Any business owner recognizes the importance of not just generating revenue, but also being profitable. The good news is, if you’re looking to increase or maintain eCommerce profit margins, RevLifter has a list of tactics that can help.
The truth is, any retailer can generate more sales by advertising their products at a heavily discounted rate.
The magic is in structuring your promotions to give you a healthy profit.
How to calculate your profit margins
We all know the simple calculation that reveals your gross profit.
Revenue – cost of goods = Gross profit
Data from NYU Stern School of Business has gross profit within online retail at 41.54%. However, this can go up and down based on what you sell.
You also have a basic calculation for working out your net profit, otherwise known as your ‘bottom line’:
Gross profit – expenses = net profit
Expenses can include anything from staff wages to any costs associated with driving a sale; for example, your spend on technology to drive these conversions (e.g. conversion rate optimization technologies, affiliate partners).
What’s less clear is how to increase eCommerce profit margins in a world where discounts are a top purchase driver.
The difficulty with increasing eCommerce profit margins
Retailers operate in a world where customers love getting value for money. Years of sales activity have conditioned many shoppers to go with the brand offering the best price.
As a result, it’s no surprise that 43% of consumers list coupons as the top reason for buying a product online, above reviews, free returns, and loyalty points.
Discounting your products is a sure-fire way of beating the competition, but any price reduction impacts your profit margin.
This is why brands try to appeal to customers in different ways. Here are some other ways of setting yourself apart:
- Improving product quality
- Offering free shipping
- Shipping items faster
- Offering loyalty points
- Providing free returns
- Producing eco-friendly products
So, if you could get ahead in a few of these areas, and if increasing eCommerce profit margins is our end goal, are discounts really needed? In two words: not always.
Allow us to explain our working here.
Are discounts good or bad?
The debate of whether discounts are good for business is highly complex. The backstory, however, is simple.
Price, along with quality, remains one of the top purchase drivers for online shoppers. Some retailers love discounts too, cutting line after line to shift their excess stock and hit their targets.
Others have a frostier relationship with any kind of sales activity. Luxury brands tend to avoid discounts due to their perceived harm to brand value. However, research from Vogue Business shows major industry players like Alexandre Vauthier and Ralph Lauren increasing their discounts to shift excess stock following the pandemic.
For most brands, the question of whether or not to discount their products is less about image and more about margins.
From RevLifter’s viewpoint, discounts could work better for brands and their profit margins. Let’s take a look at what we mean.
Bad vs good: the difference between discounts
The structure of most discount-led promotions leads to them chipping away at the retailer’s margin.
We’ll raise two examples from brands that both use discounts but will generate totally different balance sheets.
Brand #1 – Poor profit margin
Strategy: “20% off” to all customers over Black Friday
Overview: Brand #1 runs a “20% off” sale over a key sales period. It’s highly visible, applies to all products, and can be redeemed by all customers.
Although the brand generates lots of sales, it loses margin by discounting barely profitable sales. The promotion even converts lots of returning customers that may have checked out without a deal.
Result: Sales have been driven, but questions surround whether the campaign was truly successful.
Brand #2 – healthy profit margin
Strategy: Multi-tiered promotion with discounts ranging up to “20% off”
Overview: Brand #2 offers a maximum 20% discount, but it’s controlled by the customer’s spend.
Customer #1 places $130 worth of items in their cart. This triggers an overlay advertising “20% off when you spend above $150”. Certain low-margin products are excluded to keep everything profitable.
Result: The promotion drives increases spend per customer while only reducing the price of products that have a strong buffer to maintain margin.
The difference between brand #1 and brand #2
What we’re comparing is one-size-fits-all discounts with 1-2-1 discounts. Brand #2 beats brand #1 every time because it accounts for the fact that every cart margin is different.
Discounts aren’t always bad for business, but blanket discounts really can be. Giving every customer the same deal is why some promotions see the brand losing out.
Now we can see the reason why discounts work for some and not for others, let’s go through some ways of increasing eCommerce profit margins.
Becoming brand #2
We believe a big part of increasing your eCommerce profit margins comes from 1-2-1 incentivization. For that, you’ll need to tag your products or product categories according to their margin. You can then use these tags to inform the rules behind a trigger-based system for pushing on-site incentives.
Not all of our recommendations require the tagging of data, but it’s a huge step toward running profitable promotions across your eCommerce site. Now let’s go through some ways of increasing your profit margins.
1. Exclude low-margin products from sales
The first step is a simple one. Low margin equates to low profit. A discount on a low-margin product equates to even less profit on an already squeezed margin.
If you can’t positively influence the margin with a promotion – either by increasing or preserving it – you should avoid issuing it to customers checking out with low-margin carts.
This relies on segmentation to push and pull deals depending on what’s in the customer’s cart.
2. Push high-margin products with recommendations
If you have a product recommendation engine, you should calibrate it to show high-margin items where they are relevant to the cart in question.
RevLifter has deployed this strategy many times. As an example, see how telecom brand Mobiles.co.uk uses our RevConvert overlays to push mobile tariffs that deliver better value to the customer but more margin to the brand.
This is an ideal way to generate a positive outcome for the brand and the shopper.
3. Convert more high-margin carts
Tagging a high-margin product means you can take extra measures to convert the customers interested in buying them.
We advise using an exit-intent campaign to spot when a high-margin customer looks set to abandon their cart. This detects tell-tale signs of abandonment, like lengthy dwell times and new tab openings, before serving a deal to rescue the sale.
Yes, you may have to deploy a discount for this one. But more high-margin conversions = more profit.
4. Free delivery ‘deals’
According to research, coupons are the top purchase motivator among 43% of consumers, but they’re still not the top choice. That goes to free delivery on 55%.
Showing customers how close they are to getting free delivery is a great way of increasing their order value without a discount. You incentivize the conversion by simply issuing a piece of useful information. What a result!
5. Get it faster
With next-day delivery cited by 29% of consumers as a top purchase driver, why not use this as a low-margin incentive?
The difference between standard and speedy shipping often ranges between $5-10. If you can offer this free to customers with a minimum cart value, you could drive more full-price sales.
6. Loyalty points
If you have a loyalty program, offering points in exchange for purchases can help safeguard the cost of your sale.
Only some customers will be interested in your loyalty offering. Due to this, we prefer to feature this incentive alongside a few other options rather than a dedicated overlay.
Below, you’ll see how beauty brand Face the Future pushes a loyalty points offer within our RevWallet technology.
7. Free gift with purchase
If you have a cheap item to give away, the free gift could be your best tactic for increasing your eCommerce profit margins.
Beauty brands tend to use this strategy more than most. With so many products on their site, there will always be a few end-of-the-line items that can be thrown into an order.
Much like with a discount, it’s all about calculating what you can afford to lose. Giving away a small gift will produce a negative margin, but this might be out-weighed by the margin of the cart you’ve converted.
Here’s an example from Lancôme giving away three gifts with every purchase above $99.
8. Create bundles
We’re taking another example from the beauty industry. What can we say – they know how to increase their margins.
Product bundling comes in lots of forms. For instance, in beauty, this could mean pushing a gift set when a customer is checking out with one of its contents. In fashion, it could be the case of highlighting a pair of bottoms to someone ready to purchase the matching top.
Otherwise, go direct and advertise a bundle of products that ensure a high margin. See how cosmetics brand Lush does this below.
9. Value messaging
Our final tip involves raising why someone should buy with you rather than anyone else.
Maybe your products are high-quality and durable. Perhaps they’re made using eco-friendly materials, or have an backstory that’s unique.
Not all customers need a discount to convert – some just need a timely reminder of why it’s the right call to buy on your site.
Your next steps to increasing eCommerce profit margins
Start by reassessing your current on-site plays for driving sales. Any one-size-fits-all campaigns should be scrutinized, as these are the ones that fail to account for different cart margins.
We’d advise setting up special plays for high-margin carts, as converting more of these will have an instant impact.
Lastly, get creative with your offers. Try using lighter incentives or tools like loyalty points and shipping to drive more sales.
How RevLifter helps
All of the tactics above can be deployed via the RevLifter platform. We structure your on-site incentives to drive more profit and find the best place to serve them.
The result is true 1-2-1 incentivization that caters for every customer and cart, with less reliance on one-size-fits-all promotions.