5 key strategies for merchants to reduce costs and drive profitability

Wix Ecommerce Head of Business Development Shelly Cohen offers tips on shipping, pricing and saving time.

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Photo by Curology on Unsplash

By 2026, 24% of retail purchases are expected to take place online and the eeommerce market is expected to total over $8.1 trillion. This is a golden opportunity for online retailers, but they need to be smart about how they approach it. Unfortunately, many merchants struggle to understand and only track their profit margins. The higher the margin, the better, and in ecommerce, the average net profit margin is 10%. This means that for each $1 of revenue, the business earns $0.10 in net profit. Negative profit margins mean the spending is higher than what’s being made, which is unsustainable and can lead to an eventual doomsday for a business if it can’t get out of the red. The trick is for merchants to solve the paradox of growth and profitability.

Here are 5 strategies merchants can employ to keep their costs down and drive profitability.

1. Understand your operating costs down to the penny.

Operating costs are the day-to-day expenses of keeping things up and running that are not connected directly with the primary activity of the business. These expenses vary by brand, industry and location but you can’t run a business without incurring these costs, even if you don’t have a physical store. The reality is that 43% of small businesses that claim the most prominent financial challenge is paying their operating expenses. Therefore, merchants need to understand the full scope of these costs to evaluate what’s necessary, what can be trimmed back and where there could be potential issues in the budget.

Some common expenses for merchants are:

  • Website development and maintenance costs
  • Web hosting and SSL certificate fees
  • Inventory costs
  • Advertising and marketing spending
  • Payroll and employee benefits
  • Rent and utility expenses (for physical stores)
  • Taxes and legal requirements

Understanding and managing your operating expenses is critical. These expenses must be paid, or you won’t be able to survive day-to-day. However, you can try to save money by limiting expenses where possible.

2. Ship smart.

It sounds simple but it’s important to get this element right. More than 90% of consumers believe two- to three-day delivery is standard. The lack of inventory was a top concern for SMBs going into 2023. Inventory management strategies were under pressure at the start of the year and now it’s on the merchants to get their shipping process right.

Some operational shipping details merchants need to think about include:

  • The efficiency of shipping goods. Run through some different scenarios such as does it make sense to have free shipping above a certain price point in the cart to encourage more items to be sent in fewer trips (and increase potential revenue at the same time)?
  • Be smart about the time of day packages are sent.
  • Understand the cost and fees of sending goods domestically and internationally.

Additionally, you need to protect your brand from overselling, late shipments, and other costly mishaps by setting up the proper fulfillment and inventory flows. Dropshipping and print-on-demand are smart options to avoid juggling inventory supply and demand. Dropshipping allows businesses to fulfill orders as they are placed to avoid guessing the amount of inventory to stock, and print-on-demand adds a layer of product customization.

Offering pre-order options lets customers secure anticipated new products, and 28% of all pre-orders are placed on the first day of pre-order availability which is a strategic way to gauge how much inventory is necessary. Allow customers to pre-order out-of-stock items to avoid missing a sale - just don’t forget to notify customers when back-in-stock items are available.

3. Establish your pricing scheme.

Once you understand your total costs, calculate your break-even point, which is the point where your revenue equals your expenses. Additionally, conduct market research to understand what your competitors are charging for similar products. Look at both direct competitors and indirect competitors, and consider factors such as product quality, brand reputation and customer service.

After understanding all the existing data, you can now move to determine your value proposition and prices accordingly. Determine what sets your products apart from the competition and what value they offer to your customers. If your products offer unique features or superior quality, you may be able to charge a premium price.

Some tactics around pricing include:

  • Cost-plus pricing - Add a markup to the cost of products to reach the desired price point.
  • Keystone pricing - Set the price by simply doubling the wholesale price of the product.
  • Competition-based pricing - Keep your prices in line with what your competitors are charging.
  • Premium pricing - Charge a price that’s consistently higher than your competition to create the perception that your product is higher quality or better in some way.
  • Price skimming - Set the highest price you can reasonably charge for a product when it first launches, then lower the price incrementally over time.
  • Discount and sale pricing - Offer customers a temporary discount as an incentive to increase sales and customer loyalty and/or reserve discounts for out-of-season and slow-moving goods.
  • Penetration pricing - Set a low initial price for a product to attract customers and gain market share.
  • Value-based pricing - Charge a price that reflects the perceived value of your product. This could mean charging higher for products that are high-quality, durable, or created by a notable brand.
  • Product bundle pricing - Offer a group of related products as a bundle, where the total bundle price is higher than a single unit, but a single unit included within the bundle is offered at a discount.

It is important to test your pricing on a continual basis. Once you have established your pricing scheme, test it to see how your customers respond. You can experiment with different price points and analyze the impact on your sales and profitability. Monitor your pricing scheme regularly and make adjustments as needed based on changes in the market, customer demand, or other factors.

4. Optimize your personal time investment.

The little things you do every day can add up to a lot of time spent. Merchants typically underestimate the time these things can take. To grow your business, you must develop the discipline to adhere to investing your time in your business in a methodical, regular and disciplined way.

Find ways to make things easier to work more efficiently with goals. To ensure that your objectives are specific and attainable, it's recommended to set measurable goals that include a clear timeframe. While business owners may have a general idea of what they want to achieve, having well-defined goals can help avoid potential distractions and keep them focused on the end goal.

Merchants can also have technology work for them. AI tools, such as an AI Text Creator, can be used to create selections of tailored website headlines, taglines and paragraphs. AI tools can help combat the time-consuming efforts needed to complete a professional-looking website and essential marketing materials including email marketing campaigns and landing pages. Also, there are now tools and applications that can help small business owners create policies, understand taxes, incorporate their business and more without having to jump through hoops to find resources to build these important and necessary elements of the business.

5. Use an omnichannel approach to reach customers.

With the rise of mobile devices and the increasing popularity of social media, consumers are looking for a seamless shopping experience across multiple channels and devices. About 73% of consumers use multiple channels when they shop and 61% of retail traffic comes from mobile devices.

An omnichannel approach seeks to provide customers with a unified brand experience, regardless of which channel they use by integrating the organization's distribution, promotion and communication channels in the backend. This means that regardless of whether the customer is shopping online from a desktop or mobile device, by telephone or in a brick-and-mortar store, their experience will be seamless and consistent. This can increase brand awareness, customer reach and sales.

Merchants can sell their products and sync catalogs across all branded online stores, physical stores, social media, and marketplaces to create a consistent and holistic brand experience. And keep in mind that shoppers who use 4+ channels spend about 9% more than those who use only a single channel. Brands that can deliver a consistent and engaging experience across all touchpoints are likely to be more successful in building brand loyalty and driving sales.

Final thoughts

It’s easy for merchants to obsess over revenue and believe that if they increase the amount of money they bring in, their business is going to be successful. However, businesses can lose money on a sale if merchants haven’t considered all their expenses, miscalculated product pricing or haven’t optimized their sales and efficiency strategies. Merchants need to track their profit margins to understand all their financial figures to strike the right balance between spending and generating revenue to cut down on unnecessary costs and drive profitability.

Shelly Cohen is the head of business development for ecommerce at Wix.

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