Two basic concepts must be controlled for every retail store to succeed in its market: profit margin and conversion ratios. These metrics are related and interdependent, meaning that one should not be prioritized over the other.
In this guide, we will focus on how to improve the profit margin of your product catalog through different factors, such as evaluating expenses as well as scenarios in which we can set higher prices for the products we sell.
Assess your current profit margin
Profit margin is one of the most interesting and used formulas to calculate the profitability of a business, it is used both in brick-and-mortar stores and in e-commerce. The calculation of this metric is simple, you must subtract the cost of acquisition of a product to the income from sale of that same product. With this calculation we will obtain the gross profit margin. This data will give you a relatively accurate approximation of how profitable the products in your online store are. To know exactly if your business transforms income into profit you should calculate the net profit margin. The calculation is made by subtracting the cost of goods sold, operating costs, taxes and debts from the sales profit.
Once you know the result of this process, you will be able to identify areas of improvement in your business. In order to have even more knowledge of the points in which you should invest efforts, studying the competition in your market is an interesting action.
Analyzing the competition is not a simple task, since depending on how vertical you are, you may have a large number of competitors. The use of monitoring tools allows you to speed up and automate the process of tracking rivals, to know at all times your level of price and stock competitiveness against the competition.
Improve your profits
After evaluating the profit margin for your products and observing your position in the market, it is time to take action. The analysis of the competition will help you to identify the strengths and weaknesses of your e-commerce.
For example, if you see that for a product in a certain category (a specific brand for example) your prices are not competitive compared to those of the competition, you will have to renegotiate the purchase price of products with suppliers, since you are at a clear disadvantage.
Reducing operating costs will be a key challenge on the way to achieving a higher profit margin. The easiest costs to adjust are the variable costs that are usually accompanied by the level of production/sales, such as storage at the Amazon warehouse, which is paid according to the cubic meters used per month. Using simpler packaging will significantly reduce your costs in the long term.
Automating actions through software and bots, as in the example of monitoring the competition, will save you considerable time and money that you can invest in improving your store’s departments.
Protect your margin
Even though the initial goal of every business owner is to improve the number of sales or increase the profit margin, it is equally important to safeguard the margin, because without this metric, the business will not be profitable.
In order to avoid lowering prices to a point that is not sustainable, you can use semi-automatic dynamic pricing tools. Thanks to this, you can develop a pricing strategy that is updated according to the evolution of the market and competitors.
In the picture above you can see how the price suggestion indicated by the tool is higher than the price set by the product, therefore, you have a space to increase the price without losing competitiveness, which will significantly increase your profit margins.
The dynamic pricing tool gives you the possibility to establish a pricing strategy according to pre-established rules that take into account the prices of the products for the competition. These rules can range from “I want to be 8 euros cheaper than a specific competitor” to “I want to be 3% cheaper than the cheapest product”. These rules have a positive side: they are subject to a minimum profit margin, so if a competitor has a product price below your minimum threshold, your product will not be updated.
To improve your profit margins -basic metrics for the sustainability of any business- you have to evaluate the performance of your catalog, by product or specific categories, with that of your vertical’s competitors. After analyzing the performance of your products, reducing operational costs related to the storage and distribution of your items will improve your profits.
The bottom line is that you can increase prices or decrease costs. To do this, you can use dynamic pricing tools, which will allow you to identify scenarios where you can increase the selling price of your products and at the same time allow you to safeguard the profit margin.