There are many ways to boost profit margin apart from increasing your selling price. In a nutshell, profit margin is the difference between the capital cost of your product and your sale price.
This should not be confused with net profit margin, as the latter refers to the money you made after all expenses and taxes have been paid.
Over time, you will find yourself in a situation where you seem to earn less than what you did a few months ago. What we need to talk about is your net profit margin, and how you can increase it to stay afloat.
A negative profit margin puts you in the red. What we want is to put you in the black.
Every. Single. Month.
What affects profit margin?
There are many things that can influence profit margins. The cost of goods sold is one, and shipping cost is another. In a brick-and-mortar store, your rent and utilities can drastically have an impact on your profit margin.
For a Shopify e-commerce store, the monthly subscription for your Shopify account, plus the subscription for the apps you use, also impact your profit margin.
It is true that $29 per month for an online store is peanuts, but the other apps that you pay for can easily add up and eat your profits.
If you have virtual assistants, you should also look into the cost of their salaries. Add to this the costs of your marketing activities, such as payment for Facebook ads or the graphic artists who designed your ads.
In summary, here are the most common expenses that eat up a chunk of your profit margin:
- Store costs
- App costs
- Virtual assistant costs
- Marketing costs
You have to sit back and take a look at these costs to determine which ones are draining your profits. To do that, here are some steps you can take—ways to boost profit margin so you can get your business back in the black.
Ways to Boost Profit Margin
1. Be smart in discounting
You do not have to join the bandwagon of discount stores. You are an entrepreneur and you are not obligated in any way to offer discounts. But since this is a crucial component of increasing your sales, you need to be smart about it.
Let us take a look at this example:
- Product cost – $20
- Shipping cost – $5
- Selling price – $35
In this case, your profit margin is $10. If you offer a 20% discount, your selling price is now down to $28. At this rate, your profit for each product sold is only $3. Is this profit margin enough to cover for your expenses?
What you can do is to choose how you want to apply discounts. For example, what if you offer a discount only if the customer met the minimum purchase requirement?
For the same example, you can offer a 20% if only the customer met $105. In this case, you still make 80% of what you used to, but the actual value of your profit is $9, not $3. As you can see, you applied the same percentage but the monetary value of the profit margin is higher.
For more information about discounts, read my blog: 11 Ways to Increase Online Sales Through Discounts
2. Identify what does not work
When I first built my Shopify store, I had a shiny object syndrome. I got so excited about different apps to make my website look professional, but I did not realize that the costs would pile up. I immediately removed them so I could reduce my expenses.
Do you really need an email subscription form when Shopify already provides you with one? I am not saying that getting apps is bad—it is only a matter of whether the business is financially stable enough to support these costs or not.
Some dropshippers pay $9 for a banner—a colored line on top of the Shopify home page that announces something. This line does nothing but to announce that there is a sale, or that you are offering fee shipping.
Look at the orange line at the screenshot below.
Do you really need that line? Does it justify paying $9 for that per month? If it were up to me, I will just create a graphic art, or a hero banner somewhere on the landing page to make that announcement.
You see, while many apps are great to have, not all of them are a must-have. You have to carefully choose the apps that you pay for—only pay for apps that actually boost your revenue, or apps that make business processes more efficient for you and your team.
3. Sell high-end products but not high-ticket
Many dropshippers sell trinkets that can only offer a profit margin of $1. This is problematic, as you need a huge volume to pay for your costs. If your profit is $1 per item, you have to sell at least 29 pieces to cover the cost of your Shopify store, which is $29 per month.
While this is not wrong, the numbers will tell you the story. I do not advocate selling high-ticket products that are worth $500 and above. The challenge with that is you will have a low-volume of sales, and it is much more difficult to convert your prospective leads.
What I recommend is to sell high-end products that cost $100 or less. Some examples of these are drones and other toys. There is a huge market for hobbyists out there, such as camping and woodworking. If you can also find products that sell for only $50, it will be easy to put at least $10 on top if your product cost.
At this rate, it takes only three successful conversions to be able to pay for your Shopify store.
Read my blog about high-ticket dropshipping here: 5 Reasons Why You Shouldn’t Dropship High-Ticket Products
4. Increase your brand’s perceived value
It is true—people pay for a brand.
But no, you should not aim to compete against Nike or other big brands. What you need to do is to improve your brand’s perceived value.
Perceived is the keyword here, but how do you do that? Perceived value has little to do with the market price, but rather on the product’s ability to fulfill a need.
The way you present your product has something to do with a customer’s perception. It is negotiable—the better you are at presenting your products, the higher the perceived value is going to be.
A pair of shoes on a white background has no perceived value, but only real value. Real value is not negotiable. But if you ask someone to wear it and model it, you are making that pair of shoes look more expensive than what it really is.
To effectively use this strategy, you have to understand your customers or target market—you have to know what they like, what triggers their emotions, what makes them feel good about themselves, and what makes them feel bad.
Use scarcity in your product pages. If a product is running out of stock, then it must be in demand, right? You can also use warranties, money-back guarantees, change your store branding, and use testimonials.
5. Boost profit margin: reduce operating expenses
You need to know where your earnings go, and which areas of your business you are spending the most. If you can quantify these numbers, you know for a fact what part of your business is eating a huge chunk of your revenue.
Given this, you need to be decisive if you should cut this cost or simply reduce the money you spend. Let us say that you are paying for ten apps at $9 per month. Do you really think this is a necessary expense?
If you think about it, $90 per month is a lot more expensive than what you are paying Shopify on a monthly basis. Your Shopify store can stand on its own, and there really is no need for you to buy apps that do not contribute to your conversion rate.
Apps and plug-ins must only be used if your store is earning a decent profit margin—regularly. One sad thing about dropshippers is that they fill their stores with apps and plug-ins—things that cost them dearly on a monthly basis, like spinning wheels and all that.
Here are some more things you can look at:
- Cost of virtual assistants
- Cost of freelance workers
- Cost of social media managers
You do not need all of these things if your business is small. Reduce your operating expenses to boost your dropshipping profit margin. If at all, you have to concentrate your efforts on building content that will be there to stay, like blog posts or video posts.
SUGGESTED READING: 5 Reasons Why You Should Blog on Your Online Store
6. Increase your Average Order Value
The average order value, or AOV, is average amount of money that customers spend during checkout. Increasing your AOV simply means that each customer is spending more. Let us take a look at these examples:
- Customer 1 – bought shoes for $40
- Customer 2 – bought shoes for $40
- Customer 3 – bought shoes for $40
On these three transactions, your average order value is $40 + $40 + $40 = $120/3 = $40.
Now, what if we can do something to increase our AOV? Let us take a look at the example below:
- Customer 1 – bought shoes for $40
- Customer 2 – bought shoes and socks for $40
- Customer 3 – bought shoes and head band for $40
Now, your average order value is $45, which means you sold $5 more per customer that checked out. Increasing your average order value is an indication that your gross revenue is getting bigger.
But how do you do this?
Here are several ways to increase your average order value:
- Free shipping if minimum purchase is met – customers are more likely to fill their shopping cart to avail free shipping. Set a minimum purchase, like $100, for a customer to avail free shipping.
- Offer discounts – if free shipping is not an option, offer discounts on some products, not all. Items on sale, even if they do not produce high-profit margins, will force customers to buy, which moves the needle on your gross revenue, as opposed to not having sold them at all.
- Bundle some items – fast food chains do this all the time. To move their inventory, they bundle products together and price them lower than how they would have been sold if they were not grouped together.
- Create a loyalty program – set some membership tiers for your loyalty program, and offer prizes or bonuses once a customer hits this level. You can create a point system like 1 point for every dollar, and if a customer meets a specific point requirement, he will advance to the VIP Tier.
- Create time-sensitive offers – offer huge discounts or other forms of promotions that end soon. This makes customers make immediate decisions, and they are likely to make impulse purchases.
7. Negotiate for discounts with your suppliers
If you are keeping your own inventory, it makes sense that you ask your supplier to give you better prices. If you can reduce the cost of you capital, you should be able to increase your profit margin.
If you are dropshipping, there are still ways to get discounts from suppliers. For example, you can get better prices with Printify if you upgrade your subscription. This, however, works best only if you already have a huge volume of sales.
For example, the free subscription in this company allows you to purchase a shirt for $20. But if you subscribe at a higher tier, you can get the same shirt for $16 only. Upgrading, however, means that you will start paying them a monthly fee—at least $29 per month.
It does not make sense at first. But think about this: if you are selling 100 shirts and you buy each at $20, you will save $400 if you buy each shirt at $16. From that $400, you remove the monthly fee of $29, and you still keep $371 for profit.
8. Eliminate waste
If you are manufacturing your own product, one of the things you have to focus on is waste. Each rejected product is money that went down the drain. You need to apply the same principle to your other actions, like marketing and advertising.
If your marketing plan is not working, put it on hold and go back to the drawing table. Find out what is wrong with it, fix it, and then execute.
To make you better at identifying waste, you need to apply what is called the Lean methodology. To help you get started, here are some of the most common areas where you can find waste:
If you can identify the wastes, you can identify the problem. And if you can identify the problem, you can begin analyze what is causing it, and then find a solution or improve your processes.
Increasing your selling price is not the only way to boost profit margin. There are many approaches you can take to make this happen. From reducing your waste to increasing your average order value, you can improve your gross revenue and keep your business in the black, not in the red.
8 Way to Increase Sales for Shopify and e-Commerce Stores
High Traffic But no Sales: Why?
What Shopify Apps Can Improve Sales Conversion?
6 Tips How to Increase Sales with Impulse Purchases
11 Ways to Increase Online Sales Through Discounts
Watch: What is profit margin?
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