A good profit margin for online stores is between 40 and 45% of sales.
However, if you are selling expensive products, then the profit margin should be higher than this.
For example, if your product costs $100 and you sell it at $150, then you will make a profit of $50.
If your product costs $1000 and you sell it at the same price of $1500, then you will still make a profit of $500. This means that you can sell more items for the same amount of money.
I’ve been working with eCommerce website owners for seven years now, and I can tell you that the usual profit margin can vary from 10% to 80%.
Do not be discouraged when you see that some online stores have only a 10% profit margin, because if you become a go-to brand for a specific thing, the percentage would not matter that much.
In the rest of the article, I’ll explain what a good profit margin actually means for an online store and how to improve it.
What good profit margin means
The first thing you need to know about a profitable business is that it’s all about ROI (Return on Investment).
A good return on investment means that you’re making enough money so that you can reinvest in your business and grow it further.
This is why most businesses are interested in having high profit margins. They want their profits to increase as fast as possible.
How does a good profit margin work?
It works like this:
You start out by building up your customer base. You get customers to buy your products or services.
Once they buy something from you, they come back again and again. And eventually, they become loyal customers.
When you have loyal customers, you don’t have an additional cost to acquire a new customer.
So it is not all about raising prices; it is about building a loyal customer base. That way, you can keep growing your business without worrying about losing any customers.
Now let’s say you have 100 customers. If each of them buys 1 item every month, imagine if you could double the number of orders for these customers and not obsess over finding new ones.
Basically, help your customers in the first place, then help them even more with complimentary products.
This is how you increase the customer lifetime value and get customers that promote your online business.
Is an eCommerce business even with a 10% gross margin profit sustainable?
Yes! If you are able to have a positive cash flow, acquire new customers and retain existing ones, then yes, you can sustain yourself with just a 10% gross margin.
But there are other factors that play into this equation too. For example, if you are running a subscription service, then you may need to charge more than 10% to cover the cost of running the service.
But remember, the key here is to build a loyal customer base. Once you have a loyal customer base, you can easily raise the profit margin.
What is the main cause of the low profit margin?
The main reason for having a low profit margin is that you are spending money on things that aren’t helping your business.
There are two main reasons why people lose money on their online stores.
- Charging too little for products.
- Spending money on wrong things.
But let’s be real for a second.
In a few Google searches, you can see if you are charging appropriately for your products, but wasting money on wrong stuff is what drains all the profit from your business.
The truth is that most people who start an online business fail within the first year.
It’s not because they’re lazy or something like that; it’s because they do things wrong from the beginning.
If you are just starting out, you should try to make at least a 30% profit on each sale.
Because if you don’t, you won’t be able to pay the costs of running the business. No matter what you sell, always try to get at least 30%.
It’s easier to make money when your volume increases and you have a steady and predictable income stream. Then, you can try to improve your profit margin by buying high-quality products at lower costs and negotiating better prices.
Increase profit margin for your online store
If you already have an established website and continue to have bad or low profit margins, please take into consideration these fundamental things to increase your profits.
Increase traffic to your online store
If people are not visiting your website, then, honestly, your website does not matter.
You could have the best product ever, but no one will know about it unless they visit your site.
Very often, I see business owners obsess over the color of the button on their website, what font they use, etc. That is a complete waste of time.
Focus on increasing traffic to your website so that you have more sales.
Create content that is useful and educates people. People want to learn something new. They want to read interesting articles, watch videos and listen to podcasts.
They go to websites where they find such content.
Improve conversion rates
If people are visiting your website, then focus on website conversion rate in order to increase profit margin.
If you are ever in doubt about what to improve on the website, just ask yourself “How can I make this page easier to read?” When it comes to increasing conversion rates, simplicity is the key.
Don’t think that adding features makes your website look professional. It doesn’t.
People buy products because they need them, not because they are impresses by a color of the button on the website.
So, don’t add unnecessary features to your website. Just keep it simple and easy to understand.
Improve pricing strategy for a single product
As a business owner, you should not think of average profit margins based on a single product. You can have a pricing strategy where a single product can have a very low profit margin, but it is a barrier to entry for other higher profit products.
This type of business model improves sales revenue, reduces marketing costs, and creates an overall healthy margin because it focuses on long term customer acquisition costs.
Sell complementary products
People love freebies. They also love discounts. So, if you can offer both of those things or complementary products, you will have a lot of happy customers.
Personally, I don’t think that discounts are the ideal way to attract new customers and ultimately increase your profit margin, but they do work.
From my perspective, this lowers the value of your brand and online business as you will attract mostly freebie and discount seekers. But again, it works most of the time in the short term.
Promote your products through email marketing
Email marketing is such an undervalued marketing channel, even in 2022.
People think it doesn’t work. Well, if you do it poorly and just focus on selling, then yes, it will not work.
But if you take a methodical and smart approach, it can be your biggest revenue generator.
Sell products that require no setup
This is my personal favorite way to improve profit margin.
There are many products that can be sold online without having to set up anything. Examples include eBooks, courses, checklists, audiobooks, etc.
To give you an example, if you sell a physical product, you could sell a complimentary course on how to best use your product.
All in all, there is nothing wrong with focusing on improving margins. In fact, it’s very important.
However, if you are doing it the wrong way, you might end up wasting money and time.
So, before you start spending hours and days trying to figure out ways to improve profit margin, first try to improve other aspects of your online business, like traffic or conversions.
Then, when everything else is working fine, you can start thinking about making some changes to your site to increase profit margin.
Again, you can take a look at the growth plan I built for business owners, but even applying the suggestions from this article will do wonders for having a solid profit margin.