You’re selling plenty of products and doing all the right things when it comes to marketing, so why aren’t you making any money? No matter how much you sell in your eCommerce store, if your profit margins are off (or if you don’t know what they are) you could end up with few profits to show for all your hard work.
Understanding what profit margins are and how they work is essential for any eCommerce store owner; once you understand what goes into this important metric, you can optimize your store to ensure you truly make the money you need.
Your profit margin is made up of two important metrics; your revenues, or the amount of money you generate and your costs, which is the amount of money that it costs you to do business. Understanding how these two important factors contribute to your bottom line will help ensure you keep as much of your hard-won revenues as well.
Understanding where you’re spending money and what fees you are paying each month is essential; too many eCommerce brands don’t fully track or report on all their fees and costs.
What is a Profit Margin – and Why Does it Matter for eCommerce Brands?
Your profit margin is a figure that reflects how your sales and your expenses relate to one another. When you sell more items or even increase the cost of items, your revenues increase, but your profits may not. Your profit margin also reflects the costs you incur in order to do business and any fees or expenses you encounter along the way.
Most eCommerce brands use a net profit margin model; one that is expressed as a ratio or percentage. Your profit margin is important because it reveals how much money you actually earn when your goods are sold.
Using accurate reporting and numbers and including the right expenses and fees ensures you get an accurate view of your profit margin. When you understand where you are spending money, you may be able to find some ways to cut your costs – and increase your profit margin.
Accurate reporting can also help you determine if you are putting money into the right categories. In some cases, eCommerce brands invest too heavily in products and categories that don’t have robust profit margins – leaving little money left over for fast selling, higher profit items.
You can improve your margins in two ways: either boost your sales or lower your costs. Ideally, you’ll do both of these things at the same time.
Review Your Product Line With Profitability in Mind
While increasing the amount of money you bring in will help your overall bottom line, selling “more” of an item that is not properly priced or that does not offer much in terms of profit won’t help your profit margin. Review your metrics to determine which of your inventoried items brings in the best profits – the answer could surprise you.
For many eCommerce brands, the most profitable item is not the flashy bestseller or the one that brings traffic to the website; it may be a smaller, less expensive piece, a consumable or even an accessory.
A Brand Class Report, offered by SkuVault, can show you how individual brands, classes or categories are performing. You can gain valuable insights using this critical information – when you know that one category has a larger profit margin than another, you can modify your sales approach and marketing accordingly.
Identifying those items that generate not just revenue, but also profits, can help you determine where to best focus your efforts and increase profitability.
Upsell or Promote High-Profit Items
Your identified profit generators can help boost your profit margins, provided you use them properly.
Adding upsell suggestions that are relevant and that include one or more of these high-profit items can increase both revenues and profits for each sale. Add suggested items to product pages or as a pop up at checkout, and you’ll increase the visibility of these profitable pieces.
Adjust Pricing if Needed
If you review your metrics and determine that a hot seller is not generating any money, it could be time to revisit your pricing. The exception to this would be an item that generates traffic – and that causes arriving traffic to order additional items.
These loss leaders are serving a different purpose, attracting buyers, and may not need to have the same profit margin as your other stock.
Define a High-Profit Buyer Persona
You should be able to use your metrics to determine which types of buyers are bringing you the most profits; once you know this, you can better direct your marketing efforts towards these top-performing buyers.
You could determine that your best, most profitable buyers come from one social media source like Pinterest, that they have similar behaviors (like repurchasing every X months) or that they are of one gender, age or other demographic. Understanding which buyers increase your profits ensures you are properly targeting your efforts.
As an eCommerce brand, you don’t have the cost of a brick and mortar location to consider, but you do have other tangible expenses that impact your bottom line.
If you’re spending too much on marketing or advertising, you may not have much of a profit at all. Some eCommerce stores do launch with a lower than usual margin, just to gain a foothold in the market, but if you are routinely overpaying for marketing, you could be missing out on profits.
Consider replacing a portion of your costly advertising with less expensive methods – social media marketing and email marketing can both yield results without excessive costs.
The fees you pay for services, SaaS solutions, and payment processing can cut into profits as well. You should revisit your choices at least annually to be sure you still have the right provider and that you are still using the best plan for your needs. You should be tracking all of your fees and be aware of how they impact your bottom line if you want to improve your profit margin.
Get the Facts You Need to Improve Your Profit Margins
You won’t know where you stand or what you can do to improve unless you have an accurate and thorough accounting of your revenues and expenses. Most eCommerce business owners have a firm grasp on revenues and sales figures, but many struggle with the true cost of each sale and in determining profitability.
If you need accurate information, SkuVault can help. Our robust reporting is designed to help eCommerce brands gain the insights they need to not only boost revenues, but to increase true profitability as well. Get in touch today to discover the difference that these important insights can make for you.
Interested in learning more? Here are a few more resources we think you’ll like!
- How Reducing Your Inventory Actually Helps You Make More Money
- 6 Signs It’s Time to Implement an Inventory Control System
Ready to learn about how to maximize profit margins? One of our inventory experts is ready to walk you through exactly how SkuVault can benefit your business and answer all your questions about how our powerful Inventory and Warehouse Management System can help address the needs of your unique business.