Is an online store profitable? This recurring question is being asked by more and more entrepreneurs, particularly in current circumstances, determined by the emergence of Covid-19, which has accelerated the digital transformation of businesses, fostering a general consensus on the need to orient businesses towards Internet sales.
In this ‘post’ we will explain the steps to follow to have a profitable online store, focusing on four fundamental criteria: increased number of visits, the transformation of these into orders, increased purchase volume, and loyalty. In addition, we will also talk to you about how we help our clients in Routing to achieve these goals.
What to take into account when calculating the profitability of an online store?
There are many who consider the profitability of an online store, either because they want to start a business because they aspire for their offline business to finally make the digital leap, or because they already have an eCommerce platform and want to increase their profits.
In either case, when you have a clear vision of how it can be a profitable online store, it must be integrated into the criteria equation as the costs both fixed and variable scope, or investment needed in recruitment to attract visitors and convert them into purchases, to be able to be more and more numerous. At the same time, a growing loyalty must also be sought in the customers who make them.
FIXED COSTS ONLINE STORE
The fixed costs of an online store will be those that will not vary regardless of how sales evolve. Thus, we can include within these:
- The creation of the web platform
- Hosting maintenance, that is, the hosting of the page
- Office rental, in case the business has a physical headquarters
- Supplies: Internet, telephone, electricity, water, etc.
- Cost of the physical warehouse for stocks or storage providers
- Online marketing campaigns: SEO, SEM, Social Media, Inbound or other types of actions.
- Management and consulting solutions
- Company taxes or self-employment fees
- Other services, such as computer support services, virtual POS for payments, etc.
All these costs are not fixed in the sense that they will not vary, but rather that they do not depend on the volume of sales.
In fact, there are some such as investment in advertising campaigns that will have to go up if you want your business to do better since online marketing solutions: SEO, SEM, Social Media, Inbound, mailing … are essential to feed the recruitment-conversion-loyalty chain, which is where any Ecommerce plays its success. In this sense, in order not to be blind when calculating the necessary budget for online marketing, it is best to ask for help from an agency specialized in digital business.
Thus, taking all this into account, as you may have deduced, it is very difficult to have a profitable online store as soon as you start, since it is at the beginning when the strongest investment must be made, and then when the business is consolidated the portion that is they carry fixed expenses, it is modulated, although later it is necessary to reinvest in key aspects such as online marketing strategies.
VARIABLE COSTS ONLINE STORE
Everything related to variable costs will have a considerable influence in determining the profitability of an online store. Within them, stock management and logistics are of great importance, which will take a significant pinch of your budget.
If stock management is efficient, it will not be long between the stockpiling of the products and their sale, while if it takes longer, it is necessary to fine-tune enough in the management of working capital to avoid liquidity problems.
Likewise, it is very important first of all to be clear about the cost of acquiring each different product that is sold on the eCommerce platform, and the profit or gross margin extracted (ideally, it should not fall below 50%). Likewise, other variable costs that must be managed well to have a profitable online store are:
- Shipment of products
- Returns management
- The price of the packaging, including boxes, paper, seals, labels, etc.
- Other elements that may go in the packages, such as promotional brochures, gifts, etc.
All these variable expenses will be there, and they will be added to the fixed ones, so it is essential to do good planning, which will always work out better if you use specialized professionals to help you create and launch your eCommerce platform.
The only alternative to avoid these fixed and variable expenses is to direct the Internet business towards Dropshipping, this is the sale of products that are not in a warehouse because they are marketed by a third party. Thus, effectively you do not have to invest so much, but that does not mean that you will automatically have a profitable online store, since the profit margins are minimal and you have to face a lot of competition.
How to calculate the profitability of an online store?
Calculating the profitability of an online store is easy if you can make a neat subtraction between income and costs, both fixed and variable. So far we have had a lot to do with the latter, but how would the former be calculated? There is a not excessively complex formula that is:
Revenues = Visits x TC (conversion rate) x MT (average ticket)
Thus, the volume of income would be determined by the number of visits that the E-commerce is capable of capturing, the rate or percentage of conversion of those users into customers who buy, and the amount of the average ticket (order) they make.
But be careful, you also have to take into account an important criterion such as loyalty, since the times your customers repeat buying in your online e-commerce store is fundamental both for quantitative purposes, so that means indirect income, as well as qualitative so that It implies positive for your brand: a satisfied customer recommends and ‘works’ for you in such a decisive aspect as recruitment.
In this way, recruitment, conversion, and loyalty are the essential strategic lines that must be influenced to have a profitable online store, all of which are equally very important.
How to improve the profitability of an online store?
Obviously, to achieve optimal profitability from an online store, you have to try to maximize revenue as much as possible. With this objective, according to the formula that we have referred to in the interior section, a first step would be to increase visits, since the more users connect with the platform, the more likely they are to buy. Above all, if an appropriate keyword strategy has been made with SEO, SEM, or both, which has positioned the platform in good positions in the face of certain searches related to the products we sell.
But attracting visitors is only the first step, since then it would be necessary to:
- Increase the conversion rate of visits to real orders: If not, we run the risk of having a very good positioning strategy that fails when it comes to being translated into monetization.
- Increase the volume of the average order: since something as arduous as a customer has been achieved, the larger the size of their purchase the better.
- Increase loyalty: it is not just about getting a user to become a customer and place an order as large as possible, but also to find that it repeats frequently.
However, the profitability of an online store also goes through a rationalization of both variable and fixed costs. Although be careful, this does not have to mean trying to cut costs as it may, since cutting back on certain key aspects can suffer from your web positioning to the quality of the service you offer.
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Author Bio
Vikram Rana is Marketing Manager at LiftnGift and has served as the Head of Conversion Marketing at Planet Web Solution. He’s an expert in inbound marketing and lead generation.
