How to Calculate & Improve Ecommerce Profit Margins

For your business to truly be successful in the world of eCommerce, you need to maximize profit margins. But, before you can work on maximizing profit margins, you’ll first need to learn how to calculate and improve them. 

Profit margins aren’t just a key indicator of a company’s financial health — they also help business owners make decisions related to the pricing and inventory management of the company. That’s why it’s so important to be able to calculate profit margins accurately so you can make the right decisions to increase your store’s profitability.

How to Calculate eCommerce Profit Margins

To calculate your profit margin, you can subtract the amount of revenue generated from the cost of running a business. The difference is what your profit margin is.

The formula can be written out like this: 

Total revenues – the cost of goods sold = profit margin

While the formula for calculating a profit margin isn’t innately hard, many business owners can have trouble accurately tracking and figuring out what their exact cost of goods sold is. It can be easy to omit certain expenses or round up and estimate certain areas, which results in incorrect calculations that skew business plans. 

That’s why ensuring you’re correctly calculating your profit margin is crucial to staying informed and making the right business decisions based on accurate information. 

Top factors that influence eCommerce profit margins

Each business will have different considerations and expenses to manage when it comes to increasing their profit margin. Since several factors ultimately impact your bottom line, it can help to really understand what factors into an eCommerce profit margin. Here are some of the top factors that influence eCommerce profit margins. 

#1. Pricing strategy

Your pricing strategy is, of course, directly linked to the profit margin you generate. If you set prices too low, you could get higher sales but generate less overall profit. On the other hand, high prices impact the amount of sales you get. eCommerce business owners have to find the sweet spot to attract customers and drive sales, but ultimately generate a profit. 

#2. Cost of goods sold (COGS)

When you produce or purchase costs for your eCommerce company, the Cost of Goods Sold (COGS) is a key factor in determining profit margins. If you’re looking to decrease your COGS, you can try to lower your production costs or find a more affordable supplier. This is where strategies around inventory management are crucial to finding efficiencies and improving your profit margin. When we talk about reducing costs, we always like to remind business owners to avoid shortcuts that will have negative impacts. Typically cutting costs really comes down to just operating more efficiently. 

#3. Shipping and handling fees

Whether you pay for the shipping and handling fees or you make your customers pay, they ultimately impact your bottom line. Plus, you’ll need to factor in fulfillment as well. Ensuring products arrive promptly and in good fashion is an important part of operating a successful eCommerce business. 

#4. Advertising and marketing costs

Spending money on advertising and marketing costs can help you grow your business and generate sales. But, inefficient spending or campaigns that fall flat can impact your profit margin. As can successful campaigns too. 

3 Tips for Improving eCommerce profit margins

While profit margins can vary by industry, the average eCommerce profit margin should be between 50 and 70%. If you’re not calculating your profit margins as an eCommerce entrepreneur or aren’t falling within the recommended ranges, there are a few ways you can improve your profit margins so you can keep more money in your pocket and increase profit margins. 

#1. Reduce costs

The simplest and most obvious way to increase profits is by reducing your overall costs. Implementing cost-cutting measures like reducing overhead costs, finding more efficient shipping methods, and streamlining operations can immediately impact your profit margins. 

For example, you can try to negotiate better shipping rates or utilize more cost-effective shipping options. However, you don’t want any cost-saving efforts to impact your product’s quality or your customer’s experience.

#2. Negotiate with suppliers

While it might be daunting, re-negotiating your agreements with suppliers can really help increase profit margins. 

The best way to do this? Focus on building long-term relationships with your vendors. When you’ve shown your commitment to the business, on-time payments and regular communication, a vendor might be more likely to offer flexible payment terms or decrease pricing. 

Ordering in large quantities may help you earn a discount too. To access working capital in order to be able to financially afford to order more inventory and or pay faster, consider inventory financing. 

#3. Automate processes

Another way you can try to increase your profit margins is by automating specific processes to reduce costs. Implementing software to help with inventory management, order fulfillment, and customer service can help you save money and therefore increase profit margins. 

Want more tips? Read 5 Ways To Increase Your Business Profit Margins

Benefits of inventory financing for eCommerce businesses

If you’re looking for a way to increase your profit margins without making other sacrifices to your goods or service, inventory financing for small businesses can help. With inventory being the largest expense for most eCommerce business owners, decreasing your inventory expenses can immediately help improve the amount you earn from each transaction. 

When entrepreneurs use inventory financing services such as Kickfurther, they can: 

• Increase their cash flow: With less money tied up in inventory, business owners can maintain healthy cash flow and invest in other areas of growth.
  
• Improve inventory management: Whether you’re preparing for a busy season and need to stock up on inventory or you’re worried about weathering a down period, inventory financing can help you improve your inventory management costs. Invest more in improving operations and less time worrying about what you can and can’t “afford.”
  
• Spend on more strategic initiatives: With more working capital, you’ll be able to invest in strategic initiatives. The things you once overlooked can soon become a focus that can transform the way you do business.
  
• Develop a payment structure that works: While we can’t speak for all means of inventory financing, we can speak for our own platform. At Kickfurther, business owners are in full control down to controlling repayment schedules. Because we know in business and in life, we have to make things work for us. It’s no surprise that our team of entrepreneurs is all for creative solutions to make things work.
  

Closing thoughts

Maximizing profit margins for your eCommerce business is crucial to the financial health and success of your company. Not only can it help improve your operations, but you’ll also be able to grow your company and use your capital the way you want — not just on inventory.

Why Kickfurther? 

Kickfurther funds up to 100% of your inventory costs on flexible payment terms that you customize and control. With Kickfurther, you can fund your entire order(s) each time you need more inventory and put your existing capital to work growing your business without adding debt or giving up equity.

No immediate repayments: You don’t pay back until your product sells and you control your repayment schedule. 

Non-dilutive: Kickfurther doesn’t take your equity.

Not a debt: Kickfurther is not a loan, so it does not put debt on your books, which can sometimes further constrain your access to additional capital providers and diminish your valuation if you approach venture capital firms.

Quick access: You need capital when your supplier payments are due. Kickfurther can fund your entire order(s) each time you need more inventory.

Interested in inventory funding through Kickfurther? See how much capital you can access by creating an account today at Kickfurther.com!

Brandi Whytas is the Partnerships Marketing Manager at Kickfurther. She enjoys connecting with consumer product brands to understand their needs, while also building a network of partner services that supports brands in their continued growth.