Finding Profitability in the World of E-Commerce
Finding Profitability in the World of E-Commerce
Introduction:
E-commerce has exploded in popularity over the past decade; many may consider e-commerce businesses profitable; however, most e-commerce need help to achieve profitability.
Almost everyone nowadays has a smartphone with access to the internet, so there is a huge potential for e-commerce as a business, and we are far from the optimal peak of the e-commerce
The path to profitability is sometimes complicated. In this article, we will explore the complex relationship between scaling up and profitability in e-commerce and discuss some strategies for achieving long-term success.
Scaling up vs. profitability
Regarding e-commerce, there is a common misconception that scaling up is always the key to success. While it is true that larger businesses have the potential to generate more revenue, this is only sometimes the case. There is a delicate balance between scaling up and profitability, and finding the right balance for your business is essential.
Scaling up is expensive when you scale up, your focus is on the top line, i.e., revenue, GMV, new customers, and sales; however, to do that, your costs will increase (advertising cost, discount cost, general cost, hiring cost, and tech development cost) all of that is eating your bottom line, i.e., your net revenue.
Also, one crucial factor man e-commerce businesses, when they scale up, manage to generate high levels of demand successfully; however, they find themselves unable to satisfy the demand they developed from a fulfillment point of view, and as a result, orders get delayed or never delivered. As a result, customers get dissatisfied, and the negative word of mouth increases, and as research shows, it takes seven good experiences to change one bad experience.
Suppose the point of managing demand and fulfillment is addressed once we scale up. In that case, it will be as if the business has spent money scaling up advertising and on customer acquisition only to give customers reasons why they should not buy from them!
Two Types of Business based on How They Start
there are generally two types of business when it comes to e-commerce, those that focus on growth from day one and those that focus on profitability from day one. Growth-focused companies prioritize expanding their customer base and increasing their market share, while profitability businesses prioritize maximizing profit by minimizing costs. Both ways have their pros and cons will discuss them in detail in future articles.
The road toward profitability for scaled-up focus e-commerce.
The road to profitability for a scale-up focused e-commerce is challenging; it requires a combination of strategies and tactics. Some key considerations include the following:
Costs:
One of the critical factors in profitability is the cost of goods sold (COGS). Optimizing your COGS can improve your profit margins and become more profitable.
To optimize your COGS, you must first understand that COGS include your marketing cost, the cost of the products you are selling (buying), and cancel and returned orders. And under marketing cost, you have your digital advertising budget and discount budget.
This is important because your marketing budget can be an optimized and more efficient month over month, yet your COGS don't go down due to the other costs of buying and fulfillment.
Know your Breakeven point (BEP), how many orders you need to sell at the current AOV so your total net revenue will equal your total expenses; this point is essential, and you will be shocked to know how many e-commerce brands don’t know their BEP and they want to be profitable.
New customers, CAC, and LTV
Acquiring new customers can be expensive, and CAC is customer acquisition cost; you need to track your overall e-commerce CAC over time and compare it with benchmarks in the same region if possible. It is essential to carefully assess your CAC relative to the lifetime value LTV of that customer. by optimizing your CAC and maximizing your LTV, you can increase your profitability over time.
New customers defect. And your definition of new customers should be bound by time. Otherwise, the number of new customers will remain the same over time.
Why should you consider a customer who purchased from you two years ago once your customer? just because you have a customer’s details in your database doesn’t mean it is your customer.
And for the case of a customer who bought from you two years ago and has yet to come back, you should consider him precisely as a new customer and spend time and resources trying to re-acquire him.
Retaining existing customers is often more cost-effective than acquiring new ones, and it is essential to consider your churn rate carefully.
Conclusion:
E-commerce profitability is a complex issue, and there is no one-size-fits-all solution. By carefully considering your costs, pricing strategies, and customer acquisition and retention efforts, you can find the shift you need toward more profitability and achieving long-term success in e-commerce.