw materials
- Delivering the products to the specific destination
Operating expenses are the entire costs incurred by your business on a daily basis that are not immediately related to production. It contains:
- Sales commissions on payroll
- Employee advantages
- Contributions to a pension
- Travel \Rent\Repairs
The net profit is frequently referred to as the “bottom line” of a company and is also a reliable predictor of its profitability. In other words, net profit is the total revenue of a business after subtracting all costs. The costs may be from business operations as well as depreciation and taxes.
|Net profit = Revenue – (COGS + Operating costs + Taxes)|
For instance, your company’s total income is $12,000, its total expenses are $8000, and its operating costs and taxes are $2000. So, you will have:
|Net profit = $12,000 – ($8000 + $1000 +$1000) = $2000|
Net profit margin calculation
Net profit margin is determined by dividing net profit by total revenue and multiplying the result by 100.
Still, it is helpful to first understand the factors that determine your net profit margin calculation, such as net profit, operational costs, and cost of sales, as we mentioned above, before going into how to calculate your net profit margin.
If you already have all the necessary figures, you can calculate the net profit margin by following this formula:
|Net profit margin = (Net profit/Total revenue) x100|
For instance, we have a net profit of $2000, which was calculated before. According to the formula, we will have:
|Net profit margin = (2000/12000) x100 = 16,67%|
How to improve net profit margin
It’s essential to stay mindful of the profit margin when running an online store. Increasing the net profit margin is not only beneficial for the business itself but also for its shareholders and other stakeholders.
To increase your profit margin, you should consider focusing on driving sales revenue up and minimizing production costs and operating expenses. If done correctly, these efforts will help raise the net profit margin, making your eCommerce business more successful.
Hence, we will show you some ways to boost your net profit margin.
1. Lower operating costs
By cutting down operating costs and expenses, you can quickly improve profitability, and profit margins can be rapidly increased.
However, it’s important to know where and how to cut expenses. It can be challenging to identify areas of excessive spending since the sources of expenditure vary greatly from store to store.
Still, you can always start with the basic operational costs, including labor costs, employee benefits, insurance, and more.
We recommend you use the software. Investing in a high-quality and feature-rich software package could help streamline operations and provide long-term savings.
For instance, a good software package can save you time on tedious manual processes, such as accounting and payroll. It can also automate certain tasks that are currently consuming employee hours.
2. Don’t get fixated on per-order profits
Many store owners are afraid to lose money on an order, especially if doing so means severing ties with a disgruntled or angry consumer.
Nevertheless, you’re missing out on the opportunity to increase your net profit margin if you don’t promptly and proactively address customer issues. That’s because the customers are so used to receiving subpar service; as a result, they are shocked when stores proactively remedy a problem without charging them. In return, you’ll receive referral marketing and recommendations that are impossible to buy, in addition to the lifetime value of that customer.
Here are four strategies to invest in the future of your store and, ultimately, your long-term bottom line:
- When something inexpensive is broken
Send free replacements to consumers right away without making them deal with the return.
- When expensive items need to be returned
Rather than waiting until it arrives at your warehouse, send them a replacement as soon as they submit tracking information for the return of the costly item.
- When a long-time customer needs something as soon as possible
Give a long-time customer who needs something urgently a free overnight delivery.
- When a customer is not satisfied with a product
A proactive partial refund should be given to a consumer to help make up for his unhappiness.
3. Boost the average order value
You can increase your average order value (AOV) if you wish to boost your profit margin. It is known as the average monetary amount a customer spends per transaction in your store.
You can calculate the average order value (AOV) using a straightforward formula.
|Average order value (AOV) = Total revenue / Number of orders|
In addition, AOV can be calculated for you by Shopify customer reports, or you can use a variety of practical apps available in the Shopify App Store.
Still, there are multiple ways you can increase the average order value and, eventually, promote the net profit margin.
3.1 Provide recommendations for the targeted product
Store owners can utilize their past purchases by including a “most popular” or “consumers also bought” section at the bottom of their browser.
Otherwise, you can generate suggestions based on the product that the customer is presently examining. This might be used as a personalized cross-sell strategy or to direct someone toward something they weren’t even aware they were looking for.
3.2 Establish a Free Shipping Threshold
One of the simplest strategies to raise average order value and net profit margin in your e-commerce store is a free shipping threshold. The good news is that it works, and this tactic is used on most e-commerce websites.
Setting a minimum purchase requirement for free shipping will probably persuade customers to make more transactions or purchase more expensive items. Because customers would feel like they got more for their money, the transaction would seem like a better deal.
3.3 Provide product discounts with a minimum purchase threshold
Another way you can increase sales for your store is by appealing to customers’ needs to save money. Another option to reward customers who spend more than a certain amount at your store is to set a discount threshold.
By providing a discount, like 15% off orders of $100 or more, you enable your customers to benefit from special offers while raising your AOV and net profit margin at the same time.
However, when setting discount thresholds or offering special discounts for first-time customers, make sure your incentives are clear and easy to understand. This will ensure that the discounts you offer are used in the most effective way possible.
3.4 Cross-sell your products
You should spend some time designing your online shop so that it offers related products next to one another.
Cross-selling is a clever technique to help customers locate new goods. In addition, your customers should easily identify products that complement one another or the extra accessories in your store. Or, you can consider structuring your online store similarly to a physical store.
Finally, you can make the buying experience seamless by effortlessly moving the customer from one place to the next without making them navigate a lot. These activities will help your online store increase the average order value and the net profit margin.
4. Increase your brand credibility
Gaining customers’ trust is crucial for driving up net profit margins. While product qualities and pricing are simple for marketers and store owners to assess, trust is more difficult to quantify and fully comprehend.
In order to build customer trust for your eCommerce brand, here are some tips you can follow:
- Make your homepage pleasant and compelling for potential customers.
- Make it simple to obtain product information by providing detailed product descriptions and accurate search results.
- Tell your brand’s story to give them a sense of authenticity.
- Give customers social evidence, which may demonstrate customer pleasure.
- Transparency in pricing and transaction expenses.
In short, gaining the confidence of new customers will motivate them to shop at your online store.
5. Establish a consumer loyalty program
Customer loyalty programs are an effective way to boost profit margins and profitability.
A store can make less profit if there is too little attention paid to customer retention and high customer acquisition costs. Therefore, you can develop a customer loyalty program to make transactions with current customers rather than paying money to locate and close new ones.
The most effective loyalty programs put the customer first. They offer genuine value that shows devoted customers your appreciation for their patronage and desire to work for their best interests.
While steep discounts aren’t financially feasible for small stores, you can still find ways to reward customers to encourage them to make more regular purchases and switch from low-margin to high-margin sales.
6. Increase product prices
Many store owners worry that if they raise prices, their customers will stop buying from them, making their sales stop and the store out of business.
However, if you’re reselling an already-existing product on your e-commerce site, a tiny price increase might significantly increase sales and improve your bottom line, particularly if there is consumer demand.
Let’s take a look at an example of how a price increase can elevate the proportion of the net profit margin.
|Scenario A||Scenario B|
|Price at retail||$200||$210|
|Cost at wholesale||$170||$170|
You, an online seller, would undoubtedly benefit from increasing the net profit margin. Hence, you should check out these strategies above on how to improve the net profit margin as you work to increase business profitability. This way you’ll be able to decide more quickly in the future whether a new product or service will be successful and make wiser business decisions.
With these suggestions in mind, we believe that you can build a solid foundation for your e-commerce site and endure any economic unpredictability over the long term.