You start your e-commerce business with much hope of making good sales. But in a business, it doesn’t matter how high your sales figure is if your profit margins aren’t good enough. You have to calculate the gross profit margins for your online store to gauge how well you have fared and how far you can go.
Why calculate the gross profit margin for your e-commerce business?
You can grow your business if it is profitable. Calculating gross profit margin gives you a clear picture of the revenue you retain after accounting for the costs of products sold. In layman terms, it tells you how much money you make when you sell a product. It is a good method of determining the profitability of your e-commerce firm.
How to calculate gross margin profit for an e-commerce business?
When you start your e-commerce business, the gross profit margin helps you to assess the viability of the business. It measures the profit you generate on each item you sell.
Gross profit margin = [(Total revenues earned – cost of the sold goods) / Total revenue] *100
But the gross profit margin does not give you the whole picture. It does not take into account the operating costs such as shipping costs, labor, marketing, equipment, or rent. So, a better profit indicator would be the operating profit margins.
Net income = Total revenue earned - total expenses incurred
Net profit margin = (Net income / Total revenue earned) *100
What is the gross profit margin for e-commerce businesses?
The gross profit margin is different across varied online business verticals. But most e-commerce businesses operate with a gross profit margin of 20% to 50%. Many of the online retailers prefer to have a high sales volume and a lean gross profit margin of around 20%. Some of the niche online businesses that are monopolistic in nature target the high end of the market. These have low volumes but higher profit margins of about 50%. So, the gross profit margin for your business depends on the product and your target audience.
The table below shows the gross profit margin for some of the categories of online businesses as per Statista.
Gross Profit Margin For Online Businesses
Note that the profit margin is highest for classified ads such as Zillow, Autohome, eBay, and Scout24 at 61%. These online directories sell services and they have no expenditures such as warehouse, packaging, or shipping. Most of their expenses are in marketing and promotion.
The next category that has a good profit margin of 50% is the online travel segment. Here also, it is a service-based segment and they can make profits by selling niche products such as personalized tours. But the competition is fierce and they have to offer huge discounts to attract customers. This eats into their profit margin and the best way out is to increase customers and in turn, increase sales.
Large e-commerce giants such as Amazon, and Alibaba enjoy around 48% profit margins. These companies make huge money through selling retail products and through third-party retail sellers. Amazon and Alibaba enjoy multi-channel fulfillment by storing, packing, and shipping products for buyers.
Online marketplaces such as Delivery Hero, Takeaway, and Just Eat are again service-based ventures and they make profits through commissions. Their profit margin stands at around 42%. Again the competition in this segment is tough and they tend to spend a lot of offers for uses and promotions.
The e-commerce sector, in general, makes around 42% gross margin profits.
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How to improve the gross profit margin for your e-commerce business?
Let’s see what the key variables are that come into play while calculating the gross margin-
Price of the product
Sourcing of products
Merchandising and promotion
You can improve the gross profit margin by
1.Competing on price
To start your e-commerce business is easy. It requires lower capital and less overhead costs. But it comes with a downside too. The competition is fierce online and when you have many players in the online segment, you try to get better by offering discounts and offers. Today’s buyers find competitive prices easily through the internet. They compare the prices online with the brick-and-mortar stores. It is so challenging that the price of competitive products keeps fluctuating by at least 20% every day. But you have solutions for it.
Acquire new customers
Create positive customer experiences
Negotiate with vendors
Reduce shipping costs
Reduce warehousing costs.
Lowering your product-related expenses like acquiring cost, storage & shipping costs will help you offer the product at a discounted rate to the buyers. You acquire new customers and sell more. But pay heed to create positive customer experiences because even new customers search for competitive pricing everywhere when they buy the product for the second time. You cannot be complacent and sit back after acquiring new customers. You have to provide personalized services to retain them so that they make a purchase again.
2.Competing on value
The value proposition is by showing the work behind the increased cost of the products. Here, the common ways to improve value is by-
Improving the product
Upgrading the package
Better marketing of products
Expanding the product range
Product upselling, cross-selling, bundling, and threshold selling
Increasing the average order value of customers is not an easy task. Established brands can take the liberty of increasing the product price because they have achieved brand loyalty and trust among customers. Startups and small businesses have to build their way up by offering good customer services, adding value to the products, and better marketing to establish themselves as a brand.
It is easy to start your e-commerce business but growing it requires an incredible amount of hard work and good understanding of how to improve the gross profit margins. It is a steep learning curve that you get used to with time.
Grow your business by offering personalized services to customers. For instance, providing your customers with a dedicated shopping app will help you serve them better. You can now easily build a mobile app from your existing e-commerce website with Swipecart It utilizes a powerful mobile app builder tool to design apps complete with engaging product pages, varied payment options, and social platform integration. The better service you provide to customers, the more purchases they make and this, in turn, helps to grow your business manifold.