Profitability Analysis for eCommerce: Beyond Gross Margins

There’s a lot more to becoming profitable than just making sure you’re improving your gross margins — especially in eComm. Yet many eComm startups only concern themselves with gross margins, while ignoring many of the other key metrics that factor into overall profitability.

So what other metrics should you be paying attention to? Aside from gross profits, metrics like fulfillment costs and customer acquisition costs are important to note. Read on for more information on how any eComm startup’s profitability analysis should go beyond gross margins and consider various other factors.

Understanding eCommerce Profitability

Key Profitability Metrics

In addition to gross profit margins, here’s a look at some of the key profitability metrics that you’ll want to track:

• Net profit margin: Think of net margin as your return on sales. This metric is designed to measure the amount of revenue left after deducting operating expenses, depreciation, interest, taxes and more.
• Operating profit margin: Operating profit margin is the amount of money your eComm startup makes after it considers all the direct and indirect costs that are involved.
• Contributing margin: This measures the profitability that is left after accounting for fixed costs.

Additionally, metrics like customer lifetime value (LTV) and customer acquisition cost (CAC) are important to know and understand. LTV is important for better understanding the long-term value of your customers and can help your eComm startup enact strategies that are bigger picture. CAC is important because it measures how much money you’re spending as a startup to earn new customers. The less you spend to earn a customer’s business, the more profitable your startup will be.

The Role of Cost of Goods Sold (COGS) in eCommerce Profitability

COGS is essentially the cost of sales. It’s a metric that represents the direct costs associated with selling a good or service, including accounting for materials, labor costs and manufacturing. For an eComm startup, COGS also includes shipping, warehousing and transaction fees.

There are several strategies eComm companies can enact to optimize COGS, all of which tend to be related to efficiency improvements. For instance, streamlining manufacturing with automation or AI, or implementing lean principles to eliminate wasteful activities can all help optimize COGS without sacrificing the quality of your service or your product.

Strategies to Maximize eCommerce Profitability

Looking for actionable insight to maximize your eComm startup’s profitability? Here’s a closer look:

Smart Pricing Strategies That Go Beyond Discounts

When it comes to pricing a product or service, one option is to implement dynamic, or value-based, pricing models. Dynamic pricing is a strategy where prices are adjusted in real-time according to supply and demand, and other factors and market conditions. Dynamic pricing is a flexible strategy that can help your eComm startup maximize revenue, better control inventory and respond faster to changing market conditions.

Dynamic pricing is one alternative to offering constant discounts. Some of the downsides of discounts include diminished perceived value and customers becoming too accustomed to frequent discounts and waiting to make purchases. Frequent discounts can also eat into profit margins.

Reducing Operational Costs Without Hurting Growth

Efficiency improvements are an ideal means of reducing operating costs without harming your startup’s growth. One area eComm startups should examine is their inventory. Optimizing inventory management to prevent overstocking or understocking can strike a perfect balance. Additionally, taking steps to automate fulfillment, streamline supply chain operations and work smarter without working harder can help reduce overhead and increase profitability.

Boosting Retention to Improve Long-Term Profitability

Acquiring new customers is estimated to cost up to seven times more than retaining existing customers, underscoring the need for robust retention strategies. Some common strategies your eComm startup may consider implementing include customer loyalty programs, personalized email marketing, improvements to customer service and referral programs.

Leveraging Technology and Data for Profitability

AI and Automation in eCommerce Profitability

AI and automation are disrupting every industry — and if your eComm startup can utilize these technologies properly, like for performing a product profitability analysis, it can create huge competitive advantages and maximize profitability. AI, for instance, can help optimize inventory management. AI can also play a role in your startup’s customer service efforts. Automated chatbots can be created to help customers with common questions. Both strategies can help reduce overhead and increase profitability.

Data-Driven Decision-Making for Smarter Profitability

Consider making all of your decisions based on data. If you have access to data in real-time, you’re empowered to make faster, smarter decisions on pricing, inventory, marketing spend and other factors that can influence profitability.

Case Studies: How eCommerce Brands Improve Profitability

While strategies and frameworks are essential, nothing illustrates profitability in action better than real-world examples. Below are examples of how fast-growing eCommerce brands improved their bottom line by going beyond gross margins and addressing operational inefficiencies, financial strategy, and customer economics.

Caraway: Streamlining Finance for Smarter Growth

Caraway, a DTC brand known for its non-toxic cookware, launched with a lean team and limited funding. As demand for their products grew, so did the complexity of their operations — from inventory management to capital planning.

To stay focused on growth while building a scalable financial foundation, Caraway partnered with Graphite Financial for Fractional CFO services, bookkeeping, and tax support. Graphite helped Caraway:

• Implement systems for AR, AP, and inventory management
• Model different fundraising and growth scenarios
• Maintain financial visibility and control without building an internal finance team

By offloading back-end accounting to a trusted partner, Caraway was able to focus on brand, product, and customer experience — all while improving financial decision-making and long-term profitability.

Challenges That Threaten eCommerce Profitability

The Cost of Fast and Free Shipping

Consumers want their products fast and don’t want to pay for shipping. Free shipping can help with conversion rates and sales, but it can reduce profit margins. The good news is that you can offer free shipping and still maintain solid profit margins. Some tips for doing so include:

• Negotiating better rates with carriers
• Optimizing packaging to avoid dimensional weight fees
• Membership or subscription programs that come with free shipping
• Offering free shipping only after consumers have spent a certain amount

The Challenge of Rising Customer Acquisition Costs (CAC)

The old ways of advertising and marketing to potential consumers aren’t always the most practical — or affordable — today. Traditional print, TV and radio advertising is expensive, which eats into marketing budgets and profits. Rather than these conventional means, consider focusing on SEO, social media marketing and email marketing.

Future Trends in eCommerce Profitability

The Growth of Subscription-Based eCommerce

Subscription-based models are already trending — and they’re only likely to play a bigger role in the industry moving forward. Subscription-based models are ideal for creating more predictable revenue via recurring income. They can also help foster long-term relationships thanks to their convenience and value.

The Impact of Ethical and Sustainable Practices

According to Statista, about 44 percent of consumers indicate they’re more likely to buy from a brand with sustainability goals. Another report says consumers are even willing to pay about 10 percent more for a sustainably produced or sourced product. However, sustainably sourced or produced products can often be more expensive to create. So how do you balance sustainability with profitability?

• Optimize your operations to reduce waste and improve efficiency
• Ensure your suppliers are sustainable and ethical
• Lean into your sustainability practices as a competitive advantage to earn more business
• Market to eco-conscious consumers
• Explore new solutions that can reduce your startup’s environmental impact

Strengthening Your eCommerce Finances

Profitability is about more than just revenue — it’s also about cost efficiency, customer retention and operational excellence. That’s why your startup should be focusing on more than just gross margins, but on thoroughly evaluating pricing, variable costs and customer retention efforts. If your startup needs help driving profitability, consider working with a partner like Graphite Financial. As experts in accounting and financial management, we specialize in helping eComm startups drive growth. Contact us today for more information or to schedule a consultation.

FAQs

What profitability metrics should eCommerce businesses track beyond gross margins?

Metrics to track beyond gross margins include CAC, LTV, COGS, net profit margin, operating profit margin and contributing margin.

How can businesses lower fulfillment and shipping costs while maintaining customer satisfaction?

Some strategies include negotiating better rates with carriers, optimizing packaging to avoid dimensional weight fees, membership or subscription programs that come with perks. These may include free shipping and offering free shipping only after consumers have spent a certain amount.

What are the best strategies for increasing repeat purchases and customer retention?

The best way to improve retention and repeat purchases is to build great relationships with your customers. Some ways of doing this include offering loyalty programs and rewards, focusing on providing exceptional customer service, personalizing experiences and instituting a generous referral program.

How can AI and automation improve eCommerce profitability?

AI can help optimize inventory management by utilizing historical data. It can also help with your startup’s customer service efforts. Automated chatbots can be created to help customers with common questions. Both strategies can help reduce overhead and increase profitability.

What is the impact of rising customer acquisition costs, and how can businesses adapt?

Higher CAC means startups need to spend more to gain each new customer. This can negatively impact profitability. Some ways to adapt include focusing more on retention and making efforts to improve the customer experience. Additionally, assessing marketing efforts and looking for low-cost, yet effective solutions can help.

What role does sustainability play in long-term eCommerce profitability?

More consumers are indicating a desire to purchase sustainably sourced and/or produced goods, even to the point where they’re willing to pay more for them. Some tips for acting sustainably and responsibly without hurting your profit margins include optimizing your operations to reduce waste and improve efficiency, ensuring your suppliers are sustainable and ethical, marketing to eco-conscious consumers and exploring new solutions that can reduce your startup’s environmental impact.