How to Increase Profit Margin for E-Commerce

While pure e-commerce companies don’t have to factor stores into the profit margin equation, there are many other online store costs involved. Managing those costs to increase gross profit margins and net profit margins is a tricky dance that all retailers must do. Companies offering e-commerce as part of their business strategy, along with brick and mortar stores, have other factors to consider. For any e-commerce business, investing in shipping consulting is one of the best ways to increase profits with ease.

Generally speaking, there are two ways to increase a company’s gross profit margins. That is by either decreasing operating expenses (cutting costs) or increasing sales. We’ve put together our top ideas on how to increase profit margin below.

1. Fulfill Elsewhere

Wondering how to improve operating e-commerce profit margins? Check out fulfillment for your e-commerce business . Fulfillment strategies change depending on the business type. Some companies with brick and mortar stores find it better to fulfill out of the actual stores, whether from the floor or the storage area. Others prefer to use distribution centers. Pure e-commerce retailers may perform fulfillment with their own online store staff, or they may outsource it to a warehouse and 3PL. There are cost factors in each approach. Self-fulfillment includes labor costs, insurance for the labor pool, and fixed real estate payments. Depending on company size and location, there are potentially longer shipping distances and higher shipping costs if customers are scattered throughout the country.

Some e-commerce businesses find it more economical to use third party fulfillment. One warehouse location can be the hub, or the goods can be strategically placed at various warehouses for shorter shipping times and even with different mixes of goods. Outsourcing fulfillment can decrease overhead costs, however, you’ll want to seek out logistics consulting to ensure you are getting the best price for your 3PL. For more information on 3PL, check out our guides on minimizing fulfillment costs and saving on e-commerce shipping costs.

2. Streamline Operations

Dive into your operating costs and operating expenses to see where you might have waste. It could be excess paid overtime, which means you don’t have enough staff members or they’re not working efficiently. Your management may not be adequately planning the workload, so there’s a rush at certain times of the month or year.

Look at your packing materials to see if there are better ways to make a good impression on customers while spending less. Perhaps you’re using more expensive filling material or customizing the packages. Customization can be a great thing if you’re charging enough for it, and the effect isn’t wasted on the consumer. Sometimes the packaging makes a difference in branding and sets up your company as a luxury retailer. But if it doesn’t, then you should source packing materials that are sturdy and attractive, but less costly. Cost-effective supply chain management is imperative for e-commerce businesses. 

3. Shipping Solutions

Shipping is a huge part of e-commerce, so it pays to get this one right. Whether offering free shipping or the customer pays the shipping cost, maximizing shipping costs means the difference between the ability to improve profit margins, and well, losses. Below are some best practices for ecommerce shipping:

• Audit your shipping: Before making any changes to improve profitability, get a better understanding of your shipping situation. That can include numbers of packages shipped each week, shipping destination, distance shipped, carriers used (if you send packages via multiple carriers), package sizes and weights, timeliness of shipping, percentage of orders shipped on time in full, and other key metrics. If your ecommerce store doesn’t have the time and know-how to conduct a complete audit, use an outside vendor like Shipware that offers a wide range of invoice audit and recovery services.
• Audit recovery: E-commerce businesses should audit shipping records automatically, as carriers often miss their guaranteed delivery time or make errors on invoices. Just as automating other parts of your business can increase your operating profit margin, doing so with shipping will pay huge dividends. Shipware’s audit services and parcel audit technology pays itself through your savings, so there is no out-of-pocket cost. The service automatically scans all your FedEx and UPS invoices to identify unclaimed refunds and incorrect surcharges, requesting those invoice credits directly. The credits appear on your future invoices. That is not only found money but an increase in operating profit margins.
• Negotiating shipping contracts: Each year or when contracts renew, take a good look at to see what can be renegotiated, with contract optimization. Some companies have the knowledge to do this in-house, but many will save money and increase net profit margins by getting expert help. Shipware’s experts, for example, used to negotiate from the carrier side, and better understand negotiable terms and pricing, as well as pricing paid by other e-commerce companies. Businesses taking advantage of negotiating help, whether they conduct the actual negotiations or Shipware does, save on shipping. It’s a service that pays for itself. 

4. Automation

Automation is a broad cost reduction strategy that can lower labor costs and increase your operating profit margin. Not sure how to improve profit margins with automation? Ask employees about their daily tasks and how long they take each day, week or month. Can any of them be automated? This can include accounts payable, accounts receivable, scanning documents, printing shipping labels, determining package sizing, scheduling employees, linking sales data with accounting software, timesheets, and more. There are many benefits of logistics automation. By streamlining operations and automating specific tasks, you can reduce the time spent on them, and either work with fewer employees or deploy employees to other complex tasks.

5. Know Your Data

Inventory management is a huge priority in e-commerce. This is another area that should be automated in order to see a gross profit margin increase. Understanding what products you have on hand, what’s ordered, what is selling and not selling, can help with forecasting and analyzing. You can renegotiate with vendors to ask for discounts if you can order increased quantities going forward. Data helps you project these numbers and model your sales. 

Knowing your data helps you manage inventory. Businesses want to weigh running out of stock versus having excess stock. Customers interested in a specific product may leave your site to find it elsewhere, but if you have too much you can’t sell, that eats into your net profit margins. Having an excess of products is a big issue with trendy or seasonal items. It’s also important in certain e-commerce businesses like subscription boxes, where excess inventory may not be usable because it doesn’t go with the next month’s theme. 

6. Increase Average Order 

In order to improve the average profit margin for orders, you’ll need to increase the average order size. There are several ways to do this. 

• Recommendations: Develop an algorithm or key in links for adjacent products when adding new merchandise to the website. Good automation is better for efficiency, with someone spot-checking how appropriate the recommendations are, for fine-tuning. An algorithm might suggest that other customers viewed or purchased a specific list of products when they viewed or purchased the current one. You’ve seen this done on Amazon and other sites, and it works. Good items to consider are refill items for products, or different sizes, along with comparison charts. In the same way that a restaurant’s special typically provides a high-profit margin, a smart algorithm will always suggest more profitable products over less profitable ones. After a consumer commits to purchasing a product, encourage increased spending by recommending additional relevant items or impulse buys, at sales checkout. This can improve total revenue.
• Free shipping: If you’re not already offering free shipping, consider doing so for certain thresholds. Many consumers are willing to add items to the cart to qualify, and the gross profit margin can increase as a result, with increased sales.

7. Change Your Pricing Strategy

There are many external factors that retailers must be able to react to, such as competitor pricing strategy, site traffic, conversion rate, seasonality, cost of goods sold and more. Try different pricing strategy models to see what increases your gross profit margins. Here are some different techniques to try.

• Discounts: The key to providing great discounts is making sure shoppers feels they’re getting a deal and that there’s time pressure to make the purchase at the discounted price. Volume orders are one way to do this – order two or more of the same item, and the price for each goes down. Even using a buy-one-get-one-half-off can work, in some circumstances, depending on the cost of goods sold. It doesn’t take a warehouse worker much additional time to add another product to the order, and shipping costs will increase incrementally.
• Dynamic pricing: When retailers include dynamic pricing in their pricing strategy, they are able to better keep up with market fluctuations. Dynamic pricing is when pricing changes depending on demand. This can happen in seconds – a good example is airline tickets. Doing this manually is difficult, and this is another area where automation can save you time and money. A dynamic pricing strategy helps e-commerce retailers stay nimble and react quickly to market forces.
• Tiered pricing: Offering consumers a choice in price brackets can result in more sales, and potentially sales with a higher average profit margin depending on the cost of goods sold. Some e-commerce retailers find success with deluxe and standard pricing. Offering different quality items at different prices, and pricing the deluxe items considerably higher, can lead to consumers willing to pay more for higher quality and perceived higher value. If offering three tiers of products, the low-priced alternatives make the mid-range and high-range items look upscale, while much higher pricing on the high-end products makes mid-range and-low range items appear to be the best value.
• Raise sales prices: If your products don’t have a lot of competition, consider raising prices. For e-commerce retailers with regular customers, you can note the reason for increased prices, such as higher supplier charges, the cost of goods, increased tariffs, or decreased supply. That type of transparency helps pave the way for consumer understanding. If your products are similar to the competition, you may need to market them differently to raise prices, like sales on white label versions and better marketing copy to show value.

No matter what versions of pricing changes you try, perform A/B testing to see what works, so you’ll have solid data to rely on. Changing pricing models can improve the total revenue.

8. Customer Service and Retention

There’s a saying that any money you must spend after making sales, lowers your profits. And in some cases that’s true. Customer service is one area that e-commerce retailers ignore, figuring there are so many customers, it’s okay to lose a few disgruntled ones. We urge you to think about it in a different way. Excellent customer service can help your company stand out. If customers know you will back up your products, your shipping, and the entire experience, they’re more likely to become loyal customers, even if that means they sometimes pay more than they’d pay with a competitor. Set up a call center and email support with expectations for how long follow up should take, what the proper procedures are, and then monitor what happens. Auditing the work of the customer service agents is imperative to maintain that good reputation. 

Retaining customers is another way to increase profitability. It’s much cheaper to sell to existing and repeat customers than to get new customers. Marketing efforts focused on current customers are likely to get higher purchase rates than for potential customers, with less marketing dollars behind them. 

Small Changes, Big Rewards

Increasing low profit margin along with sales requires some forethought and work, but it’s doable even in a difficult economy. Making small tweaks to the supply chain can have big impacts on your business’ profitability, and is one of the easiest ways to improve your company’s performance. Contact Shipware for a 30 day free trial, to reduce your shipping costs now and become more profitable through contract optimization.