eCommerce and B2B businesses alike are always looking to improve their profit margins. Profits are what give you the fuel to scale up and have the ability to improve. Higher profit margins are also a factor that will attract investors to your company.
This article will look at 8 ways to improve profit margins. Most of the tips here can be applied to both B2B and eCommerce businesses.
As a marketing agency, Snowball Creations wants to help your business with these useful tips. After all, if you have a super low-profit margin, it’s close to impossible to make any marketing efforts work – including paid ads. Learn more about increasing profit margins in this YouTube video. Don’t forget to subscribe to the YouTube channel for more marketing and eCommerce tips.
What Are Profit Margins?
Profit margins are the difference between business sales revenues and their costs. It takes into account the revenue generated and the costs incurred and can, therefore, measure the profitability of your business.
Why are profit margins important? To put it simply, they reflect your business’s financial health.
There are three kinds of profit margins:
Gross profit margins
Operating profit margins
Net profit margins
Gross Profit Margins
Gross profit margins are a way to measure how much money you have left after incurring production and delivery costs.
It is the difference between your business’s total revenue and the cost of goods sold (COGS) divided by revenue. Finally, it is multiplied by 100, as gross margins are written as a percentage.
Calculate your gross margin with the following formula:
[(Total Revenue – Cost of Goods Sold) / Total Revenue] x 100 = Gross Profit Margin
As an example, let’s say your eCommerce has a total revenue of £25,000, and your costs for goods sold is £10,000. You would calculate your gross profit margins as follows:
[(25,000 – 10,000) / 25,000] x 100 = 60
In this example, your gross profit margin would be 60%.
Operating Profit Margins
The operating profit margins show a clearer picture of your real pre-tax profit margin. While the gross margin only takes into account the COGS, operating profit margins also factor in all other operating expenses, such as labor costs, rent, utility costs, advertising, etc.
Calculate your operating margin with the following formula:
{[Total Revenue – (Cost of Goods Sold + Operating Costs)] / Total Revenue} x 100 = Operating Profit Margin
As an example, if your eCommerce has a total revenue of £25,000, COGS (Cost of goods sold) of £10,000 and operating expenses of £5,000. You would calculate your operating profit margins as follows:
{[25,000 – (10,000 + 5,000] / 25,000} x 100 = 40
In this case, your operating profit margin would be 40%.
Net Profit Margins
Net profit margins help you see how taxes and debts affect your business profitability. It is the difference between your revenue and all your business costs. Net profit margins include COGS and operating expenses, but also interest payments and taxes.
Calculate your net profit margin with the following formula:
[(Total Revenue – Total Costs) / Total Revenue)] x 100 = Net Profit Margin
Let’s say your eCommerce has a total revenue of £25,000, COGS of £10,000, and operating expenses of £5,000. You also have interest payments of around £1,500 and taxes of £2,000, making your total costs £18,500. You would then calculate your net profit margins as follows:
[(25,000 – 18,500) / 25,000)] x 100 = 26
In this case, your net profit margin would be 26%. As you can see, there is quite a sizeable difference between the gross and net margins.
What Counts As a Good Profit Margin?
What counts as a good profit margin depends on the business and many other factors, but one way to measure it is by exceeding the average profit margin.
The average profit margin in eCommerce is around 41,54%, according to NYU Stern School of Business. According to the same source, a good and more than average gross profit margin for online retail is 45,25%, where a pricing strategy might be needed to achieve a higher gross margin than that.
It is also possible to check your average profit margin per industry to find out what a good profit margin is for your business.
How To Improve Profit Margins in eCommerce & B2B
Your business is the margins, so profit margins are something every company owner should be working to improve – all the time. Let’s look at 8 things you can be doing to increase your profit margins.
1. Reduce operating costs
One of the quickest ways to increase profitability and improve profit margins is to reduce operating costs. As a business owner, you’ll have to find what operational costs you can cut without putting your product or service quality at risk or decreasing customer satisfaction.
Expenses and costs that are unnecessary vary from company to company, so it will require some auditing on your part. Some of the costs you can look at reducing may include rent, equipment fees, inventory costs, shipping costs, and labour costs.
ECommerce: Get closer to the source
One factor to keep in mind for an eCommerce store is to try to get as close to the source as possible. Meaning when an eCommerce business is reselling someone else’s product, they’re more likely to have smaller margins. If, on the other hand, you are creating your own product, it is easier for you to increase the margins of your online store.
Another option is to reduce costs by buying your products from a country where labour costs are lower. A way to get closer to the source could be to go to one of these countries and build the entire production process yourself. The more of your own process you own, the better margins you’ll have.
B2B: Keep costs internal
B2B companies can consider how much of their service they are outsourcing and how much they might be able to do in-house. If possible, build a dream team with specialists instead of outsourcing the work.
If your B2B is working with a lot of external consultants, your margins might be smaller because those consultants and contractors have to be paid. If you can keep more of your costs internal within your company, you can improve margins.
2. Raise the average order value
Another important way to increase eCommerce profit margins is to work on boosting your average order value (AOV). AOV is the average amount of money a customer spends per transaction or orders in your online eCommerce store.
An easy way to calculate your AOV is by using the following formula:
Total Revenue / Number of Orders = AOV
As an example, let’s say that in January, your online store had a total revenue of £25,000 and a total of 500 orders. You would then calculate your AOV as follows:
25,000 / 500 = 50
This would mean that January’s monthly AOV was £50 for your eCommerce.
There are many ways to increase the average order value of your online store:
Have incentives for minimum orders — Offer free shipping or discounts on orders over a certain amount, like 10% off on all orders over £85.
Upsell, cross-sell and add product recommendations — Recommend products that are popular or related to the products purchased.
Run offers on higher margin products — Provide deals that entice customers to buy products that make a higher profit per unit sold.
Create bundles of products — Bundle products together in your online store to improve your customers’ online shopping experience and increase the perceived value.
3. Have A Customer Loyalty Program
Another way to improve both your AOV and your profit margins is to create a strong customer loyalty program.
Too many eCommerce businesses don’t focus enough on customer retention and, therefore, spend more money than they need to on customer acquisition costs.
Focus on your existing customers and create a customer loyalty program which provides real value to them, whether it’s discounts or gift cards or some other benefits. Reward customers you already have rather than spending money on finding new customers.
4. Raise Prices Strategically
Another important factor that is vital to improving your AOV and profit margins is to charge the right amount. At times, this will include raising prices.
Even raising your prices a small amount will increase eCommerce profit margins. And even if you’re only raising your margins by a few percent, it can have a significant impact on your financial health.
Analyze and compare your prices with market prices and see if you’re able to improve your eCommerce profit margins by strategically raising your prices.
Start With Larger Margins
Don’t sell yourself short. Setting larger margins can often be a self-fulfilling prophecy. Try to start with slightly larger margins. It might mean that it takes longer before you get sales, but it can allow you to start a healthier business.
5. Be Unique And Get Better At What You Do
Raising prices will be easier when you have a unique selling point (USP) and are exceptionally good at what you do. When you find your niche and provide products or services in a thought-out way, you can charge more.
Reading Tip: Blue Ocean Strategy
A marketing theory to look closer at when it comes to being unique and finding your niche is the Blue Ocean Strategy – a strategy made famous by the book with the same name.
In short, there are red oceans and blue oceans. Red oceans are competitive and well-established markets, which means that the margins will be relatively small.
The blue ocean strategy is about differentiating yourself and finding “blue oceans”, that is, growing and uncontested markets.
Google is a good example, they do have some competition, but in reality, they practically have a monopoly on the search engine market.
Finding an innovative and unique selling point that nobody else has, will allow you to niche down and, thereby, charge more.
6. Be Trustworthy
Another important factor in improving your net margin is building trust with your customers. Help your customers feel like you are reliable, authentic, and transparent.
Make sure that the page they arrive on when they enter your store is welcoming, and make it easy for new customers to find product information. Be transparent when it comes to pricing and transaction costs.
Sharing your brand story on your website is another way to make visitors feel like they can trust you, and it can also help them see your unique selling point. Apart from your brand story, don’t forget to show some social proof to demonstrate customer satisfaction to new visitors.
Always avoid trust breakers and obstacles that stop visitors from going through with a conversion. For example, avoid complicated checkouts, offer multiple popular payment methods, and make sure you have a refund policy so that shoppers don’t hesitate before going through with their purchase.
7. Have A Strong Online Presence
Speaking of social proof, don’t forget that we live in a digitally connected world. Online stores are the future of retail, so invest in your business’s online shopping experience.
A strong social media presence gives customers the impression that your brand is alive and well. Social media has the power to tell a story, build your brand, drive visitors to your site, improve your SEO, and create a community of customers who love your business. Social media is also a way to provide better and faster customer service, which encourages customer retention.
A strong online presence can be a more effective way for customers to find you, while at the same time, reducing certain operational costs.
8. Focus On The Big Picture
As mentioned, increasing the average order value is important, but if you are too focused on not losing money on an order, you run the risk of making customers dissatisfied and, thereby, losing them.
Today’s market is extremely connected and social, and one unhappy customer can quickly ruin your reputation. On the other hand, when you proactively resolve customer problems, it leads to referral marketing and, likely, returning customers.
Good and proactive service might mean that you lose money at first, but you’ll be rewarded with loyal customers who will sing your praises.
Here are three ways to focus on the big picture and not worry too much about the per-order profit:
If a customer is dissatisfied with a product, give them a partial refund.
If an inexpensive product breaks, send the customer a free replacement as soon as possible instead of asking for a return.
If an expensive product has to be returned, don’t wait for it to arrive at your warehouse; send the customer a replacement as soon as you receive confirmation that it’s on its way.
Final Thoughts On eCommerce Profit Margins
Continuously working to increase profit margins is something all B2B and eCommerce business owners should do.
A profit margin is the difference between sales revenue and costs. It measures your company’s financial health and profitability.
Reducing operating costs such as shipping costs and rent is one of the most effective ways to increase your profit margins.
You can also raise the average order value by having incentives for minimum orders, upselling and cross-selling products, running offers on higher-margin products, and creating bundles of products. Having a customer loyalty program and raising your prices to get more revenue are also two factors that can help your business boost its AOV and reach high-profit margins.
Finally, don’t forget to be trustworthy, have a strong online presence, and focus on the big picture rather than obsessing over per-order profits.
Only when you have decent margins can you start thinking about how to achieve effective marketing, for example, with a professional Google Ads agency.
If you have questions about digital marketing and advertising, feel free to reach out to max@snowballcreations.com, who would be more than happy to answer your questions.