Measuring from Ground Level: How Top Amazon Agencies Evaluate True E-Commerce Unit Profitability
When measuring profitability, it's not about your top-line revenue, but about the Delta between your cost and top line revenue. An e-commerce many cost scale proportionally with the volume of the business.
As e-commerce continues to evolve and dominate the retail landscape, businesses need to adapt their strategies to remain profitable in this highly competitive environment. While many believe that more revenue equals more profit, this old adage does not hold true in e-commerce, and seldomly with brick and mortar. In this article, we'll explore three key ideas that will help you navigate the world of profitability dynamics on Amazon, and how the Best Amazon Agencies maximize profitability for your e-commerce business for the goals you have and the stage you are in.
Idea #1: Rethinking “More Revenue = More Profit”
The belief that more revenue means more profit may have been true for traditional retail businesses, but it doesn't apply to e-commerce for several reasons:
Variable Costs: Unlike brick-and-mortar stores, e-commerce businesses face increasing variable costs, such as shipping, packaging, and handling, as sales volumes rise. These costs can eat into profit margins and prevent increased revenue from turning into higher profits.
Customer Acquisition Costs: E-commerce businesses rely heavily on digital marketing to attract customers. As competition intensifies, customer acquisition costs rise, making it harder for businesses to maintain profitability despite higher revenues.
Economies of Scale: While brick-and-mortar stores often benefit from economies of scale, e-commerce businesses might not experience the same cost reductions as they grow due to factors like increasing shipping costs and the need for more complex logistics.
Price Competition: The ease of online price comparison leads to fierce price competition among e-commerce businesses, resulting in lower prices and thinner profit margins.
Returns and Refunds: E-commerce businesses generally have higher rates of returns and refunds compared to brick-and-mortar stores. The costs associated with processing these transactions can significantly impact profitability.
Idea #2: Measure from Ground Level - Not Sea Level: Focusing on Unit Economics
In e-commerce, success is not about the top-line revenue you generate but the difference between your cost to fulfill a unit and the revenue generated from that unit. This concept is best understood as your "elevation from ground level," where ground level represents the costs associated with each unit, including shipping, labeling, marketing, storage fees, breakage, and returns. Sea level is "0".
To improve profitability, businesses need to focus on optimizing unit economics. This means reducing costs and maximizing the value of each unit sold while ensuring that these costs scale proportionally as the business grows.
Idea #3: Mastering the Balancing Act Between Profits & Scaling
There are specific strategies e-commerce businesses can employ to improve profitability and determine when to capitalize on it:
Balance Conquest and Profitability: Be strategic about when to compete for market share and when to focus on profitability. Use promotional pricing to generate short-term spikes in demand and gradually increase prices when competition slows down.
Optimize Product Dimensions: Find the sweet spot between maximizing product value and minimizing shipping and dimensional fees. For example, consider whether you can pack $15 worth of coffee in a 2-ounce can.
In the ever-changing world of e-commerce, understanding the nuances of profitability is crucial for success. By reevaluating old adages, focusing on unit economics, and mastering the art of gaining and reaping profitability, you can maximize your e-commerce business's potential using Amazon Agency Services. Visit our website at www.getARMR.com to learn more about how we can help you achieve your e-commerce goals.
