Most of the people who started e-commerce businesses were expecting to earn at least a 35% margin. But reality can be disappointing. To grow they needed to price competitively; their fulfillment costs quickly accumulated; and their actual gross margins dropped to the low twenties.
But are high margins and high growth mutually exclusive terms?
I want to make a case for the profit-financed growth model. The benefits are clear: you keep the business, your spending is conservative, and because of financial constraints your focus is laser-thin.
But this model comes with a few challenges: Cash must be carefully watched, profit and loss numbers should be accurate, and your team will need to be initimately familiar with best retail and fulfillment practices.
Many product categories can deliver 35%-plus margins. For furniture, for example, cost of goods sold is around 50% and shipping is around 15% of sales. However, when you factor in returns, damages and other fulfillment problems your costs jump from 65% to 80%.
The good news is that these extra costs are likely driven by only a few products. If you can identify those products and isolate the problem, you can enjoy a 35% margin.
Most retailers can dramatically improve their margins through better business processes and financial discipline. Here is a four step blueprint to get started:
–Get an accurate snapshot of your business. Focus on the biggest cost drivers: COGS, shipping and marketing. Reconcile at least 60 % of your last six months of invoices.
–Start with low-hanging fruit. If your shipping cost is above 15%, have someone optimize your logistics. With a good partner, in two to three months your costs will drop, creating cash to finance other process improvements.
–Rebuild your accounting processes to accurately record exceptions. Accurate data is essential for your profitability. Start with monthly per-purchase-order reconciliation for COGS and shipping and move on to per-product reconciliation. Enhance your chart of accounts to properly record costs of returns, damages and orders shipped after cancellation.
–Re-run your P&L to quantify the impact and identify other issues. Take a look at new line items: cost of returns, cost of damages, cancellations etc. Benchmark your costs against the competitors and attack your next targets.
If you can`t find logisitcs experts in your area, look around. LinkedIn is a good networking resource, but plain old Web search also works well. Google “e-commerce cost reduction” to see what experts are writing about the topic.
You will be amazed how much you can achieve in three to four months. Your costs will go down, your will business become more transparent — and you will be driving the car instead of watching it lose oil every mile.
Maxim Mironov is a supply chain expert and founder of e-commerce fulfillment consultancy OptimaLogica.