Every e-commerce business owner wants to ensure that their company is profitable. But as we know, the road to profitability is long and sometimes rather tedious. However, you can get there with the right amount of focus and commitment. It always comes down to knowing the challenges that appear, and how you can tackle them in a way that’s effective and very comprehensive.
Understanding profit margin basics
The most important thing to note is that profit margins can define how good your business is doing. If your company barely squeaks by, that means some changes might be necessary, and you can get to the desired spot eventually. But if you don’t make the right adjustments and modifications, that can prove to be very challenging to manage in the end. Yet here are some of the things you want to consider when it comes to e-commerce profit margins.
The difference between gross, net, and operating profit margins
Gross profit shows the difference between how much you earned, and how much the goods you sold cost. Net profit is the income minus goods sold, along with expenses. In some cases, you also take into account interest, amortization, item depreciation and so on. The operating profit is the amount of money your e-commerce company has left over after paying the operating costs. It’s the amount you have before paying any taxes.
Why margin calculation is essential for online stores?
Every e-commerce store needs to understand that the main focus has to be on profits and generating the right amount of revenue. The challenge here is that a lot of the time, generating revenue can prove to be extremely difficult. But a good approach is to know how well your company is doing. Do you barely have money to cover expenses? Then the operating profit is not great, even if the gross profit seems fine.
Step-by-step guide to calculating profit margin
If you need to calculate the profit margin, you usually need to do the following:
- For gross profit, you take for example $10000 you made from selling products, and then subtract the $4000 it cost you to acquire and sell those products. It leads to a gross profit of $6000. The gross profit margin is $6000/$10000 x 100, so 60%.
- For the net profit, you also need to take into account taxes, which in this case could be $2000. So in that case, the net profit will be $4000, which using the same formula brings a 40% net profit margin.
- When it comes to the operating profit, you can add $1500 more on expenses, so in the end, you have a $2500 operating profit. The same formula applies, so you will get a 25% operating profit.
Using the profit margin formula effectively
The formula is designed to be very easy to use, and you should always consider applying it appropriately. Every type of profit margin matters, because it will give you a good understanding of how your company is doing, both in general, but also in adequate details.
How to calculate profit margin in WooCommerce?
- First, you want to select the desired profit calculation period
- After that, you calculate the total amount of sales from your business
- Add in the cost of goods
- Then, calculate the net profit
- After that, you need to calculate the other expenses
- At the end, you will have the actual profit margin.
WooCommerce has some great plugins that might help you with calculating the profit margin automatically. But if you don’t want to add yet another plugin, you can use the ideas above to calculate it manually.
Strategies to improve profit margins
Enhancing and increasing the profit margin is something all companies aspire to do. But it can be more challenging to achieve a lot of the time. Yet it is doable, and something you want to take into consideration.
Pricing strategies for better profitability
Naturally, you want to try out all kinds of profitability focused strategies. Changing prices so you can be more competitive and surpass others on the market can help. You can also bundle items and provide an appealing discount. The idea is to try and experiment with new price points, bundles, discounts, all kinds of things that could help boost your profit margins in the long run!
Cost-cutting tips without affecting product quality
If you want to cut costs without affecting product quality, a good idea is to try and use alternative products and materials. You can also switch to remote work and better inventory management tools. You can also check the current costs and see what can be streamlined or even replaced by a remote/automated tool. That could be your marketing, or maybe something from the production process.
Closing thoughts
Make sure that you understand how to calculate the profit margin and what can affect it. The more you learn about this process, the easier it will be to identify where the company should cut corners or at least replace various things. It comes as highly recommended to calculate profit margins, and focus specifically on the operating and net profit!
