Depending on who you ask, 50% clear net profit is a great margin in ecommerce. Others say nothing less than 500% is healthy. For fast-growing store owners, conversations around what is and isn’t a “good margin” can be a lot to take in.
Unlike certain brick-and-mortar industries, in the world of ecommerce it’s all relative when it comes to defining a “healthy” profit margin. And it can feel far from predictable too. Despite years of increased sales growth, some sellers have recently taken a hit to their margins leaving many wondering: What exactly is a good profit margin?
And more importantly, how do you preserve your profits as you grow?
The truth is, multiple factors play into what qualifies as a “healthy” profit margin, including your niche, brand reputation, marketing and pay-per-click (PPC) expenditures, sourcing costs, storage costs, FBA fees, selling fees (oh, so many fees), and more.
And then there’s the things you can’t control. Market conditions, inflation, and supply chain issues all play a role in dictating your margin percentage.
Let’s take a closer look at what a good profit margin for your ecommerce business could look like and some of the best ways to preserve your profits as you grow.
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The scoop on healthy margins
- What’s a good net profit margin in ecommerce?
- What types of profit margins should you look at?
- How to preserve your profit margins as you grow
What’s a good net profit margin in ecommerce? Start by setting some benchmarks
As we’ve established, profit margins aren’t a one-size-fits-all affair. Different industries have different definitions of what makes an optimal profit margin.
For example, a 5% net profit margin can be considered excellent in the apparel niche but dismal in health and nutrition. And though having a higher profit margin than the next store doesn’t necessarily mean you’re more profitable in terms of hard dividends, there are some general figures for good and bad profit margins that can be helpful for setting a range to benchmark against as you grow.
A 5% profit margin is generally on the lower side across all industries, while a profit margin of 20% is generally on the higher side. But again, you’ll want to take these figures with a massive grain of salt as many of them weren’t designed with ecommerce in mind.
If you sell a high volume of low-ticket items, you might be doing just fine on lower margins. On the other hand, if you sell high-ticket items at a lower velocity, you may need to make a higher margin on each sale.
Supply chain disruptions and long lead times can eat into your Amazon ROI and leave a big dent in your margins. Find out how SellersFunding can help stabilize your cashflow and help get your inventory back on track.
Losing margin is painful (but natural) as you grow
Another not-so-sunny factor worth noting is that net profit margins tend to reduce as you grow.
When starting your business, your expenses and operation costs are generally low. Since these expenses don’t eat into your revenue too much, you pocket a considerable chunk of your sales as net profit. Life is good.
But as your business grows, you realize you need more team members, larger storage facilities, and bigger marketing budgets. These operational costs can quickly eat into your margins. You could be making double the revenue you made when starting your store and still not be as profitable.
As mentioned, that doesn’t necessarily spell bad news for your business. Let’s take a quick look at some of the different types of profit margins and metrics to help you get an idea of what a “healthy” margin could look like.
What types of profit margins should you look at?
Alright. We hate to play the “it depends” card again, but the type of profit margin to use in your business is another one that boils down to where you’re selling, sourcing from, the market economics of the niche you’re in, and how your business is structured.
Obviously, higher is generally seen as better. But once you know the type of margin you’re looking at, you can decide what type of margin and what percentage will work for your unique position in the market.
There are three major types of profit margin metrics. Each type of profit margin offers a different perspective into a business’ profitability and operational efficiency. When combined, these three types of profit margins can provide comprehensive insight into a company’s strengths and weaknesses.
1. Gross profit margin
Gross profit margin is what’s left after you deduct all the costs associated directly with production. These costs may include labor and raw materials, and are typically called Cost of Goods Sold (COGS).
Gross profit margin paints a picture of a business’ raw profitability and is calculated using this formula:
(Gross Profits ÷ Net Sales) X 100
Where:
Gross Profit = Revenue – COGS
And
Net Sales = Revenue – (Discounts, Allowances, and Cost of Sales Returns)
2. Operating profit margin
Operating profit margin is the figure you get after deducting operation, selling, and administrative expenses from the gross profit figure. It’s a crucial metric for how much profit the business makes after deducting all variable production costs.
This is the formula for calculating operating profit margin:
Operating Profit Margin = (Operating Income ÷ Revenue) x 100
3. Net profit margin
Net profit margin is the most significant measure of profitability. When people ask, “What’s your company’s profit margin?” they’re usually asking about your net profit margin. To calculate your net profit margin, deduct all business expenses from the total revenue. Then divide the result by the total revenue and multiply by 100.
Here’s the formula to calculate net profit margin:
Where:
Net profit = Total revenue – (COGS + Taxes + Depreciation costs + Administrative Costs + Interest expenses + Allowances + Discounts + All other expenses)
And:
(Net Profit ÷ Total Revenue) x 100
How to preserve your profit margins as you grow
Depending on how your store is structured, most ecommerce businesses tend to focus on revenue as the core metric for growth — often at the expense of their profit margins.
Sure, increased revenue is a good sign your business is on the right track. But your net profit margin will help you determine your store’s overall financial health by helping you gauge how well you’re containing your overhead and operating costs.
Once you know the range of margin that makes sense for you, you’ll want to work to position your store to consistently hit that number. Of course, if the last couple of years have taught us anything, it’s that some of this is likely to be out of your control.
However, there are some strategies you can use to keep your brand on the leading edge and protect or even increase your profit margins as your business grows.
#1. Adapt to emerging trends and changing consumer behavior
To start, let’s look at some of the emerging ecommerce trends you should watch out for. Again, depending on your unique niche and business model, not all of these trends will make sense for your brand.
Whatever the case, knowing the broader landscape of how things are shifting (and what types of ecommerce brands are profiting from these shifts) can help you plan your margins better.
Augmented reality for product presentation
One emerging trend causing ripples in the ecommerce industry is augmented reality (AR) for product presentation. Although AR as a concept for ecommerce applications has been around for close to five years, most businesses didn’t pay attention until after 2020. But at that point, they were really paying attention.
AR advertising revenue went from half a billion dollars in 2019 to $1.41 billion in 2020, and is expected to reach over $8 billion by 2024. That’s some pretty outstanding growth.
By helping customers visualize what a product would look like in real life, AR is a move to combat the uncertainty surrounding the nature of buying a product based on a static image. And if the numbers are anything to go by, it works.
In fact, AR is reported to increase conversions by 40%. This is especially useful for brands in categories where the ability to ‘try’ before you buy is crucial to customer conversion. But it’s not exclusive to apparel. For example, brands like Dulux paints use AR to help visualize what their paint would look like on a customer’s wall.
Virtual try-ons
On a related note, another emerging trend is the virtual try-on. Although virtual try-on falls under augmented reality, it’s exclusively used in the fashion and apparel industry.
Virtual try-on lets customers use a photo, video, or avatar representation of themselves to “try on” items and see what they’d look like in real life. As an ecommerce business, you can have this feature developed for your business by a developer or agency, or partner with plug-and-play third-party virtual try on companies like Virtooal to integrate the feature into your store.
Zenni Optical is one of the many brands that has adopted virtual try-on. Customers can try on glasses virtually to see what they’d look like in them before buying. After adopting the virtual try-on feature in 2019, the online retailer increased order volume by 54% and grew sales by 35% the following year.
Livestream commerce (a.k.a. live shopping)
Livestream commerce or “live shopping” is taking the real-time video streaming aspect that consumers love about social media and infusing it into the online shopping experience.
Although Livestream commerce is still a new concept in the US, it has been making waves in China, growing from $3 billion to $171 billion in just three years. In the US, it’s still in its early adoptions stages but is expected to be a $35 billion market by 2024.
Brands like Nordstrom and CAIA Cosmetics are some of the early adopters of Livestream commerce, with some promising results. CAIA Cosmetics saw a 5% conversion rate on their first-ever Livestream. The conversion rate was higher than their average website conversion rate.
#2. Prioritize customer retention
Customer retention is one of the core building blocks of any profitable business, but surprisingly, it’s often overlooked. According to Semrush statistics, the probability of selling to a new customer is 15% to 20%, while the probability of selling to a repeat customer is up to more than 3X those figures at 60% to 70%.
Not only that, a study by Bain & Company shows that a 5% increase in customer retention translates to a 25% increase in profits. With these numbers in mind, customer retention is undoubtedly a surefire way to preserve and even increase your profit margins as your business grows.
Let’s look at some of the strategies you can use to create a loyal customer base:
- Optimize your email marketing strategy to give your customers a personalized experience
- Incentivize customers’ loyalty with a VIP customer loyalty program
- Stay ahead of the curve by investing in creating a seamless shopping experience for your customers
- Engage with your customers on your social media pages to cultivate a relationship outside your business
- Share your brand’s story and values to get your customers emotionally invested
- Give your customers a voice by letting them give suggestions on product developments and improvements ideas
# 3. Optimize your team for peak productivity
You can only do so much in 24 hours, and when you have a thriving business, you need a reliable and productive team to keep all the wheels moving. Plus, a solid team is a great way to futureproof your profits. According to Gallup, having an engaged and productive team can increase your profits by 21%.
Of course, your team’s level of engagement and productivity all boils down to how well you optimize your human capital.
Let’s look at some of the best strategies you can use to build a high-performing team for your business:
- Get to know each team member personally outside the work environment to encourage trust and a sense of belonging
- Assign roles according to each team member’s skills and interests. Employees are naturally going to be more productive in tasks they’re genuinely interested in
- Give your team the freedom to make decisions where possible in order to foster a sense of ownership and autonomy
- Have clearly defined KPIs for each role so that team members have a clear picture of what you expect of them
# 4. Expand cross-border the right way
Sellers in more than one marketplace have an average growth rate of 35.7 % higher than sellers in only one marketplace.
Cross-border expansion essentially adds market capacity for your business by giving you access to more potential buyers. For example, if you’re crushing it on Amazon US, you can start selling on Amazon EU to expand your market capacity to the European market.
Let’s look at some fundamental steps you’ll need to take in your push for cross-border expansion:
- A feasibility test to determine the viability and demand of your product in the new market
- Check if your product can be sourced within the new market to save you the logistics of shipping from outside
- Learn the basics of tax requirements in each country in your new market
- Optimize your product descriptions, website copy, product images, and marketing materials into the different languages in your new market
- Understand the complexities of selling in the new market, consider: cultural barriers, regulations, exchange fees, and compliance
- Build relationships with vendors and suppliers to help handle logistics in the new market
Lock down your profit margins with SellersFunding
For better or worse, growing pains are part of the game in ecommerce.
As your store grows, you may find yourself at a point where resources are stretched thin, margins are tightening, and you need some extra help in order to keep scaling.
At SellersFunding, we understand the need for owners to have access to fair, flexible ecommerce funding without killing their profit margins with high-interest rates. Our Working Capital and Daily Advance ecommerce funding solutions were specifically designed to help stores like yours bridge the cash flow gaps that often stand in the way of profitable growth.
Check out our free, no-strings-attached demo to learn more.
