35 % Margin: Myth or Reality

Most of the people who started e-commerce businesses were expecting to earn at least 35% margin. The reality is disappointing. To grow you need to price competitively; your fulfillment costs accumulate quickly and actual gross margin drops to low-twenties. But, can you keep high margins and grow?

Many product categories can deliver 35% plus margins. For furniture, for example, reasonable COGS is 50% and shipping is 15% of sales. However, when you factor in returns, damages and other fulfillment problems your costs jump from 65% to 80%. Good news is that these extra costs are driven by only a few products. Identify those products, isolate the problems and enjoy your 35% margin.

Most of the retailers can dramatically improve the margins through better business processes and financial discipline. Here is a four step blueprint to do so:

• Get an accurate snapshot of your business. Focus on the biggest cost drivers: COGS, Shipping and Marketing. Reconcile at least 60 % of your last 6 months of invoices.
• Start with low hanging fruits. If your shipping cost is above 15% - have someone optimize your logistics. With a good partner in 2-3 months your costs will drop creating free cash to finance other process improvements.
• Rebuild your accounting processes to accurately record exceptions. Accurate data is essential for your profitability. Start with monthly per-PO reconciliation for COGS and Shipping and move on to per-product reconciliation. Enhance your chart of accounts to properly record costs of returns, damages and orders shipped after cancellation.
• Re-run your P&L to quantify the impact and identify other issues. Take a look on new line items: Cost of Returns, Cost of Damages, Cancellations etc. Benchmark your costs against the competitors and attack your next targets.

If you can`t find experts in Logistics in your area – look around. LinkedIn is a good networking resource, search is another great one. Google “e-commerce cost reduction” to see what experts are writing about the topic or come back to my blog for some of the best practices.

You will be amazed how much can be achieved in 3-4 months. Your costs go down, business becomes more transparent and you are again driving the car instead of watching it lose oil every mile. Building business is fun. Thrive!