eCommerce sales growth has dropped from a peak of 25.7% in 2020 to only 6.5% in 2022 – and is only slightly recovering with 8.9% in 2023. In the wake of the pandemic and geopolitical tensions, inflation is hitting hard and the market is unstable. Whereas eCommerce businesses had been focused on expanding their market share, the economic downturn has made this strategy increasingly difficult.
As customers prioritize essential commodities like food and fuel over products like fashion and home decor, the smarter choice is now to stabilize profits. Therefore, we will share three detailed strategies for improving eCommerce profitability in uncertain times: increasing gross margin, optimizing fulfillment costs, and allocating marketing spend.
Strategy #1 for eCommerce Profitability: Increasing Gross Margin
To increase your gross margin, you’ll need to increase sales of high-profit products. Focus on limited-time, product-based promotions to boost sales of slow-moving, high-margin items. These kinds of discounts have a positive impact on revenue, margins, overstock, and conversion rates.
Psychological Triggers
You can use a number of proven psychological triggers to make your product-based discounts even more effective.
- Stacked discounts to increase desirability
- Double-strike-through prices for visual emphasis
- Promotion countdown timers for increased FOMO (fear of missing out)
Strategic Discounts
When setting up your promotions, it’s essential that you apply discounts strategically to boost sales and maintain your profit margin. Our own two golden rules?
- Apply higher discounts to slow-selling products with high margins.
- Top sellers with low inventory get little or no discount.
The popular items will sell either way, but online shoppers will add the discounted slow-movers to their carts as impulse purchases. The result is an increase in overall order values and stable margins across the board.
The best way to implement this tactic is by using smart discount logic for product-based promotions. To avoid the wear-out effect, the logic should take product margins, stock level, and sales data into account when applying discounts.
Strategy #2 for eCommerce Profitability: Cutting Fulfillment Costs
Although free shipping has become a staple in the world of online shopping, many eCommerce businesses are considering reintroducing shipping fees. Retailers can expect three main benefits from this move:
- Increased average order values, as customers bundle their planned purchases into a single order or spend more to get free shipping.
- Incremental net revenue generated by shipping fees.
- Improved contribution margins due to decreased logistics expenses.
Best Practices for Introducing Shipping Fees
The simplest solution? Either charge shipping fees across the board or focus on customer profitability. The latter means that free shipping, for example, is only offered to 50% of the high-value clients. Strategies like this one, however, lack the nuance needed to determine the long-term profitability of customers.
Ideally, you’ll want to charge only customers with a low lifetime value (CLV), and only if the order is below a minimum order value (MOV). This encourages higher-value orders and rewards high CLV customers. This logic can be applied to all types of fulfillment costs, including return fees and payment processing fees, if desired.
Our team of experts has some extra nuggets of wisdom for you.
- Prepare a list of all commerce channels, pages, assets, etc. where you have communicated free shipping. These will need to be updated before you roll out shipping fees.
- Run a competitive benchmarking and decide whether your current goal is growth or profitability. This will determine how aggressive you can be with your shipping fees and MOV.
- Roll out the shipping fees in a small and stable market. This will reduce your risk and provide reliable testing results.
- Analyze your main KPIs once you go live and use the results to iterate. Stay agile and adapt on the fly.
- Communicate shipping fees and MOV throughout the customer journey.
Strategy #3 for eCommerce Profitability: Streamlining Marketing Costs
When aiming to increase eCommerce profitability, you’ll use a different marketing strategy than when your goal is growth. One step in your strategy should be allocating marketing spend to the right channels. Here’s our Marketing Steering Playbook: four tactics to allocate your marketing spend for maximum profitability.
Attribution
How much did the individual commerce channel contribute to customer conversion? Allocate the earned revenue to the channel that is responsible for generating the revenue using a rule-based modeling approach to calculate the channel’s true impact.
CRR / ROI Limits
Spend limits should be determined by the expected customer retention rate (CRR) and CLV to ensure that the cost of converting a new customer is quickly recouped. Accepting an initial loss after the first transaction may make sense, depending on the expected CLV.
Average Order Value
Evaluate your channels based on their average order value (AOV) by applying the CLV factor to the transactional value, rather than just looking at the revenue. This will determine the profitability of each channel. Allocate more spending to the most profitable channels accordingly.
Short-Term Goals
To react flexibly to changing short-term goals in your company, you’ll want to align the tactics in the Marketing Steering Playbook with the company’s overall strategic approach.
eCom Profitability: The Time to Optimize Is Now
Looking to the future, eCommerce companies will need to adapt to the ever-changing landscape and view new challenges as opportunities for growth, rather than obstacles. By staying proactive and strategic in your approach, your company will position itself for continued success in an increasingly competitive market. Take our three proven and tested strategies for increasing profitability as a roadmap to future-proofing your business and staying ahead of the curve.