A Complete Guide to Profit Margin & Its Importance For Online Business!
Running an eCommerce business is challenging because of the immense competition in this field. It is hard to survive if you are not following the guidelines and are unaware of this business’s various dimensions. The latest research suggests that only 25% of eCommerce businesses survive, so managing every aspect of online business is crucial. To know the growth graph of your online business, it is essential to calculate your profit margin ratio.
To know the actual position of your business, it is imperative to know how much profit you are making from it. Running a business blindly can become the most prominent reason for business failure.
If you are new to this eCommerce business, you may find it much more challenging to manage your finances and calculate your profit margin. However, accounting software for eCommerce can help you manage your accounts efficiently, and once you can manage your finances properly, it will become much easier for you to know your profit margin. In this blog, we will mention what profit margin is and why it is vital for your eCommerce business.
What is Profit Margin?
A profit margin is a figure that is retained after deducting various expenses. In simple terms, we can say that, after selling your products successfully, what revenue you generate by selling one individual product category is known as the profit margin. A higher profit margin ratio indicates your eCommerce business’s good financial health. There are three significant types of profit margins that we are going to mention in the following points.
Gross Profit Margin
Gross profit margin usually refers to profit on a specific product or service rather than the entire online business. Analyzing the gross profit margin can help you determine the pricing strategy because a low gross profit margin means you need to bring changes to a specific product to make it worthwhile.
To calculate your gross margin profit, you need to subtract the price of products sold from net sales, divide the outcome figure by the net sales and get the ratio; you will get the gross margin profit in the form of a percentage. The formula is; [Total revenue-COGS]/Total revenue(x100). It can help you to bring changes in the pricing of your products.
Operating Profit Margin
The operating profit margin indicates how much the profit ratio you attain after spending money on some of the indirect expenses to run your business. It is generally calculated by dividing the operating profit by the total amount of revenue. Comparing the operating profit margin with the gross profit margin considers a range of other operating expenses such as warehouse rent, shipping charges, eCommerce platform fees, etc.
Most sellers don’t calculate the operating profit margin with the other expenses. Still, the collective calculation of such expenses can provide you with a clear insight into your business’s profit, and you might get to know how these expenses affect the profit of your online business.
Net Profit Margin
Net profit margin basically showcases the exact profit of the business after subtracting all the other expenses, including the cost of products sold, operating costs, and other expenses and taxes. Net profit margin gives you an idea about the overall success of your eCommerce business. If you acquire a higher margin rate, it indicates that your business is doing well.
If it’s not, it can be a matter of concern for you, and you must work on it religiously. On the other hand, you can also use the net profit margin to compare your business performance with your competitors as well. The net profit margin is the exact revenue of your business, and you must have clarity on it. In calculating your net profit margin, it is essential to manage your finances first; for that, you can use accounting software for eCommerce.
How to Increase Your Profit Margin?
Cut Down Your Operating Expenses
To increase your profit margin, it is best to minimize the costs of your operational expenses. However, knowing what you need to cut down on your operating expenses is quite challenging. It can be tricky because there are various essential expenses you can not reduce, such as several fees, charges, and taxes.
To successfully reduce operating expenses, you need to analyze your business operating expenses closely; only then can you decide what you can cut down and what not. Instead of taking first-hand services, you can optimize and outsource them successfully.
Hike up Your Product Price
Generally, eCommerce sellers have this fear that if they raise their product prices, they might lose their essential customers, or their customers may abandon them. However, if you provide a pleasant shopping experience to your customers and they are already happy with your product, you can increase your product prices.
We are not saying that it will be easy for you; you need to use some psychological marketing tactics. For example, if you are selling a single product for Rs.150, it will be great to sell a combo product at Rs. 200. It can be a great idea to increase your product by selling one item at an average price and one at an increment price. Such a tactic can help you attract more customers as they might think they are getting a good deal. This practice can help in increasing your profit margin immensely.
Increase The Customers’ Trust
Whether you believe it or not, you need to understand the fact that the trust of the customer is everything you require to run your eCommerce business and increase your profit margin rate.
As an eCommerce seller, gaining the customer’s trust is essential. Now the question is, how will you do that? Well, in this regard, an enormous number of reviews on your product page can help you with it. Positive feedback or reviews have the impeccable power that develops trust in your potential customers and makes them invest in your products.
Increase Your Average Order Value
It is vital to increase your profit margin to increase your average order value(AOV). If you are unaware of the average order value, you need to know that AOV is the average amount a customer contributes per transaction in your online store. To calculate your average order value, you need to use a simple formula; Divide the total revenue by a total number of orders, and the outcome you will get is your average order value.
As an online seller, you can receive higher profit margins by increasing your AOV, and to increase your AOV, and you may require forcing your customers to spend less money. You can offer them free shipping on any exact order amount. You can implement upsell and cross-sale and offer them a complementary product along with any specific product they want to buy.
Hence, these are some of the ideal ways that help you to increase your profit margin. In the points mentioned above, you might have understood why it is essential to know about the ratio of your profit margin graph. Now, undoubtedly, we can say that enhancing profit margins is a profitable strategy for your eCommerce business.
A higher profit margin can make your business stand out from the competition and make it sustainable for longer. It doesn’t matter how new or old your eCommerce business is, you must know about your profit margin and manage your finances accurately. In this regard, you can use eVanik OWS’s help for compelling management of your accounts.