For new e-commerce brands, growth is primarily about bringing in new customers.
But to grow a profitable e-commerce business, you also want to keep costs down. This can become difficult as you start to pour alarming amounts of money into advertising, see a good chunk of transactions go to payment processing fees and figure out how to handle that extra inventory.
As with most things, you should focus on your goals instead of your challenges. Instead of incurring more costs, find ways to reduce costs as you grow.
E-Commerce is not just a single exchange. Successfully building an e-commerce brand requires reaching consumers, managing inventory, handling payment, getting products to customers and more. The good news is you can optimize your costs at every stage.
Building off of our e-commerce Guide to Profit & Growth, here we provide actionable tips for reducing costs in four areas: advertising, inventory, payment processing and shipping.
Efficient use of every ad dollar is a great way to simultaneously grow your e-commerce brand and keep costs down.
“Calculating the ROI for each of your campaigns determines the best ways to spend your money, with no guesswork,” writes Matt Ellis for Zapier. If you have the numbers available, calculating the return on investment is just a matter of dividing the net profit from your investment in paid advertising by the amount you spent on paid advertising and multiplying by 100.
For example, if you spend $1,500 on Facebook ads and get $9000 in sales with a 20 percent profit margin as a result, the ROI is 12 percent. In the months that follow you can make tweaks to your Facebook ads to see if you can inch that ROI up. Even a three percent change can add up to hundreds of dollars.
Of course, to be able to run the numbers on the profitability of paid advertising you’ll need to have the numbers easily accessible.
Better yet, have a program run these numbers to compare profitability across marketing channels while taking every other factor into account. A profitability analytics dashboard can help you on both fronts: keeping your ROI visual and keeping track of any tweaks you make along the way.
For more information on reducing advertising costs, see our section dedicated to understanding attribution, using UTM tags to track marketing campaigns and determining effective advertising channels on our Profit Guide.
There are a couple of winning ideas to optimize payment processing fees.
The first is to be sure that you’re using the right payment processor your e-commerce store. The second is to consider negotiating with your e-commerce platform directly.
Let’s use Shopify as an example. If you’re a growing e-commerce business, there’s a good chance you’re using (or have used in the not so distant past) Shopify as a platform. Of course, Shopify makes most of its money off of transaction fees for brands using its platform.
The good news is, if your business is making $1 million or more on the Shopify platform and set to grow even more, you have some wiggle room. At that level of revenue, you’re eligible to upgrade to Shopify Plus — the first account level where you have a chance of getting Shopify’s ear.
If you’re moving serious volume, you’re already paying Shopify more than $2,000 per month and you have a good history with Shopify you should be in a position to negotiate. In most cases you can get the 2.15 percent transaction fee down to 2 percent — and we’ve heard of e-commerce reducing processing costs to 1.7 percent (plus the $0.30, of course).
If you are denied, don’t get discouraged. You can come back in another quarter once sales are up and renegotiate, or you can negotiate with a payment processor (like Stripe) directly and bring the offer to the e-commerce platform.
For more information on reducing payment processing costs, see our section dedicated to negotiating with processors, reducing Shopify fees and more on our Profit Guide.
Shipping costs can add up quickly, particularly if you sell many items for a lower profit margin.
If you’ve been using the same shipping provider — FedEx or UPS — for some time, it may be worth trying to negotiate the deal you have with them. You can pitch volume-based discounts, guaranteed rates, reduced surcharges and more.
There’s another simple way to reduce shipping costs for your e-commerce business: focus on your packaging. Matt Ellis at Zapier speaks to this as well: “In e-commerce, one of the most overlooked costs is delivery packaging. If your packaging is too big or too heavy, you can immediately cut costs by trimming it down. One size does not fit all for shipping packages: You always want to use the smallest and lightest packaging available that will still protect the goods inside.”
Taking stock of how you use packaging could change up your carrier. If you can fit items into a flat-rate box or envelope with FedEx, it may be worth switching from UPS. It’s a simple process that may seem to save just pennies, but can add up over the long run.
For more information on reducing shipping costs for your e-commerce brand, see our section dedicated to negotiating with carriers and making good use of space on our Profit Guide.
In our last post we discussed how to organically maximize the lifetime value of your customers. A critical element to increasing LTV is to utilize the data at your fingertips — and the same goes for reducing costs while you grow your e-commerce brand.
But don’t take our word for it.
“One important advantage that online businesses have over traditional brick-and-mortar stores is an enhanced ability to collect and analyze detailed customer information about everything from cart abandonment to promotional effectiveness to average ticket size by demographic,” according to a report from payment processor First Data.
The report from First Data details the challenge and potential solution to putting data to good use: “With such large volumes of purchase data running through eCommerce sites every day, the challenge is how to cost-effectively access and analyze the data to extract useful insights. Real-time access to data analytics, as well as detailed reporting, benchmarking tools and chargeback tools, is essential to maximizing success online.”
It’s the real-time access to data from your ad campaigns, storefront, inventory and fulfillment that will give you the insight you need to reduce costs where it matters most.
How do you plan on growing your e-commerce brand while making cost reduction a reality?