If you run an ecommerce business, establishing a high profit margin (or at least a workable profit margin) is going to be one of the most pivotal aspects to making your business a financial success. Perhaps you’ve realised your business is not making enough money to grow it as you’d like or you’ve discovered you’re making a loss on certain products, whatever it is we all like the idea of improving profit margin on our ecommerce business, right?
Profit margins in retail (including online retail) are some of the tightest in any industry going, so getting the right blend between costs and price can be a delicate balancing act. In this article we run through five simple steps to increase profit margin as an ecommerce business. With some ideas specifically aimed at ecommerce businesses selling internationally.
Understanding What is a High Profit Margin in Ecommerce
Defining what makes a good or high profit margin can depend on a whole host of factors, namely; the industry in which you operate, what it is you’re selling (i.e. luxury or necessity goods), the size of your business and the marketing/growth investment you make.
Service industries (particularly financial services) can have some of the highest profit margins going, whilst ecommerce profit margins, particularly for those selling retail goods, can prove much tighter.
So, what makes for a high profit margin in ecommerce? Well, data presented by the NYU Stern Business School suggests a gross profit margin of 42.53% and a net profit margin of 4.95% as the average. Anything above this and you could consider yourself making a ‘high profit margin’, relevant to the retail ecommerce sector. What these figures do highlight, however, is the rather hefty difference in gross and net profit margins, meaning a pretty sizable markup is required on the goods you sell in order to cover the operating expenses you’re likely to encounter when running an ecommerce retail business (such as marketplace fees, client acquisition fees and logistic fees).
Understanding Your Own Ecommerce Profit Margin
Before we move onto five tips to increase profit margins as an ecommerce business we’ll quickly run through the definitions and how to calculate your gross and net profit margins.
Gross Profit Margin calculates the percentage of revenue in relation to the cost of goods sold. This measure focuses purely on the costs involved with the item you sell and not operating expenses such as wages and warehousing fees.
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100
Net Profit Margin displays the ratio of net profit (profit after all business costs are considered) to revenue. It demonstrates how much of each pound collected by a company as revenue translates to end profit. To understand net profit you do have to factor in all business costs, such as wages, warehousing fees and tax.
Net Profit Margin = (Revenue – (Cost of Goods Sold + All Other Business Costs)) / Revenue x 100
After calculating your own net and gross profit margins you can see how this stacks up vs the data supplied by NYU Stern Business School. Remember though, every business is unique and ecommerce profit margins can vary massively depending on the goods you sell online.
Five Tips To Improve Your Ecommerce Profit Margins
If you’re looking at how to increase profit margins on a gross basis (i.e. gross profit margin) then, by definition, you only have two options – either increase your prices or lower the cost that you source your goods at. When looking at increasing your net profit margin, there’s a whole bunch of areas a business can look to make improvements. Here are our five tips to improve profit margin:
- Increase your prices
- Improve on-site conversion
- Increase your average order value
- Reduce your FX costs (for international sellers)
- Improve how you manage your FX exposure (for international sellers)
Increase Your Prices
Whilst this may sound really obvious (or perhaps even a little daunting) it’s amazing how many business owners consider lowering their prices or offering discounts when they want to increase revenue. The general belief that lower prices will increase sales. This is only going to dent your profit margins though and provides no guarantees you’ll increase your sales anyway. A rise in prices will improve both your gross profit and net profit ecommerce margins. Consider the value adding services you can offer to match the increased price – easy refund processes, good customer service, reward programs or even surprise gifts to include in your delivery.
Improve On-site Conversion
Consider if your website is working as effectively as it could. Do all acquisition channels require the same landing page or do different campaigns need new landing pages? Always do your best to understand where customers are dropping off in their purchase journey. Are customers regularly reaching the basket but not completing their purchases? Perhaps the checkout process isn’t smooth enough and a new POS provider could help, minimising the steps involved to complete a payment. Maybe you need to offer your goods in a greater number of currencies or improve the number of payment options that are available.
If stocks are running low or an item is in high demand, be sure to let the customer know. A timer on your basket should help too, creating a deadline for how long you will hold the goods for each customer and creating a sense of urgency to complete the payment process.
Increase Your Average Order Value
As there’s a cost to acquiring each of your customers, you want to be incentivizing them to spend as much as they can. Can you upsell them to a similar, more expensive good to what they originally had in mind? Then there are the tactics adopted by all of the best marketplaces – see “similar items” or “customers also bought”.
Can you offer free delivery over a certain threshold? This could reduce your profit margins of course so you’ll want to monitor if the increased cost is indeed bringing in a high enough increase in revenue to counteract this. Remember, the goal is to improve profit margins as well as revenue.
Reduce Your FX Costs (Improve Your Selling Abroad Margin)
This is a particularly pertinent point if you’re allowing Amazon to convert your currency for you as part of their Amazon Seller Program or use Paypal’s currency conversion services. FX charges are around the 4% mark for both, so based on the average net profit of 4.95% for ecommerce retail businesses, this is enough to completely wipe any profit on your sales. Consider FX fluctuations too and it could easily make selling internationally a loss making activity.
Fortunately, there are now a growing number of international payment providers offering multicurrency bank accounts that link to all of the leading marketplaces across the world, or allow customers to pay directly into them. With some of these payment providers (do your research) FX charges amount to a far more reasonable 0.5%. Improving profit margins can be as simple as switching one of your providers.
Top Multi-Currency Accounts to Improve Margins
- Bank accounts available in UK, EU, Poland, Australia, New Zealand and USA
- Hold Money in 50 Currencies
- Most Recognizable Brand in Money Transfers Today
- Boast 1,000+ Employees and $4bn in Monthly Turnover
- Transparent Pricing on the Site
- Easy to Use
- Bank accounts available in UK, France, Germany, USA, and Canada, as well as Singapore, China and Japan (recent additions)
- FX Margins from 0.15% to 0.5% per Payment, Cheaper than Competitors like TransferWise (Wise)
- Industry Leader in the eCommerce Space, Owned by Ant Financial (AliPay)
- Global Offices in 5 Continents
- Bank accounts available in UK, EU and USA
- Operating Since 1970 - First Commercial FX Firm in UK
- 98% Satisfaction in Client Feedback
- Most Reliable & Friendly
- Corporate FX Specialists
- Great Online Platform
- Many Consumer and Business Awards
- Excellent Rates
Improve How You Manage Your FX Exposure (Again Helping Margin on Overseas Sales)
If you are either purchasing stock from overseas or selling your products internationally, you need to consider how FX fluctuations can eat into your ecommerce profit margins. If your margins are tight as it is, FX movements (which could move by 5%, 10% or more in any given day/week/month) can have a real impact on your bottom line. Speaking with a dedicated foreign exchange expert from a currency broker can help you devise a currency hedging strategy to minimise the impact of adverse movements in the FX markets and make the most of when currency movements are in your favour. Whilst not guaranteed, a successful FX strategy should assist you in improving profit margins.
By utilising forward contracts you can at least secure the FX rate for future stock purchases or for the repatriation of future overseas earnings, helping you to understand exactly how much currency is flowing into and out of your account. Allowing you to make better forecasts and understand what your profit margins will be for overseas sales as you move forward.
By opening international bank accounts you can also reduce how often you need to send money back and forth between your domestic currency and any overseas currencies you buy or sell goods in. In this regard you may find a natural currency hedge – protecting you against adverse movements by already holding balances in the currency you require. Reducing the level of unnecessary FX activity you do, should result in improving profit margins.
Increasing Profit Margins as an Ecommerce Business – Conclusion
As simple as it sounds, there are really only two ways to improve your ecommerce gross profit margin – either increase the price of your goods or negotiate yourself a better deal on the cost of your goods sold. Whilst raising prices may seem scary at first, this is likely to be your best bet if you can provide enough value to your customers in the process. There are a whole bunch of operational costs which can ultimately influence the net profit you make and can explain why there is such a difference between gross profit margins and net profit margins for ecommerce businesses. With customer acquisition one of the major costs to consider, ensuring you offer a high level of service, generating repeat customers and maximising your sales opportunity with every customer is vital to improving profit margins.
Lastly, if you sell your goods overseas then FX fluctuations can severely impact your ecommerce profit margin, as can choosing the wrong FX provider. Choose an FX partner that takes the time to understand your business, can build you a personalised currency strategy and help you to open overseas multicurrency bank accounts – you should find you can improve profit margins here too.