Profit margins are the major indicator whether your business will survive and grow or sink. Comparing with other variants, there is no other metric affecting directly the financial health of your business. This is especially much more obvious in e-commerce area. So, it is a continuous and never-ending challenge for e-commerce companies to fattening up the margins in order to have a solid financial health.
So, increasing the profit margins should be the prominent goal for every e-commerce companies. To reach that goal, pricing strategies play a vital role and must be built in a very serious manner.
Here, the question surrounding in founders/managers’ mind! What can e-commerce companies do to improve their profit margins?
It is a fact that competing with gigantic rivals like Amazon, Walmart is extremely hard. They are always offering lower prices by using their own advanced dynamic pricing algorithms. So, expecting high numbers of profit margins in e-commerce world is somehow over-optimistic approach as prices are dominating the decision moment of an online shopper. But, there are still vast of opportunities and tactics to cling in order to improve the profitability.
Very firstly, identify the margins of each of your products. It is very crucial to be sure about the financial performance of the products separately. What I mean by saying “financial performance” is knowing which products generate large and small profit margins. This will help you to understand the sustainability and growth capacity of your business. It also helps you decide which product to focus and which product to cut the cost and invest the saved time and money in higher potential areas of your business.
Second, use these tips to increase your profitability.
1- Use Dynamic Pricing
As I stated before, setting a fine-tuned pricing strategy is crucial while trying to improve the profit margins. Among all of the different strategies, dynamic pricing perfectly fits with e-commerce and responds almost every requirements of that world. Keep in mind that %60 of online shoppers name pricing as their main shopping decision criteria and thanks to the vast of product variety and price comparison engines, consumers can find any product with best prices. Don’t also miss the external factors- special days, competitor prices, promotion, discounts… As you can see, existing in such dynamic market, it is not effective to set fixed or rarely changeable prices. By adapting dynamic pricing, online stores have great flexibility to decrease or increase prices and increase response velocity towards various scenarios happening in the market. It is also possible to upgrade and boost the performance of dynamic pricing by using competitive price intelligence instead of doing it manually in order to monitor market 7/24 automatically. This real-time dynamic strategy helps you to gain a competitive advantage over your competitors and boost your profit margins.
Let’s see a simple and common scenario, your competitor is selling the same product that you are also offering at $150.00 and you are selling for $100.00. You can still have the minimum price if you sell it for $140.00. The critical part is you have to be awake if you don’t have superhero price senses and increase your respond speed in order to gain maximum benefit from that opportunity. So, in this case, you increase your profit margin and again have the lowest price.
2- Customer Service is Crucial
We are not living in an utopic environment where the prices are low, products are high quality and customer service is excellent. According to researches, 86% of customers are willing to pay up to 25% more to get a better customer experience. So, it is a wise approach to deliver superior customer service and set higher prices in order to increase profit margins. With that strategy you can keep customers coming back and have a chance to sell premium products. Besides, regarding to the life-long value of that customer, your online business will receive valuable referral marketing and recommendations that are impossible to purchase.
Let me give some quick advices; try to improve your return and refund policy, respond to customers ASAP and kindly, be accessible 7/24, don’t just focus on post-purchase processes – try to support consumers with different ways like live chat,personalization during every part of purchasing journey. In a nutshell, deliver a complete and great customer experience.
Building this type of customer service may costs you a bit more in the short term but it will help you to have a very healthy bottom line with loyal and vocal customers.
3- Manage Inventory
Being present and accessible are mentioned above. But, how about the availability of your products? It is a must to have well-designed inventory management for all online retailers. 81% of online shoppers tend to leave your store to shop from your competitor. Not only you just missed one opportunity, you may also lost a long-life potential customer. That may cause a huge income loss and directly affects your profitability.
Another harmful action is not being capable of forecasting your future sales and buying too much inventory. Not fixing this issue increase your costs and push you to decrease the profit margins.
4- Reduce the Costs
If you have low costs, you hold the power in your hands! That means there is an opportunity to set flexible profit margins. Try to talk with your suppliers and ask for some discounts or special offers. The costs are not just equal to the price that you agreed with your suppliers. In addition to that there are also operating costs (shipping, inventory,..). Try to minimize them.
In e-commerce world, you must use some tools/softwares to automate your business processes. As an e-commerce owner/manager you have plenty of functional tool choice in market which have different functions. Re-check the tools/softwares that you are using and don’t miss the promotions.
You have to reduce your costs if you want to increase your average profit margin. And one of the main costs of selling a product is its’ marketing expenses. If you increase the ratio of up-sell/cross-sell, you are going to increase your average profit margin too as you sell more than one product to a person.
Try to up-sell high margin products when online shopper is checking out with a low margin item or bundle high and low margin items together in a package that makes sense. Invite the customers to make cross-sell by offering them complimentary or subsidiary products. Focus on this strategy, there are bunch of personalization tacticts to be implemented in your cross-sell/up-sell.
We’ve tried to give some tips to increase average profit margins. For an online store, it is extremely important to have healthy financial status. Analyze your business, what you sell, competitors, market, persona’s behavior and try to implement the right tactic for you. We are eagerly waiting for your feedbacks and other advices. What are some other ways that online retailers can boost profit margins? Please comment with any ideas or examples.