When it comes to your Shopify store’s profits, you don’t want to leave anything up to chance. Especially when there are tried-and-tested ways to increase your profits, without even having to raise your prices and risk alienating your customers.
What are profits?
Profits are the amount of money that you’ve made in your Shopify store after deducting your expenses from your revenue.
Profit = Revenue – Expenses
That’s the simplistic view, however, because in reality there are a number of different types of profit, such as net profit and gross profit.
Gross profit is total revenue less cost of goods sold (COGS), while net profit is total revenue minus total expenses, including COGs, operating expenses, taxes and more.
Gross profit = Revenue – COGS
Net Profit = Gross Profit – Total Expenses
What is profit margin?
Profit margin is the percentage that you add onto your expenses that is retained as profit for your business, or the percentage of revenue that you retain after covering all expenses. For example, if you sell an item that costs you $10 at the sales price of $20, then your profit margin is 50%.
Gross Margin = [(Total Revenue – COGS) / Total Revenue] X 100
Net Profit Margin = (Net Income / Revenue) X 100
What is a good profit margin for an ecommerce business?
A good profit margin is a very subjective thing as it depends on a number of factors, including industry and location. Different types of businesses require different profit margins in order to be successful, for example a startup may need higher profit margins than a more established business in order to survive. Online retailers tend to have higher profit margins than traditional stores, as they have lower fixed costs than physical storefronts.
According to a study by the NYU Stern School of Business, the average gross profit margin for e-commerce retailers is 45.25%. If your gross profit margin falls below this average, or if you simply want to attain an above-average gross profit, you can implement the below strategies to achieve your profit goals.
How to increase your Shopify store profits?
There are a number of ways to increase your profits, some of which involve reducing costs, while others entail increasing revenue.
1. Track expenses and profits
You can’t improve something without first knowing where you’re coming from. With a Shopify profit calculator such as BeProfit profit tracker app you can measure and track all your expenses, income and profits in one dashboard, viewing the data and trends in easily understandable charts. This breakdown of metrics can help you see what’s working and what’s not so you can make data-driven decisions based on metrics such as:
- which marketing ad platforms and ad campaigns have the best ROAS so you can invest in the optimal ones
- which products are most profitable
- your shipping carrier costs
- your payment processing fees
2. Increase Average Order Value
Average Order Value, also known as AOV, is the average dollar value of customer orders for an ecommerce site. Since you already have the customer well into your sales funnel, it’s a good idea to try to maximize the amount that the customer spends in one order. You’ve already invested in customer acquisition so you may as well get the biggest bang for your buck. There are a few strategies you can employ to increase AOV with minimal expenditure including:
- Cross-selling – this involves selling customers complementary products while they’re in your store. For example, if you sell mobile phones, you could offer consumers phone covers, screen protectors and other mobile accessories as suggested items.
- Bundling – much like cross-selling, bundling entails selling complementary products, however the customers get offered a discounted price if they buy the ‘bundle’ of products in one order.
- Upselling – this is whereby you would try to sell consumers a more expensive or upgraded version of the product they are searching for.
3. Reduce costs
If you want your profits to go up, you can look at cutting costs. Some expenses are harder to shave off than others, so it’s worth analyzing your expenses to see what you can keep and what you can skim. Operational costs are often more difficult to cut, because you need to keep your business running, but there are certain areas where you can implement your cost reduction strategy, for example:
- Cost of goods sold: if your COGs are cutting into your profits, it’s a good idea to try to negotiate with your suppliers on their prices or if necessary, to switch to another supplier.
- Shipping costs: analyzing how much you pay your shipping carrier can give you insight as to whether you’re overpaying or now. If it turns out that you are in fact overpaying, you can either negotiate with your shipping carrier or switch to another carrier that has better pricing.
- Subscriptions: by itemizing your costs you can identify any subscriptions that you may have that you don’t use or don’t really need.
4. Optimize ROAS
ROAS, or Return on Advertising Spend, is the dollar return you get from your advertising spend per dollar spent. ROAS is important as it helps store owners understand which advertising platforms and even campaigns are working best, so they can best allocate their time and resources to the optimally performing marketing campaigns. For example, if you advertise on Facebook, Pinterest and Snapchat but you’re mostly gaining customers from Facebook, then you could rather invest your advertising budget into your Facebook campaigns.
5. Focus on your most profitable products
Not every product is created equal when it comes to profitability. Some products generate higher product margins than others. However, it’s often optimal to sell a mix of high profit margin products as well as lower profit margin products if the latter fulfill the role of drawing consumers into your store, where you can then cross-sell the more profitable items.
You also need to consider the total profits you can generate by selling your products, and not just the per-item profit margin. While low-priced items with a high profit margin may seem attractive, you would need to sell these items in bulk to make a decent overall profit.
Increasing profits doesn’t necessarily mean you have to hike your prices and risk losing or deterring customers. These tried-and-tested hacks can help you reach your Shopify store’s profit margin goals.