The RevLifter guide to increasing eCommerce profit margins
Any business owner recognizes the importance of generating revenue and being profitable. The good news is, if you want 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 shows gross profit in online retail at 41.54%. However, this can fluctuate depending 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, such as your spending on technology to drive these conversions (e.g., conversion rate optimization technologies and affiliate partners).
What’s unclear 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 choose brands that offer the best prices.
As a result, it’s no surprise that 43% of consumers list coupons, reviews, free returns, and loyalty points as the top reasons for buying a product online.
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, discounting 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 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 obvious, applies to all products, and can be redeemed by all customers.
Although the brand generates many sales, it loses margin by discounting barely profitable sales. The promotion even converts many returning customers who may have checked out without a deal.
Result: Sales have been driven, but questions surround whether the campaign succeeded.
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 the customer’s spending controls it.
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 increased spending per customer while only reducing the price of products with a solid buffer to maintain margin.
The difference between brand #1 and brand #2
We’re comparing 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 can be. Giving every customer the same deal is why some promotions result in the brand losing out.
Now that we can see why discounts work for some and not others let’s examine ways to increase eCommerce profit margins.
Becoming brand #2
We believe a big part of increasing your eCommerce profit margins comes from 1-2-1 incentivization. You must 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 data tagging, 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 simple: Low margins equal low profit. A discount on a low-margin product equals even less profit on an already squeezed margin.
If a promotion cannot positively influence the margin 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, calibrate it to show high-margin items relevant to the cart.
RevLifter has deployed this strategy many times. For example, telecom brand Mobiles.co.uk uses 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 it.
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 use a discount for this one. But more high-margin conversions equal 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 at 55%.
Showing customers how close they are to free delivery is a great way to increase their order value without a discount. You incentivize the conversion by simply issuing useful information. What a result!
5. Get it faster
With 29% of consumers citing next-day delivery as a top purchase driver, why not use this as a low-margin incentive?
Standard and speedy shipping often ranges between $5 and $10. If you 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. Therefore, we prefer to feature this incentive alongside a few other options rather than a dedicated overlay.
Beauty brand Face the Future pushes a loyalty points offer in an offer wallet.
7. Free gift with purchase
If you have a cheap item to give away, the 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-line items that can be added to 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 outweighed 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 many forms. In beauty, this could mean pushing a gift set when a customer is checking out with one of its contents. In fashion, it could highlight a pair of bottoms to someone ready to purchase the matching top.
Otherwise, advertise a bundle of products that ensure a high margin. Below, see how cosmetics brand Lush does this.
9. Value messaging
Our final tip involves raising why someone should buy with you rather than anyone else.
Your products may be high-quality and durable, made using eco-friendly materials, or have a unique backstory.
Not all customers need a discount to convert—some need a timely reminder of why buying on your site is the right decision.
Your next steps to increasing eCommerce profit margins
Start by reassessing your current on-site plays to drive 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 memorable 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.
Frequently Asked Questions (FAQs) about eCommerce profit margins
What is the importance of excluding low-margin products from sales?
Excluding low-margin products from sales is crucial because it helps maintain profitability. Offering discounts on these items can further squeeze margins, resulting in less favorable financial outcomes for the business.
How can product recommendations improve profit margins?
By calibrating your product recommendation engine to showcase high-margin items relevant to a customer's cart, you can direct attention to more profitable items. This strategy, as adopted by RevLifter, can enhance conversion rates and boost profitability.
Why is free delivery preferred over discounts by consumers?
Research shows that 55% of consumers favor free delivery as a purchase driver, making it more appealing than discounts. Highlighting how close customers are to qualifying for free delivery can motivate them to increase their cart value, benefiting both the customer and the merchant.
What are some ways to convert high-margin carts?
Effective strategies include using exit-intent campaigns to identify when potential high-margin customers are about to abandon their carts and offering incentives such as discounts tailored to prevent this dropout and secure the sale.
How does bundling products increase profit margins?
Bundling involves offering a selection of complementary products together, which can elevate the overall perceived value and encourage customers to purchase more items at once. This strategy often results in higher profit margins due to increased cart values.
