Once your online store has scaled to the point that it is generating consistent revenues, the next step to build a successful business out of it is to focus on how you can improve its profitability.
This sounds a bit easier to be said than done as the economics of online stores can be a bit tricky – especially if your ability to increase the price without affecting demand is limited.
In this article, we share 5 aspects of the business’s operating and financial structure that you can focus on to ramp up its profit-generation capacity based on some comments shared within the BeProfit e-commerce community.
#1 – Supplier network
The recent supply chain crisis is emphasizing the importance of securing a reliable network of suppliers for the products your store commercializes to avoid facing a sales downturn in case a single provider fails to deliver.
In a globalized economy, suppliers can be affected by a wide range of domestic issues that could end up affecting their prices, delivery times, and even the quality of their products.
With this in mind, building a strong network of allied suppliers will typically lead to sustainable sales volumes and relatively flat direct costs.
#2 – Warehousing and fulfillment costs
Most e-commerce businesses opt to outsource their fulfillment and warehousing operations to companies that have the infrastructure required to perform these activities.
However, as the business grows, the amount of money spent on these services may justify bringing these operations in-house. For example, this money could be used to pay the rent of the company’s own warehouse and hire the personnel required to take care of fulfillment.
In the long run, this will probably generate economies of scale that would be otherwise inaccessible if services are outsourced as most providers charge a fixed fee per fulfilled order.
#3 – Marketing budget and ROI
The e-commerce landscape has become highly competitive as businesses have progressively realized the huge potential of the digital realm.
As a result, paid ads on social media platforms such as Facebook, Twitter, and Instagram are a great tool to acquire customers and increase business volumes.
However, the cost of these ads has increased over time as well as clicks and impressions are now auctioned. This means that market segments with a lot of competition could require an elevated marketing budget so ads can be displayed to the right audience.
With this in mind, online stores should be careful not to overspend in marketing by attempting to tap on expensive audiences and keywords that can end up delivering low returns on investment.
To prevent this, a/b testing could help business owners in identifying the most cost-effective marketing approach that generates the highest ROI possible.
#4 – Payroll costs
For business owners, wearing many hats will, at some point, become exhausting if the online store is growing at a fast pace.
When this happens, it is a good idea to hire people to take over some of the most time-consuming tasks of the business such as customer support, copywriting, and billing.
However, depending on gross margins, hiring people to do these activities can eat up a large chunk of the store’s profitability.
Therefore, owners should approach the matter of hiring with extreme caution by first relying on part-time workers or even freelancers from other latitudes to keep overhead costs in check.
#5 – Subscriptions
Many software-as-a-service (SaaS) companies have developed incredible integrations and applications for the most popular e-commerce platforms such as Shopify and WooCommerce to help business owners in optimizing their online store’s operations.
Most of these services charge a subscription and, even though what they do can be rather valuable, the return on investment of these services must be tracked and assessed to make sure that money is being well spent.
Before signing up for any of these services, store owners should ask themselves. Is this subscription going to pay for itself or will it just inflate my fixed expenses? Some apps you can live without, some you can’t. Make sure you understand which ones are crucial and which one can be passed on to maintain your margins as high as possible.
#6 – Loyalty programs and rewards
One of the easiest ways to increase the profitability of an online store is to increase the average order size by introducing incentives that motivate clients to make bigger purchases.
This can be achieved by creating customer loyalty programs that offer rewards such as discounts, 2-for-1 promotions, and perks. An increase in the average ticket size will typically lead to higher sales volumes across the board and that can trigger certain economies of scale that should help the store in producing higher bottom-line profit margins.
One way to introduce profitable rewards programs is to leverage on your customer base to partner with other stores and online brands. These partners are rewarded by acquiring a new customer/user and stores can introduce a minimum purchase required to participate in the program to ensure that the average order size will immediately increase.
#7 – Reduce transaction costs
Offering multiple payment alternatives is typically convenient for customers but it is not necessarily profitable for the store as some platforms can charge a significant percentage over the total amount paid to process the payment.
In some cases, one way to save costs could be to offer a small incentive to customers if they use the cheapest payment method made available by the store. For example, a 5% discount in their next purchase if the transaction cost of other methods is 7% could lead to an extra 2% gain.
Bottom line
Owning and operating a successful online store demands both the ability to identify key market trends to offer the kind of products that consumers are craving for and the skills to make money out of this activity.
The recommendations outlined in this article should help you in achieving the latter so you can cash in on your store’s hard-earned top-line growth.
