The importance of profit margins is nothing new, but squeezing every bit of value from each transaction has taken on added gravity in a global market that’s increasingly dominated by e-commerce. Competition is king in the digital world, and you’re no longer competing only with similar businesses in an established geographical area. In theory, at least, you’re competing with everyone else who offers a similar product or service, regardless of location.
The realities of marketing and customer purchasing habits mean that you’re not really competing with the whole world. No matter what product or service you sell, though, setting the right price is more important than ever. Businesses of all sizes can benefit greatly by offering the right mix of products, for the right price.
Analyzing Online Profit Margins: Building a Strong Foundation
It all starts with a plan, and not one that’s tied entirely to market conditions. In order to improve your online profit margins, you need to focus on the things you can control. How much do your items cost to produce, and what is their retail price? Finding out might take a little digging, especially if you’re new to the process.
- The first step is a look inward, at your cost of goods sold and overhead. Cost of goods sold is the direct cost of producing the product or service in question. If you sell ham sandwiches, then the bread, meat, cheese, and fixings in each sandwich are part of the cost of goods sold.
- The refrigerator you use to store the ingredients, the electricity you need to power the fridge, and the floor space you rent for selling sandwiches are examples of overhead. These costs also factor into your pricing evaluation, even though they can’t be directly attributed to a single product.
- Once you have a good idea of the exact production costs, you can compare those costs to the price you charge for each item. Your profit margin is the difference between the cost of production, and the revenue generated by a sale.
Improving Margins with a Profitable Product Mix
Once you have a strong analytical background of your profit margins, you can start looking for ways to improve. It’s important to remember throughout the process that a thin profit margin on a popular item is not necessarily a net negative, especially if the item’s popularity is tied to its price point. Improving online profit margins is a balancing act between cost, revenue, and appealing to your primary market with the right deals.
- The basic concept is as old as business itself: Look for items that cost the least to produce, while generating the most revenue. When production costs and revenue don’t line up, it’s time for a change. Focus your marketing on the items with the strongest margin, while looking for ways to improve the production or pricing of items that are lagging.
- Trial and error is not necessarily a bad tactic… if it’s well-informed. You don’t want to raise or drop prices on a whim, but sometimes trying a new price is the only way to see if it will work. Just be sure to record accurate data as you experiment, so that you have a point of comparison.
- Promotional pricing, used effectively, is another great tool to add to your belt. Promotions are especially useful for items you believe in strongly, but which haven’t caught on as expected. A promotional price shines a light on those items, and gives buyers a chance to experience their value before paying full price in the future.
In the end, an open mind is the key to improving your online profit margins. You need to remain open to new ideas, and willing to do the not-always-pleasant work of looking inward at your business. The sticker price of an item is important, but it’s far from the only factor that affects your profit. Your product mix, marketing, and costs all play a role, too. Pay close attention to the real costs and revenue of each item you sell, and you’ll be in the best position to constantly improve your profit margins.
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