Maximizing Margins in E-Commerce
To maximize your margins in e-commerce, you cannot simply throw products online. It requires careful strategic planning, flawless demand planning, efficient paid marketing, and vigilant compliance with operational regulations.
June 10, 2020 - By Kathy Cummins
This is a common question that we get asked by brands: why am I not making a profit on my e-commerce business?
The short answer is that to maximize your margins in e-commerce, you cannot simply throw products online. It requires careful strategic planning, flawless demand planning, efficient paid marketing, and vigilant compliance with operational regulations.
To maximize profitability, brands need to set up their e-commerce assortment and pricing in a strategic way. If a manufacturer is selling 1P* (i.e., at wholesale prices, where the platform is the seller: Walmart.com, Chewy.com, Sephora, Amazon Vendor Central), then they need to set their wholesale prices to reflect expected returns, and marketing costs. If the manufacturer sells 3P* (i.e., where they are the seller, and the platform is simply a marketplace: Amazon Seller Central, eBay, Walmart Marketplace), then the brand needs to be smart about the product assortment, size/pack size bundle, and the selling price that they set. This is because there will be shipping fees, warehousing fees, marketplace co-op fees, and marketing costs.
[*As an aside, do not assume that it is more profitable to run your business 1P, versus 3P. There again, careful planning and strategic review should be done. That is a whole separate blog topic!]
Flawless Demand Planning
With 3P, brands also need to apply careful inventory management. You do not want to go out-of-stock, but you also do not want to have too much excess inventory or you will be charged excess warehousing fees.
Efficient Paid Marketing
Brands need to think about paid marketing for e-commerce differently from their brick and mortar business. Big companies spend millions of dollars in traditional TV, print, and digital media to generate awareness of their brands and get people to find them in a brick and mortar store. For Amazon, you still need to make people aware that your product is listed on Amazon through media spending, but the amount you need to spend is a tiny fraction of a traditional media budget. You do need to spend on Amazon to drive paid search and help break through the clutter, especially in very competitive categories. However auto-bidding tools make this process efficient and cost-effective. Having great keywords (back to that!) means that you can maximize your organic search, which reduces the need to pay for marketing.
Vigilant Compliance with Operational Regulations
Finally, brands need to comply with operational regulations and terms of service to avoid chargebacks, or worse, account suspensions. Sometimes the number of rules can feel overwhelming, but if you are knowledgeable and follow the guidelines, you can keep your chargebacks to a minimum. Products also should have sturdy packaging so that the product does not get damaged during shipping and suffer from excess product returns.
Resources – Expertise, Tools, and Technology
We come across many businesses that “set it and forget it,” or try to run their e-commerce with too few staff. Sometimes companies only assign a junior person to run their e-commerce, or at best, they may have a team of 5 people managing e-commerce across every single platform! By contrast, large manufacturers often have entire sales or customer teams (sometimes up to 20 people) dedicated to a single brick and mortar traditional retailer! Your results on Amazon will perform significantly better if you assign a dedicated staff with the expertise, tools, and technology to optimize it.
HINGE GLOBAL can help! We can act as an extension of your organization to help you manage your e-commerce business. The cost of leveraging HINGE GLOBAL will be a fraction of the cost of internal resources. We will bring our experience and expertise to drive your e-commerce business, and stay current with the constantly changing landscape.