The Key to eCommerce Success: Improving Gross Profit Margin through Effective Strategies
In the eCommerce sector, gross profit margins (GPM) vary depending on business verticals. While many of the larger sites like Amazon, eBay, and Zillow have GPMs of between 48 and 61%, most other eCommerce businesses’ GPM sits at around 20-50%.
Regardless of what eCommerce vertical you fall under, your business’s GPM is one of the most essential metrics. It determines your venture’s financial health and profitability within the context of your industry. More specifically, knowing your gross profit margin allows you to evaluate how efficient your production and operational strategies are in comparison to and your leading competitors.
GPM is usually determined as a percentage of your eCommerce business’s net sales. It indicates how much money you’ve made after deducting your direct costs of operating the business, also commonly known as the cost of goods sold.
A financially viable company should have a gross profit margin that allows revenues to cover its costs of production. However, this is the base threshold that you should reach. Ideally, your GPM should leave you with profits at the end of the day to facilitate your venture’s growth and development. In this article, we’ll share the most effective strategies to use to improve your gross profit margin and achieve eCommerce success.
Calculating Gross Profit Margins
Your gross profit margin shows your company’s overall sales performance based on the efficiency of its service delivery and production processes. GPM is calculated by deducting your direct costs from your revenues, then dividing the resulting figure by your revenues and multiplying this figure by 100 to reach a percentage.
Use this formula to calculate your eCommerce business’s gross profit margin:
[(Revenues – cost of goods sold) / revenues] x 100 = GPM
Remember that your gross profit margin indicates how much profit your services or products bring in, per dollar or fiat currency unit, after subtracting the cost of goods sold. This means that it only takes into account the direct costs of sales, and not other operational expenses such as taxes, salaries, and rent and marketing expenses.
Say, for instance, you pay $20 for a product at wholesale and sell it to your target customers for $40. This would give you a GPM of 50%, as half of the revenues earned were used to cover the direct cost of the product. Ultimately, GPM should be used as a metric to assess the performance and profitability of individual products and services.
Strategies to Improve Your Gross Profit Margin
1: Assess and Audit Your Current Strategies
The only true way to improve your profit margins is to enhance and streamline the processes that could be holding your business back. That means that the first step to boosting your profits is to know exactly how your current strategies work and what plans you can implement to improve them.
Take a close look at your business’s expenditure, product production processes, service delivery processes, acquisition, and retention methods. Also, look at any other critical processes that could be hindering your ability to generate revenues or driving excessively high production costs.
Assess your expense reports to identify costs that can be reduced or mitigated. Spot gaps in your sales processes that could be leading to a loss of sales prospects and identify ways in which your marketing strategies can be improved to generate more leads and conversions.
2: Raise Your Prices
Increasing prices may not be a suitable approach for every eCommerce business, but in some cases, it can certainly help to boost gross profit margins. Before you adjust your prices, thoroughly assess your competitors and their pricing structures.
Find out what they offer, and then offer your own customers something better suited to their needs, be it a niche product or service or an exclusive boutique offering. This approach will allow you to raise your prices while still offering your target audience value that aligns with your pricing.
3: Reduce Your Operating Expenses
Expenses have a direct impact on your GPM, and if you can reduce them, you can improve your profit margin. There are many effective ways to slash your costs, including:
- Restructuring your staff force and reducing unnecessary staffing where possible
- Paying invoices on time or early to take advantage of vendor discounts
- Removing subscriptions or services that are not used regularly from your budget
- Investigating the possibility of part or full remote work for your teams to reduce office rental and equipment costs
- Identifying new vendors that can provide more cost-effective products, services or materials compared to your current suppliers.
You can also use automation tools to reduce your operational expenses without sacrificing efficiency or productivity. Automating processes like billing and invoice processing, accounting, marketing, customer relationship management, and inventory management can free up your team members’ time and resources, allowing them to focus on creative pursuits and expansion plans while AI takes care of repetitive and time-consuming tasks.
4: Update Your Brand’s Identity
If your customers are willing to pay more for your products or services, your profit margins will increase automatically. However, you’ll need to shape your brand’s identity and reputation in a way that compels your prospects to spend more money.
The best way to do this is to position your brand as a premium option within your industry or vertical. You can achieve this by adding extra functions and features to your products that your competitors do not provide, by implementing a prestige pricing system, or by aesthetically redesigning your brand to exude a more high-end identity.
5: Adjust Your Sales Mix
Are there certain products or services in your inventory that perform better than others when it comes to sales? Identify those that provide you with the highest gross profit margins and focus your efforts and resources on marketing them to your target audience.
Adjusting your business focus may be the key to finding the ideal combination of products and services that maximizes your eCommerce business’s profitability.
Your gross profit margin will vary widely depending on the nature of your industry, your vertical, and the target audience you are appealing to. With that said, improving your GPM will always result in a stronger business at the end of the day.
Use the effective strategies listed in this article to refine your approach and give your profit margins the boost they deserve.
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