E-commerce is booming, with global online sales growing by an impressive 24% in 2020, topping $4 trillion worldwide.
As an online retailer, you get a front-row seat on this exciting journey and if you’re in for the ride, you already know that few experiences can compare to the pride of seeing your sales numbers rise.
But what if we told you there’s more to e-commerce success than revenue growth?
Growing your sales is a great instinct, but how often do your sales actually result in cash-in-pocket? The fact is, profits and margins play a much more pivotal role in your store’s long-term viability than sales alone.
So why is it that so many brands keep spinning their wheels with loss-making products?
Today, we’ll get to the heart of how revenue tunnel vision can drain profits from your e-commerce business, and reveal clear steps for identifying which parts of your business to leverage in order to scale profitably.
Ready? Let’s dive in.
Table of contents
- The difference between revenue, profits, and margins
- Why revenue tunnel vision is stalling your growth
- The benefits of prioritizing profits over revenue
- How to boost profitable sales for your online store
Ready to scale smarter? Find out how Flieber can help increase your profitable sales.
The difference between revenue, profits, and margins
Terms like ‘revenue’, ‘profits’, and ‘margins’ often get thrown around in conversation, but what do they actually mean?
Before you can pinpoint the right growth drivers for your online retail business, you need to make sure you have a solid working definition of these key terms.
Here’s a quick refresher:
- Revenue: Your company’s income before deducting things like tax and expenses. These are the sales that add to your top line and without it, there is no business.
- Profits: The cash your business has after it pays its expenses and obligations. This capital can be paid out or reinvested in new projects, without sacrificing your existing operations.
- Margins: The difference between revenue and cost of goods sold. Your margin shows you how much money you make per sale, and helps to assess your profitability and the viability of any future investments.
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Why revenue tunnel vision is stalling your growth
In the fast-growing world of e-commerce, appearances can be deceiving—especially where revenue growth is concerned.
While sales play an essential role in every business success story, ignoring other contributing factors (e.g., your product margins and tangible profits) can be an expensive mistake.
Let’s take a closer look at the price you could end up paying if you make revenue your sole focus.
Your profitability could take a nosedive
Unlike revenue, your profit margin tells you the truth about your store’s health—if you stop paying attention, it’s easy to think you’re working with more capital than you actually have.
Believe it or not, this is a mistake that even household brands fall into.
Take Unilever for example. In 1999, the FMCG giant had 1,600 brands in its portfolio and was operating in 150 countries. Yet, over 90% of its profits came from just 400 brands. That means a whopping 75% of its product portfolio made losses or marginal profits at best.
By prioritizing profits over revenue, you amplify your existing success and force yourself to make decisions that scale, rather than spreading your business thin.
Business expansion may have to go on the back burner
Thanks to the recurring fixed costs that chip away at it, revenue can’t help you scale as much as profits and margins can. With profits, you have free reign to reinvest funds into new projects, while keeping your existing business operations afloat.
For example, profits allow you to:
- Expand your store into new territories.
- Launch new (and profitable) product lines.
- Invest in better technology and infrastructure.
You’re constantly feeding the marketing machine
When you set your sights on revenue growth, you’ll likely need to adopt aggressive marketing and sales strategies to meet your ever-growing targets.
But while the cost of advertising rises, your profit margin diminishes. Now you’re selling more products for less profit, with Google Ads reaping most of the benefits.
In some cases, the cost of constant advertising and promotions requires a cash injection so large you can only find it from angel investors and venture capitalists.
While some prestige comes with securing these funding types, one potential con is you’ll need to hand over a certain amount of control over your business. If you’re in the e-commerce game for freedom and the chance to forge your own path, this setup could present a problem.
Working capital can be harder to access
Funding is often the elephant in the room for online retailers.
Banks don’t understand your business model, and alternative funding providers want to see evidence that your business is financially stable enough to handle repayments and operation costs before they’ll supply you with the working capital you need.
Without strong margins and profits, you could fall short of this requirement and find yourself scrambling to keep your most profitable products in stock or fill gaps between marketplace payouts and outgoing payments to staff and suppliers.
The benefits of prioritizing profits over revenue
Now that you know what’s really at risk, it’s time to reframe your mindset to focus more on profits and less on sales.
And it’s not going to be easy. These days, it’s hard to find an entrepreneur who doesn’t want more sales under their belt. After all, sales are the lifeblood of your business.
But because they don’t automatically generate margins or profits, chasing sales can quickly become a vicious cycle that leaves you in the red.
Think of it like this:
Your e-commerce store is like a machine. You put cash in on one end to buy products, and it shoots out costs and margin on the other. If your machine (aka business) doesn’t produce the desired result (healthy margin and profits), it won’t be viable in the long run.
The solution? Use your data.
By intentionally building profitability into your store at both the product and sales levels, you can start making better decisions for your business.
Here are a few key benefits of putting profits and margins first:
- Make your business more resilient: By using smart data to understand your most profitable products and sales channels, you can build a business that stays healthy—no matter what.
- Build a nest egg for your store: Set some profit aside to build savings and working capital, or reinvest in projects that will drive greater profitability for your brand.
- Make your business more stable: By scaling your business profit-first, you automatically make your brand more resilient and less susceptible to your industry’s peaks and troughs.
Not seeing the fruits of your high sales volume? Discover how Flieber can help you build a more profitable e-commerce business.
How to boost profitable sales for your online store
Know your data
Data-based insights provide the solid foundation you need to make decisions that increase profits, margins, and profitable sales.
For example, say you sell a pair of sunglasses in three variations. From looking at your data, you realize only one of the three styles sells well. You also notice your manufacturer for the top-performing variation offers quantity and shipping discounts for bulk orders.
From this, you could decide to discontinue the two poor-performing sunglasses and put the cash you save into a discounted bulk order and increased promotions for the profitable SKU.
This data-driven approach ensures your store is optimized for better results, and with the right tool, it doesn’t have to be as complicated as you think.
Get a handle on your operating costs
No matter your sales volume, it’s important to keep a sharp eye on spending to ensure you can extract profit and maintain good margins as your revenue growth accelerates.
For best results, aim to make money from every dollar you spend.
For example, if you want to offer free delivery and returns to improve conversions, research your industry’s average order return rate and charges. Then, use this information to account for order fulfillment and returns charges into your cost of goods, so that you’re never out of pocket.
Here are a few other areas to watch:
Speak with your service providers and suppliers to see whether they have any new deals to help get your costs down. The savings may not seem like much at first, but can definitely add up over time.
Concentrate on customer retention and repeat sales
If you want to scale profitably (and trust us, you do), invest in nurturing relationships with your most loyal customers.
Not only is it less expensive to generate sales from existing customers (we’re talking 5-25X cheaper), but you can also get more out of them over time. That’s because returning customers have been shown to buy 67% more in their third year than they do in their first six months.
Plus, when you increase your retention rate by just 5%, your profits can shoot up by 25-95%. Clearly, catering to your existing customer base is a low-cost way to increase your ROI.
For best results, make sure your post-purchase experience is one they’ll never forget. From there, set up regular retargeting campaigns with irresistible offers to entice shoppers back to your store.
For example, you could:
- Upsell and cross-sell related products with the highest margin.
- Make product recommendations based on customer searches.
- Set up special deals for repeat customers.
Make inventory optimization a priority
Whether it’s a sophisticated platform or an Excel spreadsheet, you probably have some kind of stock management and forecasting system in place to figure out your inventory needs.
But if you really want to scale and keep your profits and margins intact, it’s critical to pinpoint the blind spots in your inventory strategy. Think “less management, more ‘optimization.”
Here’s a starter for how to make it happen:
- Scrap the standard 30-day moving average and aim for sharper forecasting.
- Manage your ideal inventory levels across all storage and fulfillment locations (yes, you can do this even if you’re multichannel).
- Closely monitor your Purchase and Transfer Orders.
- Adjust your sales pace to match your inventory availability.
This is where platforms like Flieber come in. Flieber utilizes artificial intelligence, long-term forecasts, and crucial factors like rank influence, cyclicality, and seasonality to create forecasts you can trust.
If you’re serious about scaling your profits, don’t skip this step. Inventory mastery is key to growing your business while keeping a firm grip on healthy profits and margins.
The path to a profitable e-commerce store
At the end of the day, anyone can build an e-commerce store—but building a profitable e-commerce business is both challenging and rare.
While it’s tempting to obsess over revenue, this kind of tunnel vision can keep you from seeing what’s really going on with your business. And the consequences of this can mean the difference between your success or failure in this business.
Train yourself to think about profits and ROI first and foremost. Seek out ways to optimize your store for greater returns, and try making the leap to multichannel in order to expand your reach and set yourself up for sustainable profits long term.
Before you know it, you’ll be on your way to hitting the right goals for your business, not just the most obvious ones.
When you’re ready to put profit first, Flieber can help. See our advanced inventory forecasting algorithms in action with a free, no-strings-attached demo today.
Written by: Fabricio Miranda