#3 How To Make Over 30% NET Margin Online
As an eCommerce business, it can be challenging to stay profitable whilst growing, particularly in a crowded market. You may well have settled into the concept that a 10% net margin, maybe less, is adequate. 6% is around the average net return across the entire business spectrum, therefore you may have come to consider anything over this acceptable. In the eCommerce industry, however, I don’t personally believe that anything under 20% is sustainable and in fact we target 30% and above in our businesses and for our partners. In my experience, the most successful online companies generally follow the 30/30/30 pattern. That is 30% cost of goods, 30% operating costs, and 30% profit…with a 10% contingency that could go to any one of those. In this newsletter, I’ll share 6 ways you can do this in your own business. Don’t Think Your Primary Channel Is Your Only Channel You will likely have gotten used to one channel with which you’re familiar and comfortable, however, it is likely that you’ve been selling via that channel for so long that your pricing is deeply ingrained. This is especially true for those of you selling via more rigid price platforms such as Amazon’s vendor program or Wayfair for example where pricing is a negotiation. As a result, you may also have become equally comfortable with an unexciting profit margin, particularly post-covid. But why? Did you start your own company to earn just as much as with a regular job? Or was it inspired by the idea of exponential profit and personal earnings? The only way out is to renegotiate or reset pricing, or to diversify to more profitable channels, markets and countries. The latter is far more realistic with more established relationships and products. There is so much to go at out there, and with Amazon only holding 38% eCommerce market share (which I happen to think has peaked) that leaves 62% of those sales taking place elsewhere. Find out where, and research them. Fix That Startup Pricing We all do it. When we start in business we really don’t know what works and what doesn’t. Pricing is the biggest one of these. The gut instinct for most of us is to set a cost-plus pricing policy, often driven by our own views of what the market will pay. I have seen brands launch with prices as low as cost+50% because they believed they would be exchanging margin for volume. We should always look at what the market will stand for, not what we think it will pay. Our own assumptions of ‘greed’ or ‘market expectations’ do not belong in this scenario. Capitalism keeps our society functioning, and so long as we are providing quality and value, we reserve the right to charge whatever we like. This often works in the beginning, because there is just a founder and no overheads but as soon as we start bringing in employees, software, overheads and expenses, this usually breaks down and it becomes a loss-making exercise on otherwise fantastic product lines! This has to be addressed quickly, and it is time to renegotiate pricing where possible. If that’s not possible, you can try what we call a ‘re-SKU’ where you relaunch the same SKU under a new barcode/SKU code with some fresh imagery. And failing that, it’s time to channel and market diversify. As a rule of thumb, start with the ‘landed cost’ (raw cost+freight) and multiply it by 5 to give an indication of a reasonably profitable RRP. From there you can tweak up or down to fit a price point and ultimately prove the viability of the line. If this formula doesn’t work, find a product on which it does. With this, you can build a simple pricing matrix with discounts for each retailer or channel and be confident in what effect that will have on your bottom line. Watch The Hidden Costs Many of today’s marketplaces come with a diverse amount of hidden costs after the sale. Some are obvious, such as Amazon’s selling fees or Shopify’s transactional percentage, however, many hit you like a steam train when it’s too late, and, worse still many are hidden completely. Look out for chargebacks, storage penalties, settlement discounts, returns allowances and so on. I’ve seen these amount to as much as 25% on one particular channel which was yielding our furniture partner a -12% net profit by the time we uncovered it! The devil really is in the detail, and many of these charges have become a very crafty way for retailers and marketplaces to claw back a better price from you. I would advise spending a day going through these on a per-channel basis for every channel you sell across, and then devising a strategy for correction. Stand Out It is obvious, and it’s easy to say but to command higher prices and more margin you need to differentiate. Difficult, because most things are already being sold in a similar way, in a similar place. But standing out does not necessarily mean in terms of product. It could be a better copy, better imagery and video assets. It could be the brand story, focussing on origins, sustainability or end-use cases. You have to get creative here. What can you develop in your product strategy that allows us to charge more and stand out? It’s well to note that I have even seen brands do incredibly well pricing a similar product way higher than competitors. It can create a perception of being different, can appeal to a higher market demographic and can then have this virtuous circle of allowing more money to perpetuate ad spend. Magic. Do what you need to do to stand out, and that may include WHERE you sell your product. There are probably outlets much less crowded where you can quietly scoop sales, we see this epiphany occur almost every day at Vanquish. The big fish in a little pond, or the little fish in a big pod, hmm I’m on the fence on this one when it comes to online retail. Think about that a little. Remember though, ultimately you must try not to “think on the competitive plane”, as the great Wallace D Wattles said. There is more than plenty out there for everyone, so you must focus on yourself and your brand and the rest will follow. Pair Back I found out the hard way that less is definitely more in a product business. As my first eCommerce business began to flourish, I expanded the range at any opportunity. Anything that I liked, I wanted to sell it. I figured, as do most, that the more products we can offer the faster we will grow. I was catastrophically wrong at the cost of that business, but that’s another story. What happened was that we were running out of everything, because we didn’t have the cashflow to support all of these products. We were therefore probably running at a 50% or less in-stock rate across the board at any time. In eCommerce, there is a curious thing called sales velocity. When you’re out of stock, you reset the system and have to start over again from varying positions…a little like snakes & ladders.
But when you’re in stock, you’re allowing the algorithms across all mediums to ‘find the ceiling’. Only when you do that can you truly understand the true potential of a product. Furthermore, it is almost always better to sell more of the same product across more channels than it is to sell more products across the same channel. You create economies of scale from a purchasing, stocking and resale perspective that naturally facilitate better operations and bigger margins.
You should painstakingly analyse each SKU and brutally pair back to the very best and most profitable.
Then find their ceiling.
When you’ve done that, look for more places to sell them.
And only when you’ve exhausted that, look for new lines.
And remember, more places also mean more countries. NB/ I built Maine Home to £10M in its first 2 years with just 6 SKUs. Drop me a line if you want to see some links to those products and a deeper explanation of how I did that. Build A Simpler Model We tend to follow the crowd, it is what we do as humans. You can assume then, that whatever ‘everyone else’ is doing is likely to be the wrong thing. The truth is not in the majority, it's almost always in the minority. Most startup and growth phase eCommerce companies, therefore, follow a similar model and business structure in order to succeed. There IS a much simpler way to structure an eCommerce business to make exponentially more profit and I’m a firm believer that that should be implemented first before driving aggressive growth. Any golfers out there (I almost qualified for The Open in 2000 but that’s another story too) will recognise the old adage…” Drive for show, Putt for dough”, you business types will know it as “Turnover is Vanity, Profit is Sanity”. There are lots of consultancies and accelerators that offer unique solutions to this profit problem. You might want to check out Pattern’s turnkey model, or Spreetail’s similar one, both great companies with a high scale solution. At Vanquish it’s our proprietary ‘MultiChannel Pyramid Framework’ but selling is not what this weekly slot is about, and there's plenty about what we do online. In summary, I don’t want you to believe the hype that “competition prevents high margins”, “global expansion is hard” or “nothing beats Amazon”. I want you to know that there is a better way and that you can build an online business that returns a disproportionate amount of profit. I wish you luck on your journey, and I hope some of this sticks! ___________________________________________________________________ I hope you’ve enjoyed this week’s newsletter, and that it resonates somehow. I share as much content as I possibly can on the topics of multichannel, and global eCommerce. I don’t think there is a better vehicle for wealth than eCommerce, and I love to talk about it. My goal is to help online entrepreneurs avoid the roller coaster of success and failure that I endured on my own journey to building and exiting several 8 figure brands over the last 20 years through the expertise and experiences I share. If you fit our very specific criteria, we may also be able to help you through our accelerator programs or shared success partnerships. Either way, there’s tons more value over here → www.vanquishcommerce.com