The rapid changes in ecommerce over the past several years reflect overall shifts in the economy and necessitate a change in behavior and priorities for ecommerce businesses.
During the COVID-19 pandemic, ecommerce grew at an unprecedented rate. As rapid, continued growth seemed inevitable, more and more Amazon aggregators and investors threw their hats into the ring. They profited big time, making billions by purchasing and optimizing ecommerce businesses. However, as inflation took off and recession alarm bells began to sound in early 2022, that growth began to slow.
Ecommerce business owners now face a reality in which inflation and slowing sales have changed the outlook entirely. Aggregators don’t have the funds they used to, with investments decreasing 60% from the first half of 2021 to the first half of 2022.
With a slowdown in consumer spending, ecommerce businesses owners find themselves facing an important decision: prioritizing growth or profits.
Growth vs. Profitability in Ecommerce
Growth comes with a cost. Ecommerce brands trying to increase market share or expand their offerings often take a loss to do so. This is particularly true in 2023, as costs associated with selling products online have only increased. The rising price of raw materials, expensive shipping and continued supply chain disruptions all contribute to increased procurement costs. What’s more, customer acquisition costs have increased significantly as well.
Putting profit first, on the other hand, requires careful cost cutting, a reconsideration of pricing strategies and a pivot toward more cost-effective business strategies. This tends to slow growth, but results in greater profitability.
A strategy prioritizing growth over profit, at least temporarily, was a viable option for promising ecommerce brands until the recent slowdown. The current economic outlook, however, favors businesses with higher profit margins and a more sustainable approach to sales.
Where ecommerce aggregators and investors once sought out high-growth companies, they are now seeking profits. Entrepreneurs building a sustainable business, as well as those seeking to sell, should therefore put profitability first.
Strategies To Maintain a Good Profit Margin
Even with rising costs, better profit margins are achievable. Entrepreneurs who succeed in doing so follow these strategies:
Optimizing the supply chain is a good place to start. A deep dive into the ins and outs of your supply chain can surface areas where money is not being utilized efficiently. It’s often possible to negotiate better deals with suppliers, for example.
Utilizing AI technology in various aspects of an ecommerce business can also save valuable capital. From inventory management to chatbots to image generation, AI has the potential to streamline businesses, remove the risk of human error and save money on labor.
While many ecommerce sellers are hesitant to raise prices due to the potential hit to sales, slightly higher prices often lead to greater profitability in the long run. Especially now, when the costs of goods and procurement have increased significantly, raising prices is often inescapable.
That being said, it’s wise to test out various pricing strategies, monitoring competitors and staying within their range, unless your offering differs significantly.
Turning to cost-effective marketing strategies
Email marketing is one of the most cost-effective marketing strategies out there. In fact, the average ROI of email marketing is $36 for every $1 spent. It gives you the potential to reach a massive audience while fostering relationships with existing customers.
User-generated content (UGC) is another marketing strategy that should not be taken lightly. Consumers are more likely to trust recommendations from real people than from brands, and utilizing UGC has been shown to increase conversion rates. Offering incentives for customers to post reviews, testimonials, and photos and videos is a low-cost way to raise brand awareness and increase sales.
Targeting return customers
It costs five times more to attract a new customer than to retain an existing one. Therefore, shifting marketing efforts to customer retention is a sure way to reduce costs and increase profitability. This can be done through personalization, targeted product recommendations, top-notch customer service, and referral and loyalty programs. Spending some time fostering relationships with existing customers can be immensely beneficial to brands seeking to raise their profit margin.
A higher average order value (AOV), tends to bring with it more profitability. There are some quick and simple ways to increase your AOV, including by offering bundle deals, upselling and cross-selling through targeted recommendations, and advertising free shipping on a set order minimum.
The shifting landscape of ecommerce, marked by inflation and a slowdown in growth, necessitates a change from ecommerce businesses owners. While prioritizing growth was once a viable option, the current economic outlook favors profitability and sustainability.
To maintain good profit margins in the face of rising costs, ecommerce entrepreneurs should focus on cutting costs, raising prices strategically, employing cost-effective marketing strategies, targeting return customers, and increasing average order value.
Above all, don’t neglect the data. Regularly monitoring various sales metrics and effectively managing cash flow are non-negotiable for businesses looking to profit.
Roei Yellin is co-founder and CRO at 8fig