Above-average profit margin is a surefire proof that you are competitive in the market and attractive to investors.
Okay, what should one do if facing decreasing profits?
Let’s try to figure this out, but first things first.
What is profitability?
A company’s profitability or profit margin is the percentage of revenue it actually gets after deducting the cost of goods sold (COGS). Simply put, it is how much money the company made from sales.
To calculate the gross profit margin, you need to solve these two unknowns:
Net Sales = Gross Sales¹ – Returns, Discounts, Allowances
Cost of Goods Sold²
1. Gross Sales measures a specific area of revenues, e.g. products and services that were sold
2. Cost of Goods Sold (COGS) can include: materials, labor, storage, factory overhead
Now, substitute them in the formula for gross profit margin:
(Net Sales – Cost of Goods Sold) / Net Sales * 100%
The more money your company keeps from each sale, the higher profit margin you get.
What is a good profit margin for an online store?
Investors use profit margin to evaluate potential investments, since it indicates how well a company can manage its costs. But how do they know the profit margin is good?
Profit margins differ from industry to industry. A good profit margin can be everything that exceeds the average. As of Jan 2022, the average profit margin for online retail was 41.54%. But in 2021, for example, the rate was 42.5%.
Micro- and macro-environmental factors affect your business well-being. Their neglect can keep you from outperforming the overall market. If you double-calculate everything and see that there is a problem, then something led to it.
How to increase your profit margins?
A healthy outside starts from the inside
Audit your expenses
When profits go down or remain at the same level but costs increase — you lose your business profitability. You need to identify inefficiency, and take action:
- find ways to cut the operating expenses with automation
- find services you don’t use regularly and cut them from the budget (You know, all those one-month subscriptions that were forgotten to cancel in time)
- give up renting expensive office space if your team can work remotely while maintaining efficiency
- analyze and get rid of unnecessary staffing, if that’s the case
Shift to incremental growth
Break down your goal into actionable steps with clear performance indicators. This way your team won't be struggling with the stress of the final goal, which may seem ambitious and impossible to achieve. It’s important to have the end goal, but it’s even more crucial to track your progress over time.
Don't put all your eggs in one basket
Quite often companies rely on one main marketing method that generates most of their revenue. Whatever it may be — direct sales, digital marketing, referrals, etc. — you shouldn’t take that risk. Better yet, analyze all the methods and share responsibility. The lower the “bet”, the less you lose in a negative scenario.
Build your dream team
Building a team that works isn’t enough. You should invest in specialists who are willing and ready to develop their skills. It sounds simple, yet finding true fans of your business is very difficult in reality.
Know your worth
Raise prices without losing customers
It's always scary to raise prices. What if my customers go to a competitor, what if sales drop so much that no internal optimization will help? The answer is simple — raise your prices strategically. Analyze prices, compare them to the market, get insights, and then make a decision.
Say, you sell wooden furniture:
- Retail cost for 1 chair: $165
- COGS: $120
- Profit: $45
- Profit margin: ($165 - $120) / $165 * 100% = 27%
You raised the price by $4.99, now:
- Retail cost for 1 chair: $169.99
- COGS: $120
- Profit: $49.99
- Profit margin: ($169.99 - $120) / $169.99 * 100% = 29.4%
Even a small difference of 2% can lead to a larger overall benefit.
Increase your average order value
Review your ways of upselling products, maybe some of these you haven't tried yet:
Your brand reputation precedes your products
Be a trustworthy leader
Trustworthiness is especially important for new buyers. “Trust breakers” make newcomers change their mind and never return to your store. Weak UX, complicated checkout, lack of popular payment methods, no guarantee, no refund policy affect your conversion.
Pay proper attention to customer retention
Being trustworthy, you have already gathered a base of regular customers. The next step is to put your resources toward their retention. The high quality of service inspired the customer to make the first buy. Your aim is to keep it at the same outstanding level afterwards.
Create a successful customer loyalty program
Acquiring new clients is often more expensive than retaining existing. A strong loyalty program can benefit your customers and guarantee you repeat purchases.
Reshape your brand reputation
Prestige pricing strategy can help you focus on those 20% of customers that bring you 80% results. Companies that have used this principle for years are strategically innovative. That's their secret. It’s easy to promise a miracle — “the best of the best products ever”. It’s far harder to offer something useful and appealing to your customers. Yet, nothing is impossible.