Common Mistakes in E-commerce Profitability
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.
The Master Solution for Mario to Grow the E-commerce Business:
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.
The Solution They Opted to Follow:
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.
Learnings:
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.
Calculating Your Margins Correctly
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.
Here’s a step-by-step guide to help you understand the basics of margin calculation:
Understanding Key Terms
- Cost of Goods Sold (COGS): Direct costs of producing or purchasing your products, including factory costs, freight, import duties, and shipping.
- Revenue: The total amount of money received from selling your products.
- Gross Profit: Revenue minus COGS.
- Gross Margin: (Gross Profit / Revenue) x 100%. This percentage indicates the portion of revenue that exceeds COGS.
- Net Profit: Gross Profit minus all other expenses (e.g., marketing, Shopify fees).
- Net Margin: (Net Profit / Revenue) x 100%. This percentage shows the portion of revenue that remains as profit after all expenses are deducted.
If You're Already Operating
f 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're Still in the Planning Phase
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.
Researching Costs
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:
Calculating Cost of Goods Sold (COGS)
Add up all the costs directly associated with producing or importing your products:
- Factory Cost: Cost paid to the manufacturer.
- Freight Costs: Cost of transporting goods from the factory to Australia.
- Import Duties: Taxes and fees associated with importing goods.
- Warehouse Costs: Cost of storing your products.
- Pick and Pack Costs: Cost of picking and packing your products for delivery.
- Shipping Costs: Cost of shipping the product to customers.
Examples:
Let’s assume you sell a product for $100.
- Factory Cost: $30
- Freight Costs: $10
- Import Duties: $5
- Shipping + Warehouse + Pick and Pack Costs: $30
Total COGS: $30 (factory) + $10 (freight) + $5 (import duties) + $30 (shipping) = $75
Calculating Gross Profit and Gross Margin
- Revenue per product: $100
- COGS per product: $75
- Gross Profit: $100 – $75 = $25
- Gross Margin: ($25 / $100) x 100% = 25%
Accounting for Other Expenses
Consider your operating expenses, including fees for platforms like Shopify and costs for digital marketing:
- Shopify Fees: $5 per product sold
- Digital Marketing Agency Fees: $10 per product sold
Calculating Net Profit and Net Margin
- Total Operating Expenses: $5 (Shopify) + $10 (Marketing) = $15
- Net Profit: $25 (Gross Profit) – $15 (Operating Expenses) = $10
Net Margin: ($10 / $100) x 100% = 10% (too low)
Analysing Your Costs
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.
Planning for Growth and Scalability
When planning growth, consider if you can negotiate better rates for warehousing and pick-and-pack services as you scale.
Summary of Steps
- Calculate COGS: Add up all costs directly associated with the product (factory, freight, duties, shipping).
- Determine Gross Profit: Subtract COGS from Revenue.
- Compute Gross Margin: Divide Gross Profit by Revenue and multiply by 100 to get a percentage.
- Account for Other Expenses: Include all operational expenses like platform fees and marketing costs.
- Calculate Net Profit: Subtract all operating expenses from Gross Profit.
- Compute Net Margin: Divide Net Profit by Revenue and multiply by 100 to get a percentage.
Conclusion
- Regularly Review Costs: Prices for shipping, duties, and even manufacturing can change, so regularly update your calculations.
- Include All Expenses: Don’t forget to include recurring costs like subscription fees for Shopify or monthly retainers for your digital marketing agency.
- Monitor Marketing ROI: Ensure that the money spent on marketing leads to sufficient sales to cover those costs and still leave a profit.
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.