You put in the hours, have your business plan and orders are now starting to come through your website, Etsy store or Amazon.
Business is good. Or at least you feel that it should be. But you’re still feeling the pinch.
Online retailers and web-based businesses are susceptible to letting costs eat away at profit margins. Fortunately, this isn’t a death sentence for your company. With a little discipline and planning, you can increase profitability and prepare to scale your operations. And with the rights tools, like PitneyShip shipping software, you can make it a little easier to manage, while saving money, too.
Reap the rewards by following these 6 cost reduction strategies to increase your online business’s profitability
1. Address the cost management problem
The first step in getting more profit back into your company’s pockets is figuring out where the money is going. Cost management issues are rarely the result of a few big transactions. Rather, they stem from smaller repeat transactions that are not kept in check.
Follow the path a customer would take to discover, decide upon, and buy your product. How much money do you spend to get them to click “Confirm Order”? You may discover a few surprises when it comes to costs ranging from bad bookkeeping to excessive shipping costs.
Once you figure out where your money is disappearing, you can then address and reduce these expenses.
2. Eliminate bad pricing strategies to improve eCommerce profit margins
Never undervalue your product. There’s no point in selling something if the price undercuts your ability to make a profit and put money back into your venture.
Many businessowners fear that by having a comfortable profit margin the reduction in total sales will outweigh the additional revenue. If what you sell is within the price range of similar products, and your focus is on quality, being the “cheapest” product out there is doing a disservice to your online business.
Don’t overvalue your product, either. There’s a difference between a healthy profit margin and aggressively trying to cover all your business costs at once.
Put yourself in your customer’s shoes: Would you pay the price you’re charging for your product?
- Cost of Goods Sold: Also referred to as the cost of sales, this is the combination of all costs involved in selling a product such as the costs for raw materials, overhead costs like rent, utilities and equipment and labor costs
- Gross Profit Margin: This is the amount of money left over after deducting the cost of goods sold. Slim gross profit margins are a sign that you’re underpricing your products.
- Net Profit Margin: Referred to as the bottom line, this is what will be left in your pocket at the end of the day after deducting taxes and remaining expenses from the gross profit margin.
3. Free shipping isn’t really “free”
Another pain point that eats away at eCommerce profit margins is free shipping. In many ways, it’s a necessary evil. Study after study has shown that customers dislike paying for shipping. That doesn’t mean you should be left footing the bill.
Don’t fall for the trap other online retailers create for themselves by trying to please customers at all costs. Any good free shipping strategy requires planning. Set limits for free shipping. Include a minimum order amount to qualify or limit the offer to products that are profitable.
Build the shipping costs into your offers and classify them as a cost of goods sold. A postage software like PitneyShip can help you determine and track your shipping costs, allowing you to better understand what it costs to ship an order.
4. Don’t overpay for shipping either!
Although many online shoppers will choose 1-day delivery if the price is right (as in, free), a report by Pitney Bowes shows that 75% choose free shipping over fast shipping.
So what’s the use in overspending on delivery costs to have something overnighted if your customers wouldn’t pay for it in the first place. Instead, give your customers options to choose from. Have a free option that will take a bit longer to arrive and faster options with additional fees.
One of the best ways to manage these different options and keep costs down in the process is to use online shipping software like PitneyShip. These types of solutions allow you to compare postage rates for each delivery situation and quickly choose the best option at the best price.
5. Keep business and pleasure separate
It’s not uncommon for entrepreneurs to use a personal account for their company’s finances. That doesn’t make the practice a sustainable one for your online business.
In order to look at your business as an investment, you need to keep your finances separated. This prevents you from using company money to pay for personal expenses or cutting into profits you can reinvest. It will instill discipline in your business practices and force you to make smarter financial decisions.
6. Reinvest in your business
A business can only grow by reinvesting into it. However, many entrepreneurs never take the necessary steps to ensure that a percentage of their profit margins go back into the products and activities that make their companies successful.
If you’re hesitating about what you feel might benefit your business, something to consider is time.
As an entrepreneur, you may feel the need to be hands-on with everything in your company. However, successful business owners know where to focus their energies: the tasks that help generate revenue. Hiring employees or investing in equipment can help free up time so that you can concentrate on what matters most.
Discipline reaps rewards
You have a great product and a growing customer base. Now is the time to tighten your operations and use these expense-saving tips consistently by incorporating them into your day-to-day operations.