The only way to scale and grow your online business in a reliable way is to control and improve your margins. You could increase your number of sales, expand your portfolio, and market your products, but you still won’t see the growth you want if your margins are low.
You need lean processes with strong margins so that every sale brings in a high profit for your business.
The margin is the amount of profit your company nets for a unit or product. It’s the difference between the sales price and the cost to make the product.
Your gross profit margin is your total revenue subtracted by the cost of goods sold (COGS). The COGS consists of all the costs to make and ship your product, including materials, manufacturing, shipping, packaging, fulfillment, warehousing, and other business overhead like employee pay.
To calculate your margin ratio:
Gross profit margin = (revenue – cost of goods sold) / revenue
Thus, margins have two essential parts: costs and revenue. If you want to increase your margins, you have to look at both costs and revenue. You want to reduce your costs and raise your revenues to pad your margins effectively.
What can you do to improve your product margins as an online company?
How much do you pay your manufacturer for materials, production, labor, and other costs? What is your minimum order quantity?
You want to pay as little for your goods as possible, and this starts with the supplier of your product. You should be reevaluating your product costs on an annual basis to ensure you aren’t overpaying for your goods.
Before entering into negotiations with a supplier, be sure to conduct a spend analysis. This will help you determine exactly where most of the cost is going and if there are any hidden fees you shouldn’t be paying. This should also take into account customer trends and purchasing data.
You may also want to discuss:
How much are you spending on transport? A number of carriers charge hidden fees that you should take into account. Moreover, the shipping methods you choose can drastically impact the price. For example, shipping via ocean is generally cheaper than shipping by air.
Talk to your carrier about possible discounts. Some transporters will charge less per unit if you ship a greater volume at once, for example.
You can also work with your supplier or private label partner to find cheaper shipping options. Some suppliers and brands will have transport partnerships that can offer discounts.
Note: Large, heavy products tend to cost more to ship. Smaller, lightweight products will generally have a reduced transport cost.
You want your supply chain to be as lean as possible. Cut out any distributors and suppliers that aren’t adding value to your chain. Often, sourcing overseas can land you with “mystery players” who charge exorbitant fees without providing any value to your product.
Analyze your supply chain firsthand. Cut out the extra “fat” to create a lean process with low costs. The more direct your supply, the lower your costs.
Not sure how to start this supply chain analysis? Partner with us for an in-depth look at your logistics.
Packaging eats up a significant amount of our costs, and we often overlook these prices. Take into account every part of your packaging to see if you can minimalize the materials and cost.
Raising your prices can feel scary for online sellers, especially with such steep e-commerce competition. Of course, you want to make sure you’re pricing competitively, but you also want to make sure you’re pricing in a way that isn’t killing your business.
Don’t be the “low cost” brand. If possible, position yourself as the luxury brand. Add more value than your competitors so you can raise prices accordingly.
The right branding can instantly raise your prices without impacting your costs or changing your products. Upgrade your private label and push valuable content so you can raise your prices while still remaining competitive.
When inventory isn’t moving, sellers have a tendency to discount products in an effort to move products off the shelf. However, frequent discounts can drastically cut into your product margins—sometimes so drastically you actually see negative profits.
If you want to see inventory movement, focus on marketing rather than discounting.
For example, you discount a $50 product by 30%. Your revenue on that product is now only $35. It cost you $20 to make that product. What would have been a $30 margin is now a $15 margin. Discounting by 30% cut your margins in half.
If you were to instead run an Amazon pay-per-click campaign, you would increase your visibility and conversions for a few dollars total —not tens of dollars per product.
Moreover, discounting your product attracts a type of customer you may not want. It attracts those customers who purchase only on discount. That means they will only buy from you when your products are discounted (aka low-margin). This means you’ll never make a strong margin on those customers.
When you market, though, you naturally reach more relevant customers who will purchase your product full-price.
If your products still aren’t moving, discount the slow movers to get rid of them and then move on to higher margin products. Don’t throw money at slow, low-margin products.
Some products generally have greater margins than others. This doesn’t mean that they’re more expensive products. Some “inexpensive” products can be high-margin because they’re so low cost to make.
We also recommend choosing products with high-margin complementary products. This increases your portfolio while still maintaining a narrow focus.
Private label Home & Kitchen products generally have high margins (which was how Home Revolution was started). They also have a number of complementary products to sell.
Contact Home Revolution for a list of our favorite high-margin products.
At Home Revolution, we calculate our margins with the “price backwards” technique.
Before we choose a product to sell, we look at any and all fees that would be involved in selling that product from an e-commerce standpoint. We look at our competitors’ pricing for similar products and we analyze the supplier, manufacturing, and shipping costs.
We only source and sell those products that show a strong margin after calculation.
BONUS: Bundling your products as multipacks can help cut down on warehousing and fulfillment costs, especially if you use Amazon FBA. Learn more about product bundling here.
A few changes to your margins can drastically impact your bottom line. The strongest way to sustainably grow your business is with thick margins that put a greater percentage of profits into your company’s bank.
If you want to increase your product margins, you need to reduce your supply chain and boost your revenue.
The Home Revolution team has expertise in choosing high-margin products, reducing supply chain costs, and boosting product revenue.
Don’t wait to grow your business.
Contact us right now to start improving your margins and scaling your e-commerce business.