Ways to Increase Your Profit Margin in E-Commerce
Updated April 21, 2023.
Profit margin is a measure of financial performance that shows how much profit a business makes for each dollar of revenue, calculated by dividing net income by revenue.
In the e-commerce space, due to the low margins typically associated with this type of business, a high profit margin is essential for profitability. An online company must be able to sell its products and services at a price that covers costs and generates a healthy profit. Ultimately, if an online entity isn't profitable, it will eventually go out of business.
To help you avoid this, this article will explain why it’s important to improve profit margins and discuss strategies for doing so.
3 Types of Profit Margins
There are 3 types of profit margins:
- Net profit margin The percentage of revenue remaining after all expenses have been paid, including interest and income tax.
- Gross profit margin The percentage of revenue remaining after deducting the cost of goods sold from total revenue.
- Operating profit margin The percentage of revenue remaining after deducting all other operating expenses from total revenue.
An effective method of determining whether your profit margins are sustainable is to use a customer profitability analysis.
3 Strategies for Increasing Profit Margins
1. How to Improve Net Profit Margin (NPM)
To improve your net profit margin, you'll need to focus on 3 key factors:
- Review your expenses and reduce them Can you negotiate a lower rate with your suppliers? Can you cut back on some of your advertising or marketing expenses? Are there any unnecessary or duplicate services you can cancel?
- Increase your revenue by finding new customers This can also be achieved by selling more products and services to your current customers. Can you increase your prices without causing too much backlash? Can you cross-sell additional products or services to existing customers?
- Track your net profit margin regularly and make adjustments as needed Change your business strategy in order to improve profitability. Don't be afraid to make tough decisions in order to protect your bottom line.
A high net profit margin is a good thing—it means the company is doing well financially.
» Learn how to calculate net profit margin
2. How to Improve Gross Profit Margin (GPM)
There are a few key ways to improve your company's gross profit margin:
- Increase the price of the products or services that you sell This can be done by conducting a market analysis to ensure that your prices align with those of your competitors. You may also want to consider raising your prices if you have not done so recently.
- Reduce the cost of goods sold (COGS) This can be done by producing or purchasing products and services more efficiently. You may also want to explore alternate suppliers who can offer lower prices for the same quality product.
- Keep track of business expenses Keeping track of business expenses can help you ensure they are in line with your overall business strategy. Reviewing your overhead costs regularly can help you reduce them without sacrificing quality or service.
A high gross profit margin means that a company sells its products or services at a higher price than it costs to produce them.
» Learn how to calculate gross profit margin
3. How to Improve Operating Profit Margin (OPM)
Operating profit margin is a key metric for any business. By understanding how to improve your company's operating profit margin, you can ensure that your business runs efficiently and makes the most money possible. There are several ways to improve your operating profit margin:
- Look for ways to reduce spending This applies to all areas of your business, which may include renegotiating contracts with suppliers, streamlining processes, and reducing headcount.
- Raise prices If demand for your products or services is high, consider raising prices to increase revenue. However, be sure to do so in a way that does not alienate customers or hurt sales.
- Optimize processes Make sure your business is running as smoothly as possible by optimizing processes and eliminating waste.
A high OPM means a company is making money on its core operations.
What Is Considered a Good Profit Margin?
When running an online business, there is no magic number for what is considered a good profit margin. The amount of profit that a company makes on each sale can vary depending on the industry, the products or services being offered, and the company's overhead costs. However, most businesses would like to see a profit margin of at least 10-15%.
