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December 18, 2024
As consultants, we’ve observed that one of the most common mistakes entrepreneurs make when starting an online business is not properly understanding profitability.
Having a great idea, the money and the drive to invest in an e-commerce are crucial for pursuing your dream, but understanding profitability is essential for building a successful business. Many businesses just break even and don’t make any money because owners set their margins too thin, leaving no room for sustainable growth and scaling.
Changing your prices after you start selling can also be problematic. Starting too cheap and raising prices later may deter customers, as they have already set an expectation of your product’s value. Conversely, starting too expensive and then lowering prices can make customers feel deceived.
Planning correctly before launching your online business is key to success. Spending time on pricing and planning might seem complicated, but it is crucial for ensuring profitability. If you have an e-commerce and feel the revenue is not enough, you’re are selling however not making money.
We advised them to streamline operations; stop focusing on what they wanted to sell, lower their expenses, reduce SKU, and focus on higher-margin products.
Unfortunately, they decided not to follow through and didn’t streamline his financial plan and expenses. As a result, they had to close the business several months later.
When you are too attached to your initial investments and blindsided by the numbers, you may struggle to decide where to invest in your business. This can lead to continued spending on areas that don’t generate a return, on the contrary, chew your money.
Learning from these successful stories and some other stories that we call as lesson stories, help us to understand where to go and how to go. We don’t have to go through the same struggles that some other business owners went through.
To be able to plan correctly we share with you the basics steps you must follow.
To calculate your margins correctly, especially for an e-commerce business (assuming you are importing products to Australia), you need to consider all your costs and revenue and have it planned and leave some extra to hidden costs.
If you’ve started testing your products and selling on marketplaces or Instagram, you should have an idea of your main costs. You should also understand your marketing, target audience, and whether they are willing to pay your prices.
If you have an idea for your business but haven’t started selling yet, put your idea on paper and conduct extensive benchmarking. Research competitors’ products, reviews, and customers to get a clear idea of your potential client base.
Research all the costs involved to plan how much revenue you need to cover your costs and understand your margins. Here’s how to calculate your margins:
Add up all the costs directly associated with producing or importing your products:
Total COGS: $30 (factory) + $10 (freight) + $5 (import duties) + $30 (shipping) = $75
Consider your operating expenses, including fees for platforms like Shopify and costs for digital marketing:
Net Margin: ($10 / $100) x 100% = 10% (too low)
If you find your margins are too low, consider ways to reduce costs or increase prices. For example, negotiate better rates with suppliers or optimise your shipping processes.
Understand what products you can raise the margin and still remain competitive.
When planning growth, consider if you can negotiate better rates for warehousing and pick-and-pack services as you scale.
By following these steps, you’ll be able to accurately calculate your margins and make informed decisions to ensure the profitability of your e-commerce business.
If you’re still struggling to break through the ceiling despite optimising your costs, operating effectively, and generating revenue, but haven’t yet reached the 7 to 8-figures milestone you’ve always dreamed of, it’s possible to achieve it. Contact us now and book a free Discovery Call. We can help you achieve your goals.