When you think about starting your business, you should be ready to face a lot of questions. What products to sell? How to find your niche? How to attract customers and increase their loyalty? And, one of the most important for an online store’s owner, how to improve an average retail profit margin? There are no strict answers, these themes require your constant attention, research, analysis, and work.
If you are a beginner in ecommerce, we gathered all the most frequently important questions and tips to help you to streamline your knowledge and create a working profit margin formula.
What about terminology?
Profit margin measures the profitability of your business and it is one of the main indicators of your company’s success. Your region, industry, kind of business, and personnel obstacles, all these things can affect the profit margin, and make this rate unique.
As a rule, profit margin seems low, when it achieves 5%. 10% is an indicator of the average profit margin, and more than 20% is a sign of a high-profit margin. Also, online retail shows the highest rates than brick-and-mortar stores. So, you can track the situation in your category and compare your data with common results with the help of a special study that shows margins by sector.
Gross margin is needed to define how much money you get after deducting production costs. So, to get this rate you should subtract the cost of producing the goods from a total revenue per certain period, then divide it by total revenue.
As we can see in the research, 45% is a good gross profit margin. To achieve it, you should choose a proper pricing strategy. Also, you can calculate your perfect product price with the help of a special Shopify online service, a profit margin calculator.
Operating profit margin
Operating profit margin is the profit that you get after deducting operating costs: payroll, materials, and so on. This percentage helps to manage your operating costs and shows how successful and profitable your company is at that moment.
To calculate it, you can use this formula:
(Gross profit – Operating expenses) / Gross revenue
Strategies to increase profit margin
1. Make your operating costs lower
It’s the simplest and fastest way to increase your online store’s profitability. But don’t forget that each business is unique, some costs can be essential for you, and at the same time, several of them have nothing in common with your business.
So, at first, you need to reconsider what is included in your costs:
- office and warehouse rent
- municipal services
- software and maintenance fees
- tax deposits
- insurance, etc.
Then, you need to check your everyday tasks and store’s goals: maybe, there is something time or resource-intensive. Think, what you can do to simplify your and your employees’ work. How can you reallocate your resources? Maybe, you don’t need to provide customer support by phone, and live chat would be enough? Or you can unsubscribe from equipment that is constantly breaking down?
2. Check that you can raise prices
To make this strategy work and don’t scare off the customers, beforehand, make sure that your store has a strong unique selling proposition and market demand. So, you need to find it with the help of ABC analysis and monitoring your competitors’ prices. If you resell popular products, you need to attract your customers and offer them something special. Also, make sure that your clients aren’t price-sensitive and your pricing strategy stays clear.
Check the Statista research to see the situation with an average value of online shopping orders, if you don’t know how to start the implementation of this strategy.
3. Focus on your customers’ loyalty rather than on order profit
Sometimes you can face the situation when you should make a decision: to solve your customers’ problem or to reject them. If there are no huge risks for your money, don’t lose the chance to improve the loyalty. By doing so, you will get a good reputation, recommendations, and future long-term profit. A satisfied customer will every time return to your store, and recommend you to his or her friends. It’s a powerful tool for online stores, where companies are struggling clients.
So, what does it look like?
- The customer says that an inexpensive thing from your store broke down. You can send them the same thing for free, without the returning of a broken item.
- If the expensive product broke down, you can give them a replacement just now, after they send you tracking confirmation that they have made a refund. You show that you trust your clients and estimate their time.
- If your loyal customers are dissatisfied with something, terms of shipping, quality of the package, etc, give them compensation. It can be a little gift, discount or a partial refund of money.
4. Try to increase the customer’s trust your store
There are several features, necessary for a successful online store: it should be convenient, fast-working, and credible. And, if the convenience and performance we can measure, to achieve clients’ credibility can be more challenging. Customers can choose among the great number of stores that offer similar or the same goods, so you need to show them your benefits.
When we talk about reasons how customers decide to make purchases, it’s about trust builders and trust breakers. Certain elements of a website’s design help people feel convenient and are sure about the purchase. Or, vice versa, they look off-putting, and people don’t want to make something in common with this company.
So, these are the main trust builders that you can use for your online store.
- Friendly homepage to inspire confidence in new visitors.
- Well-established and convenient search.
- Detailed products’ description.
- The page with the brand’s story and your mission.
- Customers’ reviews, successful stories, and other feedback.
- Clear pricing.
5. Work with your average order value
High average order value allows you to get a high-profit margin. It’s the average amount of money that customers spend in your store per transaction.
You can increase your AOV with the help of several actions below:
- Show product recommendations on the product’s page and checkout page. It can be the most popular goods or staff that other customers buy with this one.
- Show complementary products. By doing so, you stimulate people to buy not just a coffee maker, but also, coffee filters, new cups, and so on.
- Motivate people to spend more money. For example, you can offer free shipping for orders over the needed amount, a special discount, or a gift.
- Offer sets of products at a good price. Customers see that a set with shampoo and balm costs cheaper than these products on their own, purchase a set and increase your AOV.
- Create special offers, coupons, or discounts on your expensive products.
6. Set up a customer loyalty program
Customer retention is a more profitable strategy than customer attraction. Loyal customers give regular income and buy more than random clients. So, a customer loyalty program can help you to increase your profit margin.
For example, you can award special points after every purchase, and customers will exchange them for discounts or gifts. Also, it can be an accumulative discount, something that gives benefits to the clients. You can make them personal offers, exclusive access to show the customers that you appreciate them.
The desire to increase retail profit margin is normal for business, and each online store’s owner thinks about it at the time. As you see, there is no universal rule for all business categories. So, stay tuned for changing situations in the marketplace, analyze your customers’ needs and their behavior.