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How to track ecommerce profitability
Your first step is to track your store’s current profitability and set goals for improvement. You can calculate your store’s gross profit margin with this formula:
Calculate your net profit margin with this formula:
Within these broad equations, there are many metrics you can monitor to track your store’s success and find specific areas for improvement. These include:
- Customer acquisition costs
- Customer lifetime value
- Average order value
- Return rate
- Conversion rates
- Customer retention rate
What is a healthy profit margin for e-commerce?
It depends hugely on your product category and COGS, but generally speaking, a healthy gross profit margin sits around 50%+. The average net profit margin for e-commerce stores is around 10%, with 20% or higher considered a healthy margin.
6 real ways to improve e-commerce profitability
1. Reduce operational costs
Audit your current costs, analyse where you’re spending the most and find out whether you’re seeing a return on that investment. With just a few small tweaks you could save your business a significant amount of money. Here’s how:
Cut warehousing costs
If you’re spending a fortune on renting a large warehouse space and not seeing it pay off in a large volume of sales, consider:
- Just-In-Time inventory, where you receive products exactly as they’re needed to fulfill orders
- Maximising the efficiency of your warehouse layout with apps like SKU Savvy or Pulpo WMS that provide smart space-saving suggestions
- A dropshipping model, where your business doesn’t physically hold any inventory
Reduce returns
It’s calculated that around 30% of all e-commerce purchases are returned. Given the added shipping and administrative costs of returns, this could be hugely affecting your store’s margins. Cut down returns by:
- Shortening your returns window. This will also help you avoid fraudulent returns.
- Using automation in your returns processing. This will help catch fraudulent returns and save you time and money in staffing.
- Reconsidering whether free returns shipping is viable for your business. While it does incentivise shoppers to checkout, it may be costing you more in the long run. Instead, you could offer free shipping only for damaged items or exchanges rather than change of mind returns.
- Having a clear returns policy that explicitly states the returns window, what condition the item must be in, the price of return and which items are non-refundable.
- Providing detailed and accurate product descriptions and photos on your website.
- Packaging products to avoid damage in transit.
- Ensuring timely deliveries through partnering with reliable carriers.
- Encouraging exchanges over returns with an extended exchange window and the option for extra store credit.
Save on shipping
- Use flat-rate shipping.
- Package snugly. The less space your items take up, the lower the cost will be.
- Use local fulfillment centres.
- Start local, then consider whether global shipping is feasible.
- Offer free shipping sparingly for loyal customers and large orders.
Automate manual processes
When you save your store its most important resource: time, you’ll find that profit follows. By automating tedious administrative processes, you’ll have more time to focus on growth. Here’s how:
- Make your warehouse systems more efficient with apps that provide smart picking route suggestions.
- Automate purchase orders with smart demand forecasting apps like Prediko.
- Keep your inventory in sync across stores with an app like Syncio. Once you connect multiple store’s inventory, the software will automatically update stock levels after each sale. This will save you in the long run from stockouts/missed sales and overstocking.
2. Open up new sales channels
If you take one strategy away from this blog, let it be this: the biggest (and often most overlooked) hack to boost your store’s profitability is thoughtful distribution and collaboration.
There are likely hundreds of established stores out there within your niche. They've spent years building audiences that would probably love your products. Instead of competing with them or burning cash on ads to reach those same people, you could grow by working with them.
By cross-selling your products on their storefronts, you essentially get to borrow their customer base and credibility. They get fresh inventory that complements what they already sell. You get instant access to buyers who are already in shopping mode.
It's a genuine expansion of your sales channels without the usual growing pains.
Finding the right stores to sell on doesn't have to be complicated. Start with stores whose vibe matches yours - similar values, complementary (not identical) products, and an audience you'd actually want to reach. You can scout on social media, chat with people at industry events, or browse curated directories like Syncio Marketplace where stores are actively looking to collaborate.
The math is simple: more quality touchpoints with the right audiences = more sales.
3. Implement a smart pricing strategy
There’s no point in running deep discounts if it’s not profitable for your store. Instead price mindfully with strategies like dynamic pricing. Put simply, this is where you adjust price based on demand. So on off-peak times, items will be discounted and during peak-times, they’ll be a higher price. This ensures maximum profit. There’s software that can work this out for you like zilliant or Prisync.
4. Cut down your CAC
Audit your current marketing spend and performance. See what’s working and what’s not. Then follow these tips to cut down your CAC:
- Ensure you’re segmenting and targeting the right customers, so you’re not wasting money on ads that won’t see conversions. This means meeting customers on the platforms and niches they’re already visiting.
- Experiment with small ad budgets first. Track the results closely before investing more.
- Automate email flows and sales call/enquiry follow ups for maximum impact with minimum time investment.
- Prioritise customer loyalty and retention with loyalty programs and email campaigns, so that there’s less need to acquire new customers constantly.
- Put attention into building organic social media engagement, so that you don’t have to spend on ads.
- Set up a referral rewards program and let customers do the acquisition for you.
- Use collaboration with other stores to cross-promote and reach new customers without any ad spend. Simply post and share on both store’s channels.
5. Increase conversion rates with seamless checkout
When it comes to checkout, your goal should be to reduce friction. The easier it is for shoppers to click ‘buy’, the higher your conversion rate will be. Here are a few steps you can take to create a seamless checkout experience:
- Have multiple payment options, particularly one-click payments like Apple Pay and Google Pay.
- Provide a guest checkout option so that customers don’t have to create an account first.
- Pre-fill data where you can.
- Remove any unnecessary steps and required information fields.
- Speed up load time by using light themes.
- Optimize your store’s mobile design. You can use tools like Lighthouse to find areas for improvement.
6. Boost AOV
Boosting your average order value will be hugely beneficial to your store’s profitability, and it may be easier than you think. Here are some simple strategies you can employ to incentivise larger purchases:
- Implement upsells at the bottom of product pages and at checkout, like ‘frequently bought with’ or ‘you may also like’.
- Take this one step further with personalised product recommendations, based on the items that customer has looked at or bought in the past.
- List and promote product bundles, so that you’re selling multiple items in one go.
- Offer tiered discounts, like 10% off for orders over $100 for instance.
- Offer free shipping for orders over a certain price point like $100. Just make sure the threshold is actually profitable for your store.
Your store’s next move
You may feel overwhelmed by the volume of tips in this guide, but you don’t have to implement every single one at first. Your best bet is to invest the time in auditing your store’s current profit margins and expenses, then identify 1 or 2 key areas for improvement. Now you’re equipped with the right strategies, implement them and watch your business’s profitability grow.
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