“How can I make more money from my ecommerce business.”
It’s a commonly asked question. So much so, that it generates over 86 million results on a Google search (yes, we checked).
But with such a mind-boggling amount of info out there, how do you filter it all down into an ecommerce profitability action plan that works for you?
Fear not! The Linnworks team of online business experts has been powering ecommerce operations for years, and we’ve got all the essential info you need – as well as a handy checklist to get you started.
Ready to rock ecommerce profitability and launch your online business into the stratosphere of success? Then read on! In this handy guide, we’ll navigate the difference between revenue and profit, dissect the crucial factors shaping ecommerce profitability, and unveil our tried and tested checklist for the ultimate bottom-line boost.
The background to ecommerce profitability
Ecommerce profitability isn’t just a buzzword or a financial metric based on the digits and dollars on your balance sheet. It’s the heartbeat of your online empire. More specifically, it’s the interplay between revenue, costs, and strategic finesse.
But before we dive into the specific factors that influence ecommerce profitability, it helps to clarify the difference between revenue and profit. It’s a classic mix-up, and we’ve lost count of the number of times that one is mistaken for the other. Here’s the easiest way to think of it.
- Revenue is not the money in your pocket. It’s the total income generated from your products or services.
- Profit is the money in your pocket. In other words, it’s the net reward once all your costs and expenses have been deducted.
Understanding this distinction is pivotal. Revenue might fill the room, but profit ensures you can pay the bills and have a bit left for that celebratory cup of success.
But here’s the tricky bit. Profit margins don’t always improve when sales are increased or costs are reduced. Sometimes, increasing revenue can result in higher costs and lower profit margins.
And therein lies the battle for most ecommerce operators. That’s why having a solid understanding of the factors that influence ecommerce profitability is so essential.
Which factors influence ecommerce profitability?
Unfortunately, that’s no walk in the park to answer. In fact, it’s probably easier to list the factors that don’t influence ecommerce profitability. But we’ll give it a whirl!
Broadly speaking, the main contenders in the ongoing tango between revenue and profit are cost management, pricing, inventory management, and customer acquisition/retention.
But even within those (let’s face it, pretty broad) parameters, there are myriad other factors with the power to define the financial health of your business. A few examples include:
- Market research
- Marketing and advertising
- SEO considerations
- Data security and compliance
- Analytics and forecasting
But don’t go getting overwhelmed and hang up your hat in frustration just yet. After all, the best route to ecommerce profitability isn’t clambering up the mountain as quickly as possible. It’s about choosing the right path and mastering a series of strategic steps to help you reach the peak injury-free and with plenty of energy left to hang out and enjoy the view!
Let’s break everything down into a few more manageable, easy-to-dissect chunks to make it feel more within your grasp.
1. Cost management
Every financial decision you make contributes to the overall health and longevity of your business. So, to ensure maximum return on investment and maintain sustained ecommerce profitability, you’ll need to carefully consider and continually re-evaluate spending across every cost category:
- Product costs – Everything involved in sourcing materials, manufacturing, packaging, and shipping products to you so they’re ready for sale.
- Marketing costs – You’ll need to track every dime you’ve spent on content creation through to publishing via social media campaigns, pay-per-click advertising, influencer partnerships, affiliate marketing, etc.
- Technology costs – E-commerce relies heavily on technologies like payment processing systems, CRM software, inventory management systems, and customer service tools.
- Operational costs – At minimum, you’ll need to consider website development, hosting, domain registration, and any platform fees required to sell across multiple sales channels.
- Logistics costs – Outbound factors include shipping, packing, and delivering your products to customers. Inbound factors encompass returns processes, restocking, and potential product write-offs.
- Inventory costs – Beyond immediate product costs, ongoing expenses related to holding inventory include warehousing, insurance, and potential losses due to damage, obsolescence, or shrinkage.
- Employee costs – Even if you’re a solopreneur (for now!), you should carefully record everything related to salaries, benefits, and training.
- Compliance costs – From data protection to consumer rights and other industry-specific regulations, ensuring legal compliance is a critical aspect of risk management.
2. Pricing strategies
Remember when Jesse J burst into the charts with her 2011 hit, encouraging people to ‘forget about the price tag?’ While it’s a cute concept in theory (and to be honest, we quite like the song), it’s pretty terrible advice for ecommerce operators!
Competition in the online marketplace is tough. So, nailing your pricing strategy should be a top priority. Here’s a rundown of your main options:
Calculate the total cost of producing or acquiring a product, then add a markup to determine the selling price.
- Simple to calculate
- Ensures costs are covered
- Provides a baseline for profit
- Ignores market demand
- Overlooks competitor pricing
- May not optimize for maximum profitability
Adjust prices in real-time based on factors like demand, competitor pricing, and market conditions.
- Agility to suit current market conditions
- Potential for increased revenue
- Requires careful monitoring
- Requires sophisticated pricing algorithms
- Risk of customer backlash if perceived as unfair
Set prices based on the perceived value of a product to the customer, based on factors like quality, exclusivity, etc.
- Provides a strategic approach
- Aligns pricing with perceived value
- Allows for higher prices in the right circumstances
- Highly subjective
- It can be challenging to communicate value to customers
- May require additional spending on customer education to work effectively
Set prices based on what your competitors are charging.
- Responsive to market dynamics
- Clear benchmark for pricing decisions
- Helps keep you competitive
- Potential for lower profit margins
- Risk of a price war
- Can lead to a lack of differentiation in the market
Set product prices lower than their market value to attract a large customer base quickly.
- Attract price-sensitive customers
- Gain market share fast
- Can discourage potential competitors from entering the market
- Potential inability to cover costs
- Doesn’t attract high-value customers
- Raising prices later can be challenging
Set a high initial price to capitalize on customers willing to pay a premium for new or innovative products.
- Capitalizes on early adopters
- Maximizes initial profit
- Positions your brand as premium or exclusive
- Limits market penetration
- Invites competitors with lower prices over time
- Could lead to customer resistance if perceived as overpriced
3. Inventory management
Effective inventory management isn’t just about arranging products on shelves – although mastering that art will certainly jazz up your picking and packing routine. It’s also about:
- Optimizing cash flow by reducing excess stock to free up capital for other projects.
- Avoiding the drama of stockouts and overstocks, which lead to lost sales, dead stock, and may force you to introduce discounted clearance sales.
- Mitigating holding costs to minimize expenses related to warehousing, insurance, and obsolescence.
- Enhancing customer satisfaction by providing seamless shopping experiences with prompt delivery.
With features like real-time synchronization and automated workflows, inventory management software can be a strategic ally in ensuring your inventory stays in perfect rhythm with your business goals.
Leveraging advanced ecommerce profitability solutions like Linnworks One enables you to seamlessly integrate multichannel listings and control everything from inventory control and warehouse management to order processing, fulfillment, and reporting from a single, centralized platform. Here’s a few of our team’s top tips for ultimate inventory mastery (and yes, our software can help with these too. But no, we’re not pushing the hard sell):
- Minimize excess inventory by employing a Just-In-Time approach so you receive goods only as needed.
- Utilize ABC analysis to categorize products based on their importance and allocate more resources to high-value, showstopper items.
- Establish clear reorder points to prevent stockouts.
- Regularly regular inventory audits to ensure accuracy and identify discrepancies.
4. Customer acquisition and retention
Learning how to attract and keep customers is a delicate dance that requires finesse, strategy, and a keen awareness of the ever-changing rhythms of consumer behavior. Let’s delve in to learn more.
How do you find customers for your ecommerce business? Sure, if you throw enough money into marketing, advertising, and promotions, you’ll likely capture the attention of some potential buyers. But will they be the right buyers? Probably not.
Casting your net as wide as possible and hoping for the best is rarely a successful strategy for ecommerce profitability. That said, being visible to as many people as possible is essential. So, dotting the i’s and crossing the t’s on creating a user-friendly and SEO-optimized website is critical.
After that, it’s all about research and effective targeting. The bottom line is that businesses waste $37 billion annually on ads that fail to engage. To make the most of your budget, best practices include:
- Dividing audiences into segments based on demographics, behavior, and preferences.
- Tailoring marketing efforts to specific segments to increase relevance and resonance.
- Utilizing various communication channels, including social media, email, content marketing, etc, to reach diverse audiences.
- Ensuring a cohesive and recognizable brand image across all marketing efforts.
- Offering referral perks (people are four times more likely to purchase when referred by a friend!)
Did you know that it costs 5-7 times more to attract a new customer than it does to retain an existing one? So, the more strategies you have in place to reduce churn, increase lifetime customer value, and boost loyalty, the better.
Looking for inspiration? We’ve got you. Here’s some tried-and-tested customer retention strategies with optimum pulling power:
- Personalize your product offerings – Studies show 80% of consumers prefer buying from companies offering personalized content.
- Offer loyalty programs – Just a 5% increase in customer loyalty can drive ecommerce profitability increases of between 25% and 95%.
- Communicate regularly – Existing customers should be the first to know about new products, promotions, or updates.
- Leverage analytics – Use customer feedback to understand preferences, buying patterns, and pain points to refine your products, services, and marketing strategies.
- Provide outstanding customer support – From product inquiries and complaints to returns and refunds, make sure your customers feel heard.
The link between analytics and ecommerce profitability
We know, we know. You’re an ecommerce operator not a math genius, and number crunching might not be your thing. But don’t sweat it. There’s a heap of awesome tech out there to help you.
Analyzing the ebb and flow of customer behavior, market trends, and operational efficiency provides invaluable foresight and the ability to adapt to the rhythm of customer expectations. The bottom line is that, regardless of how into it you are, data isn’t just numbers on a screen. It’s the secret sauce that fuels continuous improvement.
But precisely how do you track ecommerce profitability? That’s where key performance indicators (KPIs) come in.
Key performance indicators (KPIs)
Here’s a list of ecommerce profitability metrics that we suggest should take center stage:
- Conversion rate – The percentage of website visitors who make a purchase.
- Average order value (AOV) – The average spend amount per customer, per transaction.
- Customer acquisition cost – The total cost of acquiring a new customer.
- Customer lifetime value (CLV) – The total revenue you can expect from a single customer.
- Cart abandonment rate – The percentage of users who add products to their cart but abandon the checkout process.
Strategies for increasing ecommerce profitability
The blueprint to increased ecommerce profitability and market success is a dual strategy that’s ultimately product-led while also optimizing organizational efficiency. Let’s meet the maestros of revenue-boosting tactics.
Upselling and cross-selling
Every product in your inventory is a potential VIP – a Very Impressive Purchase! Upselling and cross-selling are the keys to transforming regular performers into chart-topping sensations. Here’s how it works.
By suggesting advanced versions, premium features, and tailored recommendations, you can entice customers to level up their purchases. Here’s a couple of examples of how you can phrase your value proposition:
- Upgrade to the deluxe edition for just X% more!
- Get enhanced features for less than you’d spend on lunch!
- Enjoy an exclusive discount on premium – only available for the next 24 hours!
By recommending complementary products or accessories to enhance the customer’s purchase, you can sell more and skyrocket customer satisfaction scores simultaneously. A few phraseology examples include:
- Complete your order with these matching accessories in our exclusive bundle deal!
- If you like [product name], you’ll love [product name].
- Other customers who purchased [product name] also loved [product name].
Spoiler alert: Streamlining operations is not the same thing as cutting corners. It’s about working smarter, not harder, to enhance ecommerce profitability by making operational and logistical improvements that help your team – in addition to providing value to end users. For example:
- Efficient operations minimize unnecessary expenses.
- Swift order processing and delivery fosters loyalty and repeat business.
- Automation offers greater agility in the face of market fluctuations and consumer demands.
Of course, achieving greater efficiency doesn’t mean sacrificing quality. Quite the opposite. Dedicated platforms like Linnworks are the ultimate wingman for your ecommerce tech stack, offering a unified approach to e-commerce operations, encompassing:
- Comprehensive inventory management
- Efficient order processing
- Real-time analytics
- Multi-channel integration
- Automated shipping and tracking
- CRM integration
- Dynamic pricing strategies
- 100+ ecommerce platform integrations
- Enhanced data security and compliance
Cost reduction and optimization
There are two surefire ways to reduce costs for enhanced ecommerce profitability. The first involves building partnerships with other businesses. The other is investing in a tech stack with the best features and integrations.
We know that vendor and tech costs can mount up. But there’s no need to panic. We’ve got you covered with these top tips on how to haggle your way to prosperity and turn your tech toolbox into a profit potion.
Ah, the subtle art of vendor negotiations! Is it intimidating at first? Hell yeah, it can be. But essential nonetheless, as effective negotiation tactics can open doors to multiple cost reductions to give you a competitive edge. Here’s a list of top tips to boost your confidence and bargaining prowess:
- Establish a collaborative rapport from the off. A relationship built on trust can lead to more favorable terms and conditions.
- Gain insights into your supplier’s cost structure to identify areas for potential savings. Demonstrating knowledge can strengthen your negotiating position.
- Leverage the power of bulk purchasing or commit to larger quantities to secure volume discounts.
- Discuss payment terms with financial perks for early payments and flexibility for extended payment windows to optimize cash flow.
- Look for mutually beneficial solutions that offer advantages to both parties. Remember, they’re in this to win, too!
Every tech investment you make has the power to help you save valuable resources, eliminate errors (yay, no more manual input mistakes!), and improve customer satisfaction. The overall result? Yep, you guessed it: improved profitability! And, of course, there’s the added bonus of freeing up more of your time to spend on, well, whatever you want really. From working on your next genius plan to exploring new hobbies (competitive duck herding, anyone?), your tech stack puts it all within reach.
How does it all work? We’re glad you asked.
- Payment processing systems – Swift and secure payment processes that incorporate various payment methods reduce manual effort, minimize the risk of errors, and enhance checkout experiences.
- CRM software – Centralizing customer data allows you to track interactions, personalize communication, and tailor your marketing strategies.
- Customer service tools – Tools like chatbots and automated ticketing systems answer and resolve customer queries quickly and efficiently 24/7 – with no cheesy hold music in sight!
- Inventory management tools – Automated stock tracking, order fulfillment, and replenishment processes ensure a seamless supply chain. FYI, this is Linnworks’ forte – we mentioned that a couple of times already, right?
Onwards to enhanced profitability!
We hope this whirlwind tour through the labyrinth of ecommerce profitability has provided you with some newfound wisdom and a sprinkle of technological glitter to sprinkle on your entrepreneurial cape.
Need help getting started? Download our ecommerce profitability checklist today! And, of course, if you need any help with inventory-specific know-how, we’re here to help.