How to Set Healthy Ecommerce Margins

Written by
Published on
May 25, 2016

If you fail to carefully track profit margins, the success of your online store could be short lived. Remember the saying, “It doesn’t matter how much you make, it matters how much you keep.” Knowing which products generate large and small profit margins is critical to ecommerce growth and sustainability. It also helps you decide where to focus resources for growth, where to cut prices and increase ad spend. The average ecommerce gross margin is approximately 40%. But every online store is different. It’s important to analyze your profit margins and determine strategies for improvement.

Fixing Low Margin Products

It's okay to have low margin products. It is not okay to be unaware of the lack of profit those items are generating for your store. First, make sure you know the margins of each of your products. Second, use these tips to increase your profitability.

1. Cut production costs. Find exactly where your nickels and dimes are going into producing the product. Then negotiate with your vendors or find a new vendor who is willing to produce for less. No one wants to cheapen a product, but see if you can find materials that don't trade value for quality.

2. Bundle low margin items with high margin items. Think of how Amazon markets their "Add On" items. These are items that are not profitable when shipping them alone, but can be bundled with other items to make shipping and handling profitable.

3. Raise the price. Simple! If a product isn't earning you money, raise the price. The old adage of "It's a business, not a charity" holds true.

4. Discontinue the product. Finally, when all other strategies are exhausted you should consider cutting this product.

Checklist for Fixing Low Margin Items

Maximizing High Margin Products

Treat your high margin products the same way you would your best sellers. Here are some ways to maximize your high margin products and get them infront of your customers.

1. Increase marketing spend. Put high margin items front and center in customer emails, ad campaigns and remarketing efforts

2. Implement cross-sell strategies.

  • Cross-sell high margin products when buyer is checking out with a low margin item.
  • Bundle high and low margin items together in a package that makes sense.

3. Ensure prominent website presence. Give your high margin winners front and center space on home and landing pages

4. Consider adding products similar to high margin offerings. Add variations of high margin products such as different designs, colors or sizes.

Checklist for Maximizing High Margin Products
What are some products with an amazing profit margin? Product Markup Furniture 400% Designer jeans 650% Skin care products 300% HDMI Cable 1,900% Phone Charger 672% Eyeglass frames 1,329% Source

Both Low and High Margin Products

Margin analysis should be an ongoing activity as costs, pricing and competition continually shift. estimates 20% of online prices change daily on competitive products. To ensure your margins stay healthy, realize you can only go so far when competing on price. Make sure you also compete based on the value you provide shoppers in the form of product quality and customer service.

Resources to Help Guide Your Profit Margins

For a quick look, you can use this handy profit margin calculator offered by our integration partner Shopify. Check Google Trends or Google Shopping Insight to determine if there are specific products trending in those categories.

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