9 Foolproof Strategies for Profit Margin Improvement

Let’s talk profit margin improvement.

The hard truth is that inflation and cash flow will affect many online retailers this year. Therefore, finding the right ways to improve and increase your profit margin will be essential to weathering any economic storm while ensuring long-term profitability and growth.

It is simply not enough to just raise your prices.

Instead, eCommerce business owners need to have the right margin improvement strategies in place to recalculate, manage, and continuously measure their margins. They need to then filter these goals into every aspect of their business from merchandising to PPC.

Therefore, these strategies must consider operating profit margins, net versus growth, profitability ratio, profit deficiencies, operating costs, retail and marketing KPIs, and more — basically everything contributing to COGS (cost of goods sold) for each product you sell.

In this post, we give you those key strategies to improve retail profit margins.

Feel free to click any of the above margin improvement strategies if you’re looking for something specific. Otherwise, grab that coffee, and let's first get started by quickly reviewing some of the basics.

The Basics of Building an Optimized Profit Margin Strategy

Before we look at top profit improvement strategies, we must understand what a profit margin is, the difference between profit margins, and how to calculate a profit margin for any product. Here’s a refresher!

What Are Profit Margins?

Simply put, a product’s profit margin is the amount of money earned — when selling that product — after all the expenses (including operation, product production, and advertising costs) have been paid.

Or, even more simply, it’s the difference between your total sales revenue and your costs and expenses.

Ultimately, it is the measure of your business profitability, and the higher your margins are, the more successful your business is likely to be. However, there isn’t just one type of profit margin that plays a part in a good margin improvement plan.

Types of Profit Margins

Every business owner — whether they are starting a small business or running a 7-figure online retail store — should consider three main types of profit margins when reviewing their profit margin strategies. These include:

  1. Gross profit margin
  2. Operating profit
  3. Net profit margin

Let’s take a closer look at each.

1. Gross Profit Margin

Referred to as gross profit margin (or simply, gross margin), this metric looks at your store’s total profit. Here, brands can look at their business as a whole to see how much profit they are earning.

The gross profit margin formula is:

 [(Total Gross Revenue – Cost of Goods Sold) / Total Gross Revenue] x 100

how to work out gross profit

[Source: Wallstreetmoio]

Gross profit percentage is an excellent way to assess the overall health of your retail brand, ensuring that you’re taking in more than you are paying out.

Bonus Tip: What Is Gross Profit Margin Ratio?

Your gross profit margin ratio compares your gross margin to your total revenue. It enables you to determine the gross margin profit for every sales dollar spent. The higher this ratio is, the better you are managing your sales and operating expenses.

Let’s say your ratio is 30%. Your company’s gross profit margin would be 30 cents for every dollar earned through online sales.

gross-margin-ratio

[Source: CFI]

2. Operating Profit

Similar to gross profit, your operating profit margin factors in COGS. However, it also considers key operating expenses. The formula to work this out will look like this:

{[Total Revenue – (Cost of Goods Sold + Operating Costs)] / Total Revenue} x 100

Operating Profit Margin Formula

[Source: EDUCBA]

The bottom line is that operating profit margin percentages give a far more accurate picture of expenses vs. earnings — showing you if/how operating expenses may be drawing from profits.

3. Net Profit Margin

Net profit margin (or net margins) takes operating profit margins a step further. It factors in COGS, operating expenses, and debt, taxes, interest, and other accounting expenses.

Net profit enables a business owner to consider how their current cash flow and debt — as well as any taxes they are incurring — affect the final cash-in-hand earnings.

The formula for net profit is the same as gross profit, except you are factoring all COGS, operating expenses, and accounting costs (tax, debt, or interest) into your calculations.

[(Total Revenue – Total Costs) / Total Revenue)] x 100

Net Profit Margin Formula

[Source: EDUCBA]

How to Calculate Profit Margin the Right Way

As you saw above, you can use three different formulas, depending on whether you want the gross, operational, or net profit margins. You will want to use these formulas for your business as a whole, as well as for each product category, or individual products.

Let’s do a quick example showing how you can quickly calculate a company’s gross profit margin.

Let’s say an online retailer generates $10 million per year in apparel sales. As they have a hybrid retail business that includes manufacturing and dropshipping (POD), they are able to keep labor and material costs to $4 million per year.

To calculate their gross profit margin, we would take their net sales from their COGS, like this:

Gross margin = $10,000,000 − $4,000,000 = $6,000,000

We can then divide this number by their revenue and multiply by 100 to get their gross profit percentage.

Gross margin = ($6,000,000 / $10,000,000) x 100 = 60%

This means that 40% of their total sales are going to COGS.

Ultimately, to ensure you can implement the right margin improvement strategy for your brand, you will want to calculate operation and net profit margins, as well as your company’s gross profit margin!

(You will also repeat this on a category and product level to assess your business success — but more on that later.)

If you’re looking for easy-to-use profit calculator tools, you can try Omni Calculator or Shopify’s Profit margin calculator.

online profit margin calculator

What Causes Profit Margins to Decline?

There is a big chance that you’re reading this post because your once-profitable business has seen a decline this year, and you may be asking yourself, why? This is very likely due to one of, or a combination of, these reasons below — which our strategies will help you address:

  • Increased supplier costs
  • Sudden economic changes
  • Shifts in customer bases
  • Poor retention
  • Increased competition
  • Rising operation costs
  • Poor pricing
  • Unoptimized marketing
  • Rising interest rates

How to Calculate Margin Decline

To calculate profit margin decline, you will first need to assess your net income, work out your total sales revenue, and then input factors into your profit margin equation.

Let’s do an example calculation for a store with a net income rise in 2023 but whose increased production costs also caused a significant margin decline.

2022 Net Income

= Total Revenue − Production and Operation Costs

= $5,000,000 - $3,000,000

= $2,000,000

2022 Profit Margin

= ($2,000,000 / $5,000,000) x 100

= 40%

2023 Net Income

= Total Revenue − Production and Operation Costs

= $6,000,000 − $5,000,000

= $1million

2023 Profit Margin

= ($1,000,000 / $6,000,000) x 100

= 16,6%

As you can see, despite the example store earning a million more in revenue, their overall retail margin increased substantially due to a steep increase in product and operation costs, which could be a result of many of the reasons listed above.

As you can see, despite the example store earning a million more in revenue, their overall retail margin increased substantially due to a steep increase in product and operation costs, which could be a result of many of the reasons listed above.

Now that we have reviewed the basics, it’s time to implement a margin improvement plan using these nine foolproof strategies.

9 Foolproof Strategies for Product Margin Improvement

1. Reassess Your Profit Marketing Goals

The first thing every eCommerce business owner or manager should be doing this year is reassessing their profit goals.

This applies whether you’re a mega store brand or a new small business breaking into eCommerce for the first time. Why? This will help ensure that you have perfectly defined the ideal profit margin for your store compared to current market conditions to gauge success.

Or, more simply put, you want to ask yourself what a good retail profit margin is and set that as your goal.

Before we get to the how, let’s look at what actually makes a good profit margin.

What Is a Good Profit Margin?

Here’s the thing, there really is no black-and-white answer to this question.

Why?

Every industry, market, niche, audience, and brand is different and will require some internal tweaking.

For example, the restaurant profit margin goal will differ greatly from the average profit margin goal for a mega online fashion store brand. Why? Because the markets, demands, averages, and customers are just so different.

However, we can help nudge you in the right direction. You will want to consider two main things before setting your optimum profit margin goals:

  1. Niche establishment. You will need to consider how new your business is. If you are new, trying to penetrate a very saturated market while building authority, then you are likely to set your margin goals lower than average until such time as you build your brand.
  1. Market landscape. The niche, market, or industry you’re selling in plays an even bigger role in setting your overall profit margin goals. Yes, we want to reduce costs and optimize margins for profitability, but we need to do so within realistic frameworks.

According to a 2022 NYU study, gross profit margins differ dramatically between industries and niches. For instance, their report shows that online retailers like yourselves should be considering the following as good profit margin benchmarks:

  • 42.78% gross profit margin
  • 0.64% net margin

However, that’s not the whole picture.

For example, if you’re an online retailer selling general electronics, you will want to gauge the market averages for that niche. In this case, your gross profit margin goals would be higher (27.35%) than if you were selling healthcare products (57.74%).

So, How to Set Your Profit Margin Goals?

Remember, some products will have lower margins but higher sales, while others will have higher margins and lower sales. The bottom line is that you want to look at each product and how it affects your entire net profit.

Therefore, you will want to strive for incremental growth. To do this, you should look at each product to find the optimal margin and then combine them to determine your desired net profit margin.

A Quick Note on Incremental Growth

Yes, we will very likely need to increase profit margins this year. But that doesn’t mean you need to rush in, guns blazing. Instead, you want to aim for small incremental growth that won’t just help with short-term cash flow but also long-term profitability.

2. Audit and Identify Profit Deficiencies

Even if your company’s gross profit is almost where it should be, that doesn’t mean there isn’t a lot of room for improvement. This is where a profit margin analysis comes in.

Once you have a good idea of where you’re headed, you will need to look honestly at where you are. This means auditing your gross, operational, and net profits across your entire store — and, of course, of your brand as a whole — over a specific set amount of time.

Basically, you want to get to the meat of what is not working and ask yourself where the noticeable gaps are that you can address with a well-optimized profit margin improvement plan.

Below are some steps you can follow in order to do a proper profit margin analysis.

How to Audit Your Profit Margins

  1. First, calculate your net, operating, and gross profit margins to see where you stand.
  2. Then research market averages, looking to your closest competitors, and compare results.
  3. Next, you will want to do the same with your main shopping categories and individual products.
  4. Lastly, you will want to look at your store, category, and product analysis to see where there are opportunities to improve.

3. Go Back to Your Branding Strategies

With growing competition and decreased available spending due to economic shifts like rising inflation, shoppers are becoming more careful about how much they spend — and where. How potential shoppers see your brand will play a key role in whether they buy from you.

In fact, they may be willing to spend a little more on your products than shop with a competitor they view as low quality. It’s all about creating an end-to-end customer experience.

Yes, short term, you will need to increase costs to upgrade your branding strategies. But long term, this will pay off in ensuring that your brand is trustworthy, no matter the price discrepancies.

Generally speaking, this means investing in optimizing your overall shopping experience and ensuring that you focus on the features of your products, rather than the price.

Here are some brand-building tips to get you started:

  • Be authentic and fully transparent about what the customer is getting and how much it costs
  • Make a good impression with every page
  • Streamline your customer buyer journey and make your products easy to find
  • Invest in top-class customer service
  • Highlight your product features and point out how they can solve a potential shopper’s problem/need

This brings us to the next product margin improvement strategy.

4. Review Your Product Positioning

Can potential customers easily see how your products differ from those of other competitors? This is an important question to ask when looking to increase your brand’s profit margin.

Why? Product positioning helps you:

  • Stand out from competitors
  • Position your products as unique
  • Keep your brand front of mind with repeat customers and potential shoppers
  • Improve and enhance brand messaging consistency

In a nutshell, the more innovative and unique your products appear — in terms of answering their specific needs and wants — the more likely you are to secure a sale. Therefore improving advertising ROAS and increasing profitability overall.

So, how do you improve product positioning to improve retail margins? Here are some questions to ask yourself about your brand positioning:

  1. Is it clear to potential shoppers what problems or pain points your products solve?
  2. Does your unique selling proposition come across clearly, on-site and off-site?
  3. Are you sure your entire team is working from the same product positioning statements?
  4. Do your product features stand out from those of your closest competitors?
How to position products

[Source: CXL]

5. Use Advanced Product Sorting to Push Profitable Products

Sometimes, to improve your average profit margin, you need to look at individual product performance as well as your inventory backlog. Slow-moving inventory or dead stock, for instance, will eat away at your store’s net profit, even if you’re outselling your competitors with your bestsellers.

The truth is you can’t build long-term profitability without updating your product discovery strategies.

Why?

Yes, you want to ensure that a potential customer finds the right product for their needs (increasing conversion changes) — while also you also need to ensure that they are purchasing one that offers the most profit potential, while simultaneously making sure you aren't letting inventory costs eat away precious revenue.

It’s a balancing act where inventory optimization meets product sorting. A high-performing merchandising and advanced product sorting strategy should:

The best way to ensure you are harnessing the power of all these elements is by using the right merchandising ideas automation tool — especially if you have a growing product category list.

Kimonix is the only holistic merchandising tool. Designed to help online retailers fulfill their business goals, fuel conversion, and keep their customers coming back, it enables you to sort products by multiple parameters, including inventory KPIs and margins.

You can find out more here.

6. Think Bigger Than Per-Order Profits

When formulating a plan to improve and increase profit margins, you want to look at your strategies as a whole.

In other words, you don’t want to be obsessed over per-order profits but instead look at these with your retention, conversion, and net profit rates.

Let’s say you have a product with a lower profit margin. If you are just focusing on this one product, you could be tempted to increase your margins by increasing your pricing. But that’s not the whole picture.

What if this product brings you more sales than other products, thus giving you a chance to convert new shoppers that you can then put in your retention strategies?

Retention costs less than the initial acquisition and thus offers better profitability, even if the margin on the next product they buy is slightly less than you would want.

Or, you could use this product as a hook for your upsell strategy to increase AOVs (average order values). In fact, increasing AOVs is an excellent way to increase net profit for the specific sale, as well as profits overall.

Here are some ways you can increase your AOVs (and therefore your profits) without outpricing yourself out of your market:

  • Cross- or upsell complementary products
  • Offer product bundles or package incentives
  • Invest in robust customer loyalty strategies
  • Create gifts or other incentives — such as a free shipping threshold — to increase order totals

Here’s an example of a brand (Kopari Beauty) doing the latter.

how to increase average order value with incentives

[Source: Shopify]

7. Reduce Operating Costs with the Right Optimization Strategies

The next strategy for a higher profit margin is to review and optimize your operation expenses and reduce overhead costs.

If you want to increase your store’s profit margin, you will need to improve your operating margins, and to do that, you need to audit all your operating costs and expenses and bring your overhead expenses down.

Bonus: How to Calculate Operating Margin

Your operating margin is equal to your operating earnings, divided by your expenses.

For instance, let’s say you have a yearly sales revenue of $2 million and your COGS are $850,000, while your admin backend expenses are $150,000.

Your operating earnings would equal $2 million − ($850,000 + $150,000), or $1 million. And your operating margin is 50% ($1,000,000 / $2,000,000 x 100).

operating-marging

[Source: EDUCBA]

While you will likely have fixed costs you can’t change, there are many ways you can lower your overall operating expenses. Here are a few ways to reduce operating costs to get you started:

  • Audit your backend spend to see where you can decrease equipment and maintenance fees
  • Reduce backend office space and take your teams remote
  • Reach out to vendors and suppliers to renegotiate contracts
  • Avoid late payment fees by paying suppliers on or ahead of time
  • Look at your labor costs and see where you can opt for SaaS tools instead of new hires
  • Renegotiate fixed costs, such as insurance and licensing fees
  • Outsource services to third-party services
  • Implement strategies to help you reduce product return rates
  • Review and optimize product packaging
  • Reduce your holding costs by implementing strategies to reduce non-moving inventory
  • Lower shipping costs by tying shipping to incentive promotions
  • Review your brand’s variable cost and see where cuts can be made

Ultimately, the best way to reduce your operating expenses is by making minor strategic cuts. And the best way to do that is by harnessing the power of eCommerce automation and AI.

8. Focus More Heavily on Retention

Retention rates and customer loyalty are vital to improving your profit margins and boosting long-term profitability.

As we touched on earlier, marketing to return customers costs much less than acquiring new shoppers, thus resulting in far better ROAS, which improves margins.

Or, more simply put, good retention strategies will help you increase your sales volume while keeping your COGS down for those product sales.

Here are just a few ways to boost your retention strategies that will help you with profit margin improvement:

  • Identify, segment, and reward high-converting customers (VIPs)
  • Under promise and over deliver when it comes to fulfillment and unboxing
  • Invest heavily in customer service strategies to make the shopping experience not only seamless but enjoyable
  • Build a content marketing strategy that offers high-value information and resources
  • Harness the power of email marketing to deliver personalized product recommendations
  • Build a robust loyalty program that helps with retention rates and product discoverability
Customer conversion cycle

[Source: The Good]

9. Get Strategic with Price Increases

There may be no other way to boost long-term business profitability than increasing pricing — especially when you have no control over the increases in your fixed costs that could be coming your way. Ultimately, when all else fails and you have no choice, it may be time to review your pricing strategy.

But the act of increasing pricing can be a delicate business. You want to ensure you add enough value in your messaging to ensure you don’t disrupt your retention rates or turn away new potential customers.

To strategically raise your prices, you should first ensure you have implemented all other profit improvement hacks mentioned in this post. It is also important to assess if there is room for improvement in your customer service and product quality.

Once you are sure you are optimized in terms of service and products, you can look at ways to raise your prices without disruption. Sometimes it’s as simple as increasing the percentage, but sometimes it will require far more finesse.

Here are some hacks for implementing a new pricing strategy with minimum conversion disruption:

  • Add as much value as possible, first by focusing on product positioning and quality and improving brand authority.
  • Study your previous price strategies and hikes to review what worked best
  • Test all new price strategies and increases before you implement them in full
  • Consider moving products into bundle options only
  • Review areas where you can expand into brand-new market segments

You can read more about these and other strategies here: The Ultimate Price Increase Strategy for eCommerce.

Final Thoughts: When It Comes to Margin Improvement Strategies, There Is No One-Size-Fits-All

The truth is each brand is different, and each industry is different.

Yes, these foolproof strategies for profit margin improvement are likely to work. But it’s not enough to just copy them. They each need to be adapted for your online retail brand.

No matter which of these hacks you plan to utilize in your profit margin improvement plan, you will want to tweak, test, and then optimize again for your specific brand, niche, and target shopper. You will also want to regularly review your pricing strategies and margins regularly and be ready to pivot with quick market changes.

Want to learn more about how you can upgrade your product collection on auto-pilot? Reach out to our online merchandising and retail marketing experts here.

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