A World of Margin
Posted: Mar 29 2016 / Richard Bairstow / We are Underground
One of the attractions of starting an online shop is that the barriers to entry are relatively low. Whether you are already selling products elsewhere or decide to open up with a new idea, it’s a very short step to having your store up and running.
Choosing your e-commerce platform and then picking a theme for your store is pretty easy and once you’ve set up the products and organised your payments gateways the money will come rolling in. Or will it?
If you are new to online sales or just graduating from other marketplaces, then there are some important things you can do to give your store the best chance of success. In this series of articles we’ll be looking at the fundamentals for success - whatever it is you are selling.
So let’s assume that you have your product range sorted and you already know there is a good market. Let’s also assume that your product photography is attractive and your store is laid out in a way that means people can find what they are looking for – in categories or with search terms. Let’s assume you’ve got all the essential information about your terms of trade, privacy and also your contact details.
So you’re ready to go right?
Well yes you are in theory – but there are also many practical elements that will affect your store operation.
You’ll be wanting to make money from your efforts, so getting the economics right is the first task.
When it comes to making money with your store there are three things that matter most – margin, margin and margin! You’ve probably heard the phrase ‘revenue is vanity and profit is sanity’ and it’s so true!
Buying in or making products at one price and selling them at a higher price is the goal – but to do that you need to understand your true costs. Setting you selling prices will probably be governed partially by the competition, but you need to be sure that you can be competitive and still make money.
So let’s look a ensuring that you have your cost model right.
- Raw product cost – your ‘buy in’ or manufacture price for the item(s)
- Delivery costs – often your suppliers will charge delivery and this has to be included. Try to minimise or lose incoming delivery costs altogether by buying in sufficient quantities.
- Fulfilment – run some typical timings to see how long it takes to prepare finished goods to leave your store. Maybe you are paying a fulfilment service to do it for you – in which case you should know exactly.
- Advertising and promotions – how much per item sold will it cost to attract buyers (more on this in later articles)
- Returns – however good your product is, you will have the cost of processing a proportion of returns. Make sure you know your average return rates and make an allowance for the time and costs to process these.
- Time – don’t forget to value yours or someone else’s time in the production and shipping process
- Gateway payment charges – these can vary considerably but a good guide is around 2.5%. Try to negotiate the best deal you can with your chosen gateways as even a fraction of a percent could make all the difference.
- Shipping – make sure you know the postage or courier costs for the weight of your products. Also be aware of overseas shipping costs if you plan to send products abroad.
Once you’ve done all that then you can set your pricing. The difference between the costs and the selling price will be your unit gross margin. And don’t forget, if you are operating in a country where sales or value added taxes apply then you need to allow for those too.
So if something costs you $5 to produce and sell – including all the above elements and you sell it for $7.50, then you would have to sell twice as many units just to make the same amount as if you sold each unit at $10. So there has to be an optimum margin and price point that means you make the most for the least workload. It may take some trial and error to find this point on each product – but that’s the beauty of an ecommerce platform that allows bulk price changes in seconds..
When you are starting a new store there is so much to do that time is at a premium and any savings you can make will reduce your costs. The mistake many people make when they start an online store is to ignore their own time as a cost – so even if you are willing to do things ‘for free’ in the early days, just make sure you know how much you are giving to the business.If you get your fundamental cost and pricing model right then you will know the gross margin for each unit sold and be on top of your business from the start.