It is easier to operate and manage online sales, but the actual struggle arises with the intricacies of preserving profit. Solely focusing on driving sales will not sustain the business in the long run; you also need to divert attention towards generating profit for healthy accounting books. Therefore, as a seasoned E-commerce Accountant, I have curated these seven crucial steps to transform your profit margins and ensure your success isn’t merely on paper. So, let’s get started.
Step 1: Evaluate your actual Cost of Goods Sold (COGS)
The first critical sign of your thriving business is the gross profit margin, which is calculated as (Revenue – COGS) / Revenue. The problem occurs when business owners often miscalculate the COGS. When running a UK E-commerce business, your COGS must cover:
- Product cost: The direct cost of manufacturing or purchasing the inventory.
- Import duties & shipping: If you’re importing inventory from outside the UK, remember that customs duties, VAT on imports, and freight costs must be allocated to your product cost.
- Packaging: This includes boxes, tape, and wrapping that accompany the product.
Action: Perform a line-by-line audit of your product costs. Next, use this COGS figure to calculate your true gross margin per product.
Step 2: Clarify and manage shipping costs
Shipping costs are never constant. However, choosing the cheapest carrier is not the best option; what you need to look for is the most cost-effective and strategic solution that fits your business model.
- Negotiate with multiple carriers: Big shipping services are all good. However, if your business is not large, it is wiser to explore regional carriers and use your shipping volume as a bargaining tool.
- Implement a shipping strategy: Offer free shipping services to your customers by baking the average cost into your product pricing and increasing your AOV (see Step 4). For heavier or distant orders, consider implementing a tiered shipping rate or small surcharge.
- Audit your packaging: Air shipment? Then, you need to pick the right-sized boxes to reduce dimensional weight charges. This affects the carrier pricing.
Step 3: Optimizing payment processor fee
Every successful transaction has a hidden cost. These are payment processor fees (e.g., Stripe, PayPal, and others), which might seem small individually, but when compounded, can be a significant expense.
- Understand the platform’s fee structure: Be clear about the difference between flat fees, percentage fees, and any cross-border or currency conversion fees.
- Negotiate and shop around: Your negotiating power increases as your sales volume grows. You can then confidently approach your current provider and competitors to negotiate for a better rate.
- Optimise the checkout: Offer your customers multiple payment options (e.g., Google Pay, Apple Pay) to reduce friction and reduce the risk of fraudulent transactions.
Step 4: Increase your Average Order Value (AOV)
Want to boost your business’s profitability efficiently? Try increasing the AOV. Since the cost of customer acquisition is often fixed, you need to compel them to spend more, which directly enhances your ROI.
- Upsell and cross-sell: Offer suggestions or attractive prompts, like “Customers who bought this also bought…” or “Upgrade to the premium version.”
- Implement bundling: Create the right bundle of products at a slightly discounted price to the individual items. This moves inventory and also increases the perceived value for the customer.
- Strategic free shipping thresholds: Leverage compelling purchasing thresholds like the classic “You’re £5 away from free shipping!” Your threshold should be slightly above your current AOV to encourage customers to put that extra item in the cart.
Step 5: Control your marketing spend
In the E-commerce landscape, every pound spent on marketing must be accountable. Therefore, document and monitor:
- Track your Customer Acquisition Cost (CAC): CAC = Total marketing spend / Number of new customers acquired.
- Calculate Lifetime Value (LTV): LTV = Average order value x Purchase frequency x Customer lifespan.
- The golden ratio: Aim for an LTV and CAC ratio of at least 3:1. If yours is lower, you are likely spending too much on customer acquisition who don’t bring enough value. This is where you need expert advice from an E-commerce accountant who can help you model this data to pinpoint which channels are truly profitable, and also drive traffic.
Step 6: Implement proactive inventory management
Whether your inventory is understocked or overstocked, you are losing money in both scenarios. Here’s how you find a balance:
- Forecast demand accurately: Analyze your historical sales data, seasonality, and marketing plans to predict demand, avoiding panic buying and over-ordering.
- Calculate your Inventory Turnover Ratio (COGS / Average Inventory): A Low ratio means you’re holding onto stock for too long. Here, you need to turn over your inventory quickly to free up cash.
- Run regular promotions on slow-moving stock: Run targeted campaigns to clear stagnant stock, thereby converting it back into working capital.
Step 7: Leverage the power of your financial data
Your financial data is not only a legal requirement for tax compliance; it is also your most powerful strategic asset. Take full advantage of the information.
- Use a Profit & Loss (P&L) dashboard: Beyond those static monthly P&Ls, leverage live dashboards in financial tools like Xero or QuickBooks to track your KPIs in real-time, such as gross margin, net profit, AOV, and inventory turnover.
- Schedule a monthly financial review: Conduct a professional review of these reports every month. Ask questions like Why did margins dip this month?, or Why did shipping costs spike?
This proactive analysis strategy empowers you to recognize trends and adjust the course before a minor issue becomes a major loss.
Closure
This guide suggests shifting your focus from revenue to profit. And by adopting these seven strategic steps, you can expect lasting profitability for your E-commerce business. If the journey feels overwhelming, collaborating with a specialist can offer valuable insights and clarity, helping transform your revenue into sustainable success.
