Supercharge Your E-Commerce Business: A Friendly Guide to Boosting Profits
So, you’ve got your shiny new e-commerce store up and running. You’re selling products you’re passionate about, and customers are starting to trickle in. But, there’s this nagging feeling in the back of your mind – “Am I making enough money?”
Today, we’re diving into one of the trickiest questions that can haunt the dreams of anyone running an online store – Gross Profit. Clear as mud, right? But trust me, it’s super important and can make or break your business. So let’s break it down in a way that’s easy to wrap your mind around.
Gross Profit = Dollars in Your Pocket
A while back, we had a podcast episode where Karen, one of our fellow e-commerce rockstars, shared her cash flow struggles. Sound familiar? She was working tirelessly month after month but felt like she was chasing her own tail, not sure why she wasn’t getting ahead. The answer was simple – not enough Gross Profit.
Now, Gross Profit might sound like jargon, but it’s just a way of saying, “how much actual money are you making after covering your product costs?” If that dollar amount isn’t high enough, it’s like trying to fill a bucket with holes in it.
Many of us start with a product, think, “I’ll sell it for twice what I paid,” but forget about all the other costs lurking in the shadows – Shopify fees, email service providers, advertising expenses, and more. Suddenly, that $5 profit looks more like pocket change.
So, we did a follow-up episode #167 (if you want to check it out) where we ditched all the confusing percentage-based pricing strategies and focused on the cold, hard dollars – Margin Contribution Dollars. Margin Contribution is simply the selling price per unit, minus the variable cost per unit.
Alison’s Journey to Profitability
Our podcast guest, Alison, who runs a successful e-commerce business (and happens to be an e-commerce coach in the Inner Circle,) had the same question many of us have – what’s a good Margin Contribution Dollar target? She’s been in the game, mastered Facebook ads, Google ads, and all the things, but finance still left her scratching her head.
Alison sells all sorts of products on her site, from high-margin socks to lower-margin walkers. Her socks might have a whopping 100% margin, while walkers are hanging out at 25%. But here’s the kicker – the actual dollar profit on walkers might be higher!
So, what’s the magic number? Well, there’s no one-size-fits-all answer, but here’s a trick – set a minimum Margin Contribution Dollar you’re willing to accept for a product. For Alison, it was around $20. If it doesn’t meet that threshold, she’s not interested.
A Bird’s Eye View of Your Finances
Before you start scrambling to redo your entire pricing strategy, take a breath. Instead of drilling down to individual products, focus on the big picture. What’s your monthly run rate? Let’s say it’s $12,000. You need to generate enough Gross Profit to cover that and leave some sweet cash for yourself. How much is up to you.
Get Your Financial House in Order
First things first, you need an income statement every month. Yes, just like clockwork. This is your financial compass, helping you navigate the e-commerce seas.
Some folks out there do their accounting on a “cash basis.” What does that mean? Well, if you receive a massive order of socks, for instance, they expense the whole shebang in that month. You can’t run an e-commerce ship that way. It’s a big no-no.
What you need is “accrual accounting.” Fancy term, but it means your cost of goods is only what you sold that month. This will give you a much clearer picture of your expenses.
If you’re working with a bookkeeper who hasn’t navigated the e-commerce waters before, they might mess up your numbers big time. Imagine them pushing that big order through every invoice. That’s a recipe for disaster, skewing your cost of goods and margins.
So, step one, make sure you’re working with someone who has e-commerce experience. And step two, get that accrued income statement every month. It’s your financial lifeline.
Putting Data to Work: Analyzing Your Sales
Here’s where it gets exciting. Don’t be afraid to get down and dirty with your data. What products are your heroes? Which ones are playing hide and seek? Anything below, say, 10% of your total sales? Well, they might as well be invisible because they’re not making a dent in your profits.
Now, imagine this – you’ve got your sales data in one hand and your expense report in the other. You can see the pieces of the puzzle coming together. You’re not just throwing darts in the dark. You’re making informed decisions based on your business’s unique needs.
The Great Outsourcing Dilemma
But wait! You’ve analyzed your data and your expenses are creeping up. Maybe you’re using a 3PL (Third-Party Logistics) to handle your shipping, or have been paying a Virtual Assistant to manage your social media posts or customer service. Wouldn’t it make sense to bring it all back in house?
It’s tempting…but that move might not be the best for your business.
The truth is, slashing expenses won’t necessarily lead to long-term profitability if it’s going to drain your time and energy. If you have to take a course to understand Quickbooks and it still takes you 3 times longer than it would to hire out your bookkeeping…it’s not worth doing yourself.
If you sell a high price-point item and your buyers expect white glove customer service, is it worth the risk that you won’t be able to answer their questions in a timely manner?
Avoid making knee-jerk reactions to cost-cutting, and take the time to consider your long term profitability. Your focus should be on growing your business, not on menial tasks that someone else could do better and faster.
Overcoming Pricing Paralysis
Have you ever struggled with pricing your products? It’s common, especially in the e-commerce world where competition is fierce. Here’s a secret: Pricing isn’t all about being the cheapest.
Sure, some shoppers hunt for bargains, but others value factors like fast shipping or excellent customer service. Especially in the high-end market, customers are less likely to spend hours comparing prices.
Stop stressing about a couple of bucks and focus on delivering value beyond price tags. Your unique selling propositions, like superior service or unique product features, can be the reason customers choose you over a cheaper competitor.
Facing the Hard Decisions
As your business matures, you’ll need to make some tough calls. Whether it’s discontinuing a product that isn’t performing or parting ways with an underperforming team member, remember: It’s about what’s best for your business’s growth.
Don’t hold onto things that aren’t moving your business forward. Consider the data, analyze the numbers, and make informed decisions. Sometimes, you’ll need to try different approaches a few times before finding what works best.
Crushing Your Debt and Raising Your Profits
If you’re juggling business debt, focus on a plan to pay it off. That debt won’t disappear by itself, but once it’s gone, you can re-allocate those payments to give yourself a nice raise.
Map it out on a spreadsheet: Set a target date for becoming debt-free and visualize that financial freedom. Take responsibility for your financial results and don’t let past mistakes weigh you down. You didn’t know then what you know now, and that’s okay!
Remember, every business has startup costs, and not everything will bring immediate returns. Think of it like making a down payment on a house—it’s an investment in your business’s future.
Don’t Overcomplicate Things
It’s easy to overthink unfamiliar territory, especially when it comes to finances. You don’t need to understand every single detail, but you do need a grasp of the essentials.
Focus on the part that directly impacts your bottom line: making profit. Once you embrace this mindset, you’ll find that financial management becomes more enjoyable and less daunting.
Keep Your Eye on the Prize
Set clear financial goals and track your progress. If you want to pay off debt, give yourself a raise, or boost your profitability, start by visualizing the outcome. Create a plan, and don’t be afraid to adjust it along the way.
So, what’s the next step for your e-commerce business? Keep hustling, stay focused, and watch your profits soar. The struggle is real, but so are the opportunities. Don’t be afraid to dive into your numbers, make data-driven choices, and, most importantly, give yourself a raise when you deserve it!
Find Alison’s website here: www.easeliving.com
Pricing to Maximize Profit: https://thesocialsalesgirls.com/pricing-to-maximize-profit-episode-167/
The Secret To Getting Paid: https://thesocialsalesgirls.com/the-secret-to-getting-paid/
How To Have a Business That Pays You Well: https://thesocialsalesgirls.com/how-to-have-a-business-that-pays-you-well-episode-2/
Ditch Your Decision Fatigue: https://thesocialsalesgirls.com/ditch-your-decision-fatigue-im-giving-you-my-framework-its-brilliant-episode-186
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