There are many different motivations for starting an ecommerce business, and many different desired results. Some entrepreneurs want to have an ecommerce store supplement their existing income and may even view it as a hobby, while others want to reach a point where their online storefront is their primary job. No matter what they sell, all ecommerce entrepreneurs share a common goal: to make money.
Making money in ecommerce involves more than just creating an online store and beginning to take orders. Many factors have to be considered to give your store the best chance at success. There's no guarantee that a store will be successful, but following these best practices will help maximize your profits and eliminate some of the most common unnecessary costs for ecommerce merchants.
A good profit margin is one of the most critical elements for profitability. Without understanding how much money your business is making per product and per sale, it's extremely difficult to know where money coming back into the business needs to be spent, how much money you should pay yourself and other important considerations. Calculating a profit margin is a straightforward task, and the same formula determines how much money is being made from each and every item your store sells, no matter how varied the products.
To calculate your profit margin, first take the total amount of money made per item, or revenue, and subtract the cost of the item. This yields the net profit per product sold. Then divide the net profit by the revenue to get your margin. For example, an item that costs a retailer $5 to purchase and is sold for $8 has a net profit of $3. The profit margin of that item would be 37.5%.
Keeping track of the net profit and profit margin for your business makes it easier to adjust your costs while maintaining or improving profitability. With this information on hand, you can make better decisions. For example, you could compare the prices from different suppliers or determine if you could make more money by using different materials for handmade goods. Understanding your store's profit margins also lets you run more profitable sales and promotions. You can even monitor the prices of your competitors and appropriately re-price products as needed.
Maintaining the right level of inventory optimizes your cash flow by preventing you from tying up too much capital in products that may take months to sell. You can then use that money elsewhere whether investing in other areas of your operation or setting it aside until a need arises. Unlike profit margin, there isn't a single equation to calculate the right level of inventory for your store. But there are some steps you can take to reach an inventory level that works best for your business.
First off, you should be tracking how often products sell and the relative frequency with which each items is ordered as compared to others. It's possible to manually track these statistics, but that can be a time-consuming task depending on your market and sales volume. Luckily, a wide variety of apps are available to help track sales and inventory levels.
Once you know the frequency of each of your products, you can then calculate how long a quantity of items will last. Although this data will be an average, it's still valuable. The specifics of optimal inventory depend on the costs of delivery from suppliers, as well as how frequently items are sold and how often you want to receive deliveries. By factoring all of those variables together, you can adjust inventory levels in order to receive fewer shipments from vendors and reduce the associated costs, plus free up more capital.