If you are not running a profit and are thinking about quitting, then please read through article as I go through 10 steps to turnaround your unprofitable eCommerce store. While this will not be easy, it is possible if you take a systemic and structured approach.
The mathematics behind the profitability of a store is much easier than actually addressing any fundamental problems with your business.
There are a few key attributes that make up your revenue which is generally defined as:
Revenue = Number of Visitors * Conversion Rate (%) * Average Order Value ($)
So, you can increase your revenue by improving any of these three important metrics.
We will be diving into how to improve 10 key profitability criteria and give you some ideas about how to improve them. Identify which 2-3 of these are your biggest opportunity and focus your efforts there.
Last though before we begin – if you honestly want to turnaround your unprofitable eCommerce store then you will have to make some hard decisions – this might be firing employees, downgrading your pretty packaging, uninstalling plugins that might be required for your future but not right now.
It is much easier and more mentally comfortable in growing a profitable store then pouring more and more money into an unproven idea.
That’s enough introduction, let’s begin.
Table of Contents
Is your product range popular?
Are you selling large quantities with low marketing spend?
Do your products have a high profit margin?
Is the supplier of your products dependible so you don’t need to keep large quantities in stock at any point in time?
Can you upsell and cross sell to higher end product options and accessories?
Do you have a high return rate?
Can your ideal customer buy over and over again?
These are just a few questions to get your brain going. Picking the right product range is core to your business. It isn’t something that needs to be perfected straight away, but you should always be thinking about what is the next stage in the product range – whether that is Product 2.0, new accessories, or how to reduce the cost of goods through innovation in manufacturing or logistics.
If any of your product lines are unprofitable – then they are an easy decision to cut. Plenty of companies run unprofitable product lines to get customers in the door. But if your entire store is unprofitable then this is not a strategy that is working for you. They have to go.
What about complex products that require a lot of customer service? This can be a good moat to prevent competition for entering your business, but they also require ongoing costs for months or years post purchase.
Step one for this process is to review your product range with a fine tooth comb, both in terms of black and white accounting but also more long term strategic benefits.
An easy way to increase your profitability is to increase your prices.
- If your product costs $100 to produce, ship, and advertise and you sell it for $200, then you have a $100 of profit per sale.
- If you increase that sales price to $300, then your profit goes up to $200 per sale.
Of course, the number of sales you generate might drop, and even drop significantly. But unless the number of sales drops by a larger percentage than the percent increase in profit, then you might end up ahead.
Testing your pricing is certainly something you should test. Selling a high end, luxury product can even attract more attention.
Certain products are more price sensitive than others. For example, if you are re-selling a branded product that the customer can buy elsewhere, then you are forced to stick with a similar price.
But if your product is unique, and adds significant benefit to your customers life or business, then you can potentially increase the price without observing a drop in sales.
Action – Conduct an analysis of the prices of your competitors and whether there is an opportunity to increase your prices without substantially reducing your sales.
If there is a potential opportunity then take the plunge and test increasing your prices.
The profit margins of your products can be seperated into two categories – gross and net.
Gross profits are how much profit is built into your product sales price minus the cost of goods. Increasing this profit margin is always important but might not be strategically wise. If you can cut $1 from your cost of goods you can either bank that profit per sale or you can reduce the price of your products and get more sales – this of course depends on how price sensitive your customer base is.
The other metric is net profit which includes all of your other costs – salaries, warehousing, internet, printer paper, etc. You have a lot of control over your costs – more than you expect.
A streamlined business should always be looking at cutting costs. Do you need all of these Saas apps that nobody uses? Can you buy your packing boxes somewhere else for less? Can you negotiate better shipping prices with your logistics company.
Business owners often think about expenses in terms of growth. But I really believe you can grow your revenue without needing to spend money upfront.
Keep a close eye on your expenses monthly. My advice is to review your profit-loss statement monthly and go through every line item. Anything that is not essential to your current goals should go. After 6 months of this you will have made a substantial cut to your expenses and an improvement to your profitability.
The amount of cash you have locked up in inventory can often paralyse a growing company. As your revenue grows you need more inventory but don’t have the cash to pay for it. This often leads business owners down the path of getting business loans that end up hurting their cashflow position.
Getting financing is a great way to increase your growth rate, but there is nothing wrong with growing at a sustainable rate that your cash position can afford.
As easy way to burn through your cash is marketing. It is so easy to get distracted by the latest and greatest digital marketing tool, app, or service. Whether that is PPC, SEO, SMS, or any other three letter acronym.
The biggest problem I have found with marketing is attribution. All marketing platforms try to give themselves the highest attribution of sales that they possibly can. This gives a false impression that you can never reduce your marketing spend because they bring in so much revenue. If they bring in so much revenue then why is your store unprofitable?
It is certainly worth testing this claim – if you turn off your marketing do you still get some sales? You will, and those sales will be significantly more profitable per sale.
Personally I would prefer a business that sells 100 units at 20% profit margin rather than 400 units at 5% profit margin.
Return on Ad Spend
Return on ad spend (ROAS) should be one of your most closely monitored metric. The difference between a ROAS of 100% and 200% can be the difference between an unprofitable store and an extremely profitable store. And the difference in the backend of the ad platform might just be a few clicks of the mouse.
ROAS can be defined as how much return in revenue do you get per dollar of marketing costs. So a ROAS of 200% means that for every $1 in marketing costs you get $2 in revenue. By the time you include gross margin and net margin then you might actually need to be achieving a much higher ROAS than you initially expect.
You also need to take into account the lifetime value of your customers. If a customer averages 3 purchases from your store then you can afford to lose money or breakeven on the first purchase.
Conversion Rate Optimization
One of the best ways to increase revenue and profitability is through conversion rate optimization. This is defined as the number of sales you get 100 visitors. Generally most ecommerce stores achieve 1-3% conversion rate depending on their source of traffic and how expensive their products are.
The most expensive the product the more research a customer will do before making a purchase.
If you can get double the conversion rate this means you can double your revenue with the same number of visitors, marketing spend, and fixed costs.
It also gives a much better user experience. If you have a conversion rate of less than 1% then I would dedicate the next few weeks to learning everything you can about conversion rate optimization. This does not always meaning changing the color of your ‘buy button,’ but the most significant wins are around your product photography, pricing, and messaging.
Shipping costs can be one of your largest expenses, particularly if you are giving away free shipping as a marketing tool. Negotiating with your current shipping logistics company is always worth attempting, but might require you to be a large enough size to be worth their time.
There are always new players coming onto the logistics scene who might offer discounted rates.
A word of warning, if you go with the absolute bottom line cheapest shipping provider then you might need to deal with more customer complaints from lost or slow delivery.
There is nothing more depressing than a customer returning a product. This has become the new norm as customers have been given exceptional return policies from companies like Amazon.
Making sure you are accurate in your packing, use plenty of bubble wrap, quality control, and using reputable shipping companies is key to reducing your return rate.
Returns are a direct expense that you should be doing everything practical to avoid.
Return Customer Rate
On the opposite side of the coin, there is nothing so good as a returning customer. The marketing cost of a returning customer is five times lower than that of attracting a new customer.
They are your biggest promoters, they buy the most products, they understand your brand, and they already like you.
If there is one thing I have not spend enough time on that I should have it is focusing on return customer rate.
If your returning customer rate is low then you need to have a profitable marketing spend on your initial purchase – which makes everything more expensive and more difficult.
Work on post purchase email marketing, brochures and flyers in your product packaging, offering products that lend themselves to accessories or replacement items.
Another option is to consider expanding (or contracting) your product distribution. Sales Channels like Amazon and eBay are a great way to get your products in front of their pre-existing audience, but they do take a fair chunk of your revenue in fees.
The comparison is with your own store – the fees you pay there are your marketing channels. Before you start adding or cutting, take a comparison of the costs for each channel:
- Your Website = Monthly Fees + Credit Card Fees + Marketing Costs
- Amazon = Monthly Fees + % of Revenue
- Offline = Restocking Fee + Postage to Location
Sometimes we get stuck only thinking about the online options, but if you are serious about turning around your unprofitable eCommerce store you might want to consider some offline distribution options.
Here are a few options:
- Local markets
- Brick and mortar retail stores
- Big brand outlets
This could be the beginning of pivoting towards wholesale. If your skills are more towards product creation then you might be better off getting other people to do the sales and marketing.
That brings me to the end of this article. Honestly, the guide of turning around an unprofitable ecommerce store could be an entire book or an online course. The real secret is to take these ingredients and apply them in a systematic way.
You will need to make hard choices and potentially pivot the direction of your business. But an early pivot is preferable to a long, slow decline.
Treat this as an exercise or a game. It is hard not to be emotionally invested in your creation, but when it comes to cutting costs you may need to let go of some of your best ideas.
If you have any questions or suggestions please leave a comment below so that we can all add to the wisdom of the online entrepreneur community.