Are you using the best possible profitability strategy? Understanding gross profit margin and the other metrics of your profitability formula are key to capitalizing on revenue. Scroll through for this list of tips on how to improve your profitability.
Financial metrics like these will help you measure your ability to generate a profit. Overall, your profitability formula should be high and your margins should be low. Depending on your business goals and online strategies, there could be a key profit calculation you're overlooking.
We take a closer look at two popular profitability formulas: Gross Profit Margins and the Cost of Customer Acquisition.
You don't want to miss this -
#1 Gross Profit Margin Calculator
Remember that gross profit margin (GPM) gives you an overview of how your current revenue is serving the rest of your online business. It will tell you whether you're earning a profit or not. Check out this profit margin calculator for a quick glance at how things are going.
Gross Profit Margin Formula:
GPM = (R-COGS) ÷ R
gross profit margin equals (revenue minus the cost of goods sold) divided by the revenue
Gross Profit Margin Example:
If you have $100,000 in monthly revenue and a 10 percent GPM, that means there's only $10,000 per month to pay expenses -- and yourself. Compare that to a 50 percent GPM on $20,000 per month in revenue, which would give you the same $10,000 to work with.
Now let's take a closer look:
The small business earning less revenue each month doesn't require high-volume sales. It also requires less time and other resources.
This side-by-side comparison serves as a reminder that revenue obsession isn't useful. Instead, you want to keep an eye on profitability. You can boost your profitability by optimizing your highest grossing products.
Here's how -
Top 3 Tips to Optimize Sales of High Margin Goods
- Add variants. If a high-margin product is performing well, add more variety in size and color to give your customers more choices.
- Invest in online marketing and promotion. High-margin products should be front and center on eCommerce marketplaces. They should be featured in newsletters and in ads, with ads running more often to keep the turnover up.
- Cross-sell and bundle. Suggest a low-margin product at the time of checkout as an add-on. As long as they can be bundled in a way that makes sense and appeals to customers, go ahead and bundle low and high-margin products together.
Looking for more ways to improve your gross profit? Check out this infographic for six ways to improve your GPM right now.
#2 The Cost of Customer Acquisition
Too many online businesses ignore this formula, but the cost of customer acquisition (CAC) can actually help businesses find hidden costs and inefficiencies. This calculation let's you know how much you have to work with, should you want to increase your marketing expenditure.
Cost of Customer Acquisition Formula:
CAC = E ÷ NC
Cost of customer acquisition equals marketing expenses divided by the number of new customers per month, quarter, or year
Cost of Customer Acquisition Example:
If your marketing expenditure is $10,000 and you acquire 1,000 new customers, your CAC is $10. Taking it a step further, if your average order is $100, and your gross profit margin is 20 percent, your average new customer is worth $20, making the $10 acquisition cost profitable.
What do marketing expenses look like?
If you're running ads, that’s a marketing expense. If you hire a copywriter to optimize your product descriptions or pay a designer to refresh your product visuals, those are also marketing expenses. Any paid marketing professional - or the hours you personally spend on your own marketing activities - should be calculated into your marketing expenses.
How can you improve your CAC?
3 Ways to Improve the Cost of Customer Acquisition
- Use CAC by channel to evaluate where the most profitable customers are coming from and then prioritize your marketing spend.
- Evaluate specific products to determine which high-margin products can handle a bigger ad budget. This is also helpful if you're testing out a loss leader strategy.
- Use Google Trends to help you anticipate public perception regarding your product market. Google also offers Shopping Insights that can reveal answers to what shoppers want and compare trending products as well as products over time.
Apply These Profitability Formulas to Your eCommerce Business
It's time to put in the work and calculate your profitability and sales margins. These two profitability formulas help eCommerce merchants make the best possible choices to not only attract new customers and increase profit, but to outperform the competition.
Add these steps to your online business strategy today to guarantee profits and ensure the longevity of your business online.
Michelle Lievense is a long-time business and marketing consultant who enjoys helping businesses and brands, particularly through her writing as well as crafting and implementing successful business strategies. When she isn't tapping on her keyboard, she's hiking the Colorado Rocky Mountains with her dog, snuggling next to her cat with a favorite book, volunteering, skiing, or scuba diving.