5 Ways to Increase Your E-Commerce Store’s Bottom Line
All too often, eCommerce store owners focus on their sales numbers, or top-line revenue as it's called in the accounting world. There is a certain cache with being able to say “I run a seven-figure eCommerce store” or “I run an eight-figure store.”
People fall into the ego trap way more than they should. I'd much rather run a store that does $250,000 in sales and makes $125,000 in net profit than run a store that does $1,000,000 in sales and makes $100,000 in profit. Today I'm going to cover some actionable items that can add as much as 5% to your bottom line. For a store that does $250,000 in sales, that's an extra $12,500 in your pocket every year, or about $1,000 a month!
Pay With a Credit Card
At the time of writing, I've worked with just under 30 vendors / distributors / manufactures, spanning 4 disparate industries. To this point, a grand total of 1 has given me an issue paying with a credit card – they charge a 3% fee. So, for that vendor, I just pay with cash. With everyone else, I pay with a credit card and earn 2% cashback via my Capital One Spark Business Card. Shockingly, a few of the vendors I work with actually give me a discount for paying with a credit card because they get their money quicker.
Before using the Capital One Spark card, I used the American Express Plum card that gives you 1.5% cashback. The Capital One card requires a solid personal credit score to qualify for, so the AMEX card is a good backup option if your score is below 750. An alternative to a cash back cards are cards that give you airline miles. It's something I've done in the past, but at this point I have over 2,500,000 airline miles and it's going to take me years to spend them. The miles aren't worth 2% of spend anyway, so cash has the best value to me. With the amount of money I spend to purchase inventory each year, the 2% adds up to be quite a sizable number.
If you run a low margin drop shipping business this 2% can make a BIG impact on your bottom line. For instance, if you run a drop shipping business at 15% profit, this 2% cash back can increase your bottom line by a whopping 13.3%. Even with a higher margin business it can still make a sizable impact. Best of all it's easy to do. It only takes a few minutes to apply for a card and set things up with your vendors. I have my card set for autopay and just watch the cash roll in…
Negotiate With Vendors
I know this might sound simple, but I'm shocked at how many people I run into that just accept standard pricing sheets from their vendors as gospel. There is almost always room to negotiate. Most of the time they will give you extra discounts just for asking, other times they will ask you to spend $x on a single order. Whatever the case, you should grill each vendor and find out what it takes to get better discounts. If they don't want to give you cash discounts off the items themselves, ask for other things such as free inbound shipping or promotional dollars. In fact, free inbound shipping is one of my favorite things to ask for because it normalizes my cost. It's always a pain trying to calculate variable shipping costs back into COGS to figure our your Gross Profit.
I can't stress how important of a point this is because sourcing your products 5% to 10% cheaper goes right to the bottom line. I'm going to give you some actionable and real world examples of discounts I've been able to get with vendors.
– Ask “what size order would I have to place to get a 5% or 10% discount”. In almost every case vendors will offer you a volume discount. This is the first question I always ask and I typically get an answer of $1,000 – $5,000 orders for a 5% discount and $2,000 – $10,000 orders for a 10% discount. This is where inventory planning becomes critical, but if you plan correctly you can add anywhere from 5% – 10% to your bottom line.
– Ask for free inbound shipping. Regardless if I've been offered a 5%-10% discount (see above) I still ask for free inbound shipping. Again, just ask what order size it would take to get free shipping. Sometimes the shipping discount can work out to be as much as 15%-20% off your overall cost depending on the types of products your sourcing. I almost always favor vendors who offer me free shipping over those who don't.
– Ask for buy x get 1 free. It's weird how the mind works, but even if a vendor won't give you a straight percentage discount, they sometimes will give you a buy x get 1 free discount. I have one vendor who wouldn't budge on the price, but then offered me a buy 12, get 1 free deal on his entire line. It just so happens to be that this works out to a 8.3% discount!
– Ask for promotional items. Most vendors are happy to give you free product to demo or give away. These products can be great for getting more content (pictures / video / etc) and for building social / SEO. People love free stuff, so you can use the promo items to gain links, likes, shares, etc.
– Ask for marketing spend. You would be shocked at how many vendors are willing to share in your ad spend with you. You'll need to pitch them a bit, but getting them to pick up 50% of the tab to create videos, run ads, or other content is a great way to increase your bottom line and build your brand at the same time!
– If you are on a drop shipping model, then ask “what yearly dollar volume do I need to get to in order to get x% discount?” Hold their feet to the fire and see what you can get them to commit to. Even if it's some pie in the sky number, it gives you motivation and drive to achieve it. I like asking this question early on so the vendor doesn't give you a crazy big number. Then, once you hit your target they can't really wiggle out of it.
Evaluate Your Shipping Costs
I take it as a personal challenge to constantly evaluate my shipping costs and get them down as low as possible. Just shaving $1-$2 off per shipment can really add up over the course of a year. I'll use IceWraps.com as a case study, which I purchased a couple months ago. This was an existing business that had a lot of room for improvement in my eyes; one of those areas was in shipping costs. The old owner paid an average of $10.85 to ship a package. I've been able to cut that almost in half – in half. Just this simple change will allow me to recover my investment in IceWraps.com that much quicker and add several percentage points of Net Profit to IceWraps.com's bottom line.
At some point in the future I will write an entire blog post about this subject, because it's too big a subject to tackle in the middle of this blog post. However, as a few pointers I suggest the following:
– Make sure you are using the right size box. This is especially important now with the new dimensional weight calculations UPS and FedEx recently added. A smaller box will generally save you some money on shipping.
– Always look at all the options. Look at every package you send out and compare rates from USPS, UPS, and FedEx. In general the smaller / lighter the package is and the less distance it's traveling, the better chance USPS is going to have the better rate. Use a service like Ordoro or ShipStation so you can compare all the rates side-by-side. You might have an item that is 5″ x 7″ x 2″ and weighs 3lbs. That item might be cheapest to ship USPS to VA, cheapest UPS to CA, and cheapest FedEx to TX. Again, always look at all options.
– Don't discount USPS Priority Mail. Priority mail has free boxes, which are worth about $1 each alone. As part of your Priority Mail evaluation be sure to look at the flat rate boxes (Small, Medium, Large) and the Regional A, B, and C boxes.
– Call UPS and FedEx and negotiate the best rates. You would be shocked at what discounts are available out there. It works especially best when you pit each one against the other.
Credit Card Processing
Credit card processing fees are a necessary evil of running an eCommerce site. However, you should do everything you can to keep these fees to an absolute minimum. One of the more popular credit card processing sites is Stripe, which charges 2.9% + $0.30 per transaction. However, after shopping around I've discovered other providers that charge less, such as SecureNet. They offer fees as low as 2.55% + $0.20 per transaction. Using the same $250,000 example from above, this equates to a savings of almost $1,000 over the course of a year. Since I have an all-encompassing relationship with my bank, I was able to get rates down to just 0.1% over interchange, which works out to just over 2%.
Grant's Bounce Back
Mike makes a great point on rescuing your margins with the credit card rewards. I can't tell you how many business owners I've met who haggle on the cost of napkins or drive 15 miles to save $0.10 on gas, yet still use their bank issued Visa or OTC merchant rate. The extra 20 hours of driving a year might save them $200 on gas, but the 3 hours to do what Mike recommends can save them well over $10,000 for a small store.
The lesson? Don't be a lazy store owner. Fight for your money.
Add to the conversation
I hope you found these tips helpful and can use them to make actionable changes to your business. Do you have other ideas or suggestions? We would love to hear from you…