Sellers often come to HomeRev with a simple question: How can I increase my margins? This is an important question for anyone looking to be successful in the world of e-commerce. Higher margins are the key to greater sustained success.
HomeRev supports a wide range of e-commerce sellers through our passion and dedication to each client. We provide product sourcing and operations solutions that help our clients succeed in their online platforms. At HomeRev, we focus on 12 ways to boost our sellers’ profit margins:
To increase your profit margin, you need to first understand the costs associated with your product. List each expense from product unit cost to delivery. Focus on direct expenses—like the cost of goods, freight-in, and labor—as well as indirect ones—such as custom fulfillment, content development, advertising, and marketplace fees. This and every hidden cost in between needs to be accounted for.
When you understand where your costs are coming from, you can pare them down. Have you taken into account currency conversion changing FBA fees and listing management? Are there ways to renegotiate, pay as you go for the resources you need by the hour or task, or outsource processes for a fixed known fee? As the expression goes ‘if you can’t measure it, you can’t manage it’.
If you are a seller on Amazon, consider the service Fulfilled by Amazon (FBA). This is Amazon’s fulfillment service, which is one of the most advanced fulfillment networks in the world. When calculated correctly for certain products, it can help save money on storage, shipping, and fulfillment costs. FBA products have greater priority to rotate within and more consistently win the Buy Box. Thus, utilizing FBA can also heighten your product’s optimization, increase sales, and gain more exposure to Prime customers – all leading to higher revenues which help you offset your overhead to yield greater overall enterprise profit margin.
You shouldn’t necessarily use FBA for all of your items, though. For some small individual items of lesser value, this service may decrease the optimal profit and even generate a loss. Creating or entering listings offering multiples or bundles is often a good way to justify FBA fulfillment cost. This is the case because fulfillment costs often remain fixed up to a certain package size or weight.
Once you understand where your fulfillment fees come from, calculate what is best for your stock levels to ensure you are paying the least possible amount per product.
It doesn’t hurt to negotiate with your current suppliers for a lower cost or to search for other suppliers with different offers. A small price reduction can feed your margin.
Do your research to find suppliers that will provide the biggest bang for your buck while maintaining high quality. Most traditional distributors maintain a heavy supply chain model, which lands at your doorstep with unnecessarily high unit costs. Companies like HomeRev who invest in and own their own tooling and bypass wasteful layers in the supply chain can help cut costs by delivering more directly from the source. It’s also important to Mind Your MOQs (Minimum Order Quantities) (...more on this next time).
Raising your prices may seem like the obvious answer to rapidly increase your profit margin, but it can often be a mistake if not just a terrifying prospect. While raising prices for more commoditized products most always translates to lost customers, for unique niche-oriented products, packaging or bundled products it is likely that most of your consumers will not notice the difference in price. A raise in price may even make your product appear more high-end and exclusive (as long as the price is still competitive). Test the Buy box with a slight 5% increase in price, and keep an eye on your metrics to ensure you are still getting proper sell-through. Even a slight increase in price can make a huge difference in profit margins assuming that your overhead cost structure is fixed and adequately supports this sales growth.
For most suppliers, the more you buy the less it costs. If your product sales are consistent and you can confidently project to sell more of it; try buying larger quantities of goods. Be aware of the sell-through of your items across all similar listings and across marketplaces. Make sure to include the original branded product (OEM) in your assessment and do not assume that you will compete for more than a fraction (say 5-10%) of the overall market until you have the first cycle data to prove it. Be realistic and create a pricing plan that enables you to inexpensively buy in bulk without risking a decrease in sell-through of your inventory. Optimize your buy quantities and your margins will thank you.
Do not get emotionally attached to your products. If a product is not selling or is too costly to acquire, stop purchasing it. Products are increasingly experiencing shorter lifecycles, which directly impacts price degradation and sell-through rates. Take note of 1) how long you are holding on to a costly product in your inventory? 2) how much profit are you making on each item sold? If you’re holding it for a long time with low profit, the product is likely negatively affecting your margins. Focus on turning your inventory at least 4-6 times annually.
Along with watching the shelf life of your product, you should also have a projected plan for your inventory. The closer you manage your inventory, the more product you will be able to sell. Set minimum inventory levels and review them once a month. Well managed stock is critical to a streamlined business and healthy cash flow. This will not only lead you to a higher profit, but it will also help you determine your most successful products. If you watch your inventory levels, you can better understand which items to buy in bulk (as discussed in #5), which further generates higher margins.
Upon successfully managing your inventory and ridding your lineup of low-margin products, begin adding new merchandise with lower competition, ramping sell-through and higher margins. Research new products and categories that open doors to revenue growth and sustained higher margins that will offset the products with falling demand. Retail storefronts are ever changing, so your online store should be too.
Again, If consumers are buying an item, they may want a complementary product or multiples at a lower unit price. Amazon’s FBA fulfillment costs are usually regulated at a static rate for multiples and bundles. This means that selling a bundle could generate a higher margin per unit. Research your suppliers to see if they offer multiple or bundled listings that will help you cut costs on fulfilling and shipping items.
If you feel you are plateauing in your current marketplace, try selling on another platform. There are so many online shop real-estate opportunities, such as Walmart-Jet, eBay, Sears, Rakuten, Google Shopping, and more. Each platform has unique and loyal buyers with different price points and merchandise. Find the platform that best suits your business’ needs in accordance with your margins. How? Calculate your margins for each marketplace based on their available programs and fee schedules. You may be surprised to find hidden gold mines with a new or emerging competitive service.
Success comes easiest to those who focus on what they do well. Focus your efforts on selling and partner with a company that will help you control your sales and your costs. Pursuing a semi-private co-branding strategy gives you your own marketplace without all of the costs associated with registering, launching, maintaining, and forced purchasing of excessively high product minimum quantities.
This kind of strategic partnership is not only an opportunity to offer a unique set of merchandise that differentiates you from the competition. It also allows for a higher profit margin by putting the burden of production and marketing on a third party. This keeps your own organization lean and optimizes your time, cash, and energy to study new channel opportunities, to buy what you want and how you want while promoting your own brand equity.
Of course, the best way to increase your profit margins is ensuring the highest sell-through rate. In order to do this, you need to offer a great product, optimize your listings, increase traffic to your page, utilize marketing, and provide amazing customer service—all while continuously reducing costs.
It’s not easy to go it alone. There is a great effort to be applied to building a sustainable growth oriented high-margin enterprise. You need to produce, market, sell, fulfill, and ship at the lowest possible cost while still delivering great service. It takes time and support, and HomeRev is here to help you. It is our job to make your job simpler and easier, and it’s our business to make your business streamlined, profitable, and successful.