Profit Margin

You would agree. In today's day and age, it is relatively easy to set up an online store but super difficult to make money (read profits). While running an online store, there are a tonne of things to worry about: finding suppliers, shipping, marketing, customer service, managing social media, and then, if there is bandwidth, optimizing for margins.

Apart from big brands, which have an army of employees to look at every aspect of business, the majority of merchants do not have the resources to stay on top of tactics that could help them optimise their profit margins.

Why is it even important to protect your profit margins? Apart from profits leading to money in your pocket, profits drive free cash flow, and cash flow gives a business options. Options to stay independent, invest in growth, and help one's employees lead better lives. But we see a lot of merchants focus on growing sales, marketing efforts, and other aspects of business but lose sight of how they can protect their profit margins to prosper.

According to a McKinsey article from 2003: The Power of Pricing, it is shown through a study that the ability to increase prices by 1% improves margins by over 8%. While pricing is such a powerful tool, we often see online stores think about it as an afterthought and ignore it.

Transaction Pricing Challenges

As an online store, every sale (transaction) you make adds up to your profits or losses. Typically, most online stores are ill equipped to track losses being racked up across transactions due to various factors. We have identified a few factors negatively impacting prices for online stores, leading to suboptimal profits or even losses.

Transaction pricing challenges for online stores:

1. Inability to properly calculate costs.
2. Overdiscounting products while running markdowns.
3. Under pricing your products vis-a-vis your competitors.
4. Time lag in reverting prices back after a promotion.
5. Unintentional price changes in a multiparty ecosystem.
6. Selling products at a loss due to lack of cost visibility while pricing.
7. Running promotions without analysing promotion impact.

We will look at all of the above transaction pricing challenges for online stores and look at ways a store can mitigate these challenges. You may know of some of these challenges, while some may come across as a surprise to you. Either way, read on. By the end of the read, you will have a full understanding of the challenges and know easy ways to mitigate them.

Inability to calculate costs properly

Isn't it absurd to run an online store and not be able to calculate costs properly? Not really. Across all stores that start using Konigle, only 35% SKUs have costs calculated. Having spoken to thousands of merchants, we realised that the reasons why most merchants did not have costs calculated for the majority of their SKUs were mainly:

1. The process to key in costs is manual and cumbersome.
2. It is very difficult to take into account various expenses and calculate costs.
3. For merchants drop-shipping products, the costs fluctuate so much that it is almost impossible to keep a tab on costs.

Traditional inventory software hasn't evolved in years. Traditional software expects a lot of data entry effort, wrangling spreadsheets, etc.

What we realised speaking to merchants was that they chose to not enter costs rather than spend hours manually entering costs, as even if those who put in the effort to manually key in the costs once cannot use them effectively as costs are dynamic and every consignment may have different costs. What they were looking for was an easy way to key in consignments that helped them keep track of costs, rather than inventory software.

With Konigle's Inventory Management Seller Tool, it becomes extremely easy to calculate the actual costs of SKUs. For example, you can easily filter products that are needed and quickly create a consignment. In true spirit of being a tool that works for you rather than the other way around, you also have the ability to manage partial consignments.

Also, the tool allows us to take into account consignment overheads in any currency, and it evenly distributes the costs (after currency conversions) across each SKU in the consignment automatically.

Over discounted markdowns

They say retail is detail. But we see overdiscounted markdowns all the time. Merchants overestimate demand, overstock, and then sell at higher discounts than needed for suboptimal margins.

While iterating over our product, we worked with a mid-market retail chain to help them solve just this problem. This company, inspired by Artificial Intelligence, wanted us to help them build a model to predict demand and hence better decide when to discount products, etc

But by speaking to thousands of merchants and with the events of the last few years, it has become absolutely clear that it is impossible to accurately predict demand, so much so that we even see Amazon struggle with predicting demand. Hence, we gleaned an insight that trying to obsess over demand prediction was foolhardy; it was more profitable to run markdowns backed by data in a timely manner. Which is tough.

But this does not have to be this way. With proper planning and disciplined execution of markdowns, you can find the most efficient way to clear off stock while still extracting the optimal margins.

With Konigle's Dead Stock Prevention Tool, you can easily run scheduled markdowns. For example, it creates the markdown plan for you, and it is adaptive in the sense that it can change the selling price on the fly based on the number of items in the stocks. This helps you add that extra dollar to your profit while still making sure that you can clear off the stock on time.

Under priced products and competition

Keeping your products priced competitively with respect to your competition is an excellent strategy to optimise for margins. You might have realised that you can capture a higher margin by selling fewer items but at a more optimal price. This creates an excellent balance between supply and demand.

Time lag in reverting prices

Quite often it happens that you overrun your promotion, which results in a loss. This is due to the lack of a proper tool to revert back the price changes.

Konigle provides you with the tool to manage your promotion life cycle. You can control when to start your promotion and when to end. And all this can be achieved in the minimal steps possible.

Apart from various options you have to run promotion, the tool also provides flexibility to make the auto reversion on time at the end of promotion. With this, you can be sure that you never sell at a discounted price unless intended.

Unintentional Price Changes

Across stores that connect to multiple sales channels, like Facebook, Instagram, or dropship via providers like Oberlo or AutoDS, use multiple POS, or have employees constantly changing prices, we observe that over 33% of SKUs show unintended price changes.

Store owners typically never realise this or realise this when they make a sale and lose money, as the price changes usually end up reducing the prices and ending up making losses. By the time this happens, it is too late. We have seen stores losing up to 20% of their margins by such unintentional price changes.

Having a single source of truth for your prices with change history is the best way to have full control of transaction pricing on your online store. The Konigle Price Editor help's you change prices properly and track changes. And with the Konigle Profit Margin Protector, an online store can protect against unintentional price changes. We analysed ~700,000 unintentional price changes for a subset of stores using Konigle and found that unintentional price changes may cost a store almost 6% in profit margins.

A study of 700k unintentional price changes

In a study of 700k unintended price changes, we found an estimated 6% loss in profit margins due to unintended price changes. On any normal day, an average store can see as much as 62 unintentional price changes Approximately 48 hours a year have to be spent just correcting prices across stores.

We also found out that stores implementing profit margin protectors can increase their profit by up to 6%. With Konigle's Profit Margin Protector, you can start protecting your store against unintentional price changes in under 5 minutes.

1. Enable the Margin Protector tool
2. If you are a dropshipper, turn on the dropshipping mode; otherwise,  do not select dropshipping mode.
3. You can lock compare at prices too.
4. You can also select a rounding technique to have your products rounded as needed.

Lack of cost visibility while pricing

You can calculate the cost price for the profit margin you want to setup for your store. Just enter the store URL and the profit margin you want to have. You can see the snapshot of the target cost price. On the next screen, enter your email ID, where you will be sent the CSV format of your export file.

Running promotions without analysing impact

Every promotion should be analysed so that you can repeat what works and avoid what does not work. The most useful way to judge the impact of a promotion is to understand how sales and profit margin changed both before and after a promotion.

With Konigle's Bulk Price Editor, you can not only run a promotion quickly but also get automatic impact assessment reports. These show before and after change in sales and profit margin by SKU.

Takeaways

1. Pricing Power: Pricing is the most powerful lever an online store can pull to improve margins.
2. Transaction Pricing Challenges: Without proper pricing, an online store makes suboptimal profits on every transaction.
3. Unintended Price Changes: On average, a store may have 62 unintended price changes, resulting in up to 6% loss in profit margins.
4. Loss of Time & Money: Manual processes are inconsistent and end up losing both time and money for an online store.
5. Automate using Konigle: Konigle has multiple tools that can help your store sell online at optimal profit margins, and also saving time for you in the process