Many years ago, I worked in the shop and in one of the neighbouring cities there was another shop in the same chain that always seemed to make more money than we did.
One day we had a colleague from there who was a temporary worker and I asked what they really did different than us.
The answer was simple:
“I know the margins of all the goods.”
When customers came in and needed help to choose between different products, he often recommended the products he knew had the best margins. Not necessarily the most expensive products, but those that were actually the most profitable for the store.
I've thought a lot about that story later.
Because actually, it's pretty special how little we talk about margins in online commerce today, despite the fact that margins are actually the determining factor in whether growth is actually worth something.
We talk a lot about traffic, ROAS, CAC, conversion rate, automation and AI, but much less about what actually remains on the bottom line when the goods are purchased, the discounts are deducted, the order is sent, the payment fees are paid and the marketing is costed.
It was also the main theme of my post E-commerce Day at The Hub earlier this year.
Many online stores make surprisingly little money
During the talk I showed figures from participants on E-commerce Day that showed that clean online shops had an average of 4.8% margin of results. We bring the companies that also have physical stores, the average was 3.5%.
At the same time, about one in five Norwegian online shops lose money.
It says quite a lot about how demanding online commerce has become. The competition is hard, the advertising costs are increasing, customers expect more, and many costs tend to grow without necessarily paying attention to them from day to day.
Nevertheless, I find that profitability is still often something that is in management and owners. This is what you look at in your accounts, in your board meetings or when the year is to be summarised. There is not always something closely connected to the operational work of the market department, procurement and operation.
It's a problem, because many of the decisions that affect profitability are being taken right there.
What products should be pushed in the advertising? How high a discount are we going to give? Should the discount code be combined with the campaign already out? What shipping price is the customer to pay? What products are to be most visible on the front page, in the newsletter or in Google Shopping?
These are not just marketing issues. There's economic questions.
Many who work with marketing have too little economic understanding
When I was going to study, I chose the University of Kristiania rather than BI, much because I thought I didn't want to work with the economy and math. The irony is that I have later realized how much of the marketing industry is really about just the economy.
My experience is that many people working in an operational way with marketing can be very good at social media, advertising, content, e-mail, analysis tools and campaign planning, but at the same time have a fairly limited understanding of how margins actually work in practice.
It may sound a little brutal, but many people simply cannot percentage well enough to understand what a discount actually does with profitability.
If you have 50% margin and you give 20% discount, there are many people who intuitively think that it still has to be quite good margin again. But the effect on the coverage contribution can be far greater than many think, especially when you also take into account shipping, payment, packaging, handling and marketing.
The same applies to the other way. Many people don't think enough about higher margins giving greater scope for marketing. If you have a good margin on a product, you can also spend more money on selling it.
If you have a bad margin, a campaign that looks profitable on ROAS may still be quite weak when you're counting on what you're actually left with.
I don't think this is about people being bad marketers. The problem is that there is often no good culture to talk about profitability in operational work.
Many market compartments have targets for turnover, traffic, ROAS and growth, but far fewer have targets related to margins, coverage contributions or actual profitability.
And then it's not so strange that the decisions are then.
Fancy to create trading, not on bottom line
One of my first years in INEVO I was on a Black Week campaign where we had very high expectations. The campaign was good at many of the common parameters, and the turnover ended at about twice the year before.
On paper it looked like a very good campaign.
The problem was that when we looked at what we actually left with, the bottom line in the period was about half of the year before.
It was a pretty important learning for me early in my career, because it showed how easy it is to be the dazzling of numbers that look good in reporting.
High turnover, many orders and good activity can feel very right while the campaign is on, but if the margins fall too much while it is not certain you have done a particularly good job anyway.
That doesn't mean that big campaigns or Black Week are wrong. Many online stores depend entirely on such periods, both to create volume, move goods and collect new customers. But it should be quite clear before the campaign starts what is actually going to be necessary for it to be profitable.
- How much do we have to sell?
- How low a margin do we stand?
- Which products do we really want to sell most of?
- Where does the limit go that we should rather be left?
There are issues that should be included in the campaign planning before the discount rates are determined and used when the campaigns are evaluated subsequently.
It is also quite right to have campaigns that are not about being profitable. Sometimes you just have to get rid of things--but then there should be something you know at the forefront and not a conclusion that comes as a result of looking at the campaign results.
Discounts are often more expensive than people think
Discounts are probably one of the areas where the difference between turnover and profitability becomes more apparent.
Because discounts work. If you put products on offer, you will usually sell more. That's also why discounts are used so much.
The problem is not that discounts never work, but that many online stores don't count well enough on how much they actually have to sell for the discount to pay.
Here's a simple example of a product of $799. With the purchase price, shipping and parcels, payment fee, VAT and marketing, $ 169 was added in the coverage allowance per order.
If the price is reduced by 20% (a fairly common promotion price), the coverage per order falls to 45 kroner.
That's a pretty big difference.
That means you don't just have to sell a little bit more to defend the discount. You have to sell significantly more to get back to the same total coverage contribution that you had before the discount.
This is the many who underestimate. If you have 30% coverage contributions at the usual price and you give 20% discount, the sale must increase by 200% to keep you with the same coverage contributions. If you have 40% coverage, the sales must increase by 100%. If you have 50% coverage, the sales must increase by 66%.
Then the question becomes quite simple:
Do you really think the discount will give enough extra sales to defend what you give away?
Sometimes the answer is yes. Many times the answer is probably no.
Small price increases can have a high impact
And the same equation also works the opposite way.
Let's look at the same product as the one. But instead of putting the price down by 20%, we cut the price up by 5%. It's an increase of $40, and in many cases a change customers hardly notice.
However, the coverage allowance per order increased from DKK 169 to NOK 200. It's an increase of 18.3%.
This is one of the easiest measures many online shops can test. Find five products that are already selling well, fix the price a little bit and see what happens over one to two weeks.
My experience is that small price adjustments, for example, rounding up to the nearest 9 or increasing the price a few dollars on selected products, often do not have any noticeable negative influence on the volume. Not all products are involved, and this does not mean that prices should be increased uncritically, but it is often much less dramatic to test than many think.
It takes a short time to do, and you can always go back to the old price if the turnover falls.
Many kutter incorrect costs
When the economy becomes tighter, we also often see online shops start cutting into marketing quite quickly. The problem is that these are often costs that actually run the income.
It can quickly create a negative spiral where less visibility leads to less traffic, which results in less sales, which in turn leads to even less marketing space.
This does not mean that marketing should never be cut. Of course, there are campaigns, channels and activities that are not profitable enough. But before you get caught up in what actually creates demand, you should also look at costs that are slightly contributing to growth.
My experience is that many online stores should rather spend more time cutting:
- unnecessary meetings
- manual processes
- overcompiled workflows
- no user reported
- non-value-generating systems and licences
This is not always as visible as reducing the advertising budget, but it may be so important. If you're overreacting your income activities, you're at risk of making the problem bigger.
ROAS alone doesn't tell the whole story
ROAS is a useful number and one of the most common KPIs Norwegian online stores are in charge of, but the challenge is that it tells you something about marketing, not necessarily how much you're actually left with. This allows advertising platforms to quickly start giving priority to high-market products, even if margins are poor.
The result may be that you are left with campaigns that look effective in the reports, but that in practice contribute little to the bottom line.
In many online stores, we have therefore seen that profit tracking and POAS provide a better decision-making basis, both in Google Ads and Meta.
When you take into account the cost of the product, shipping, discount, payment fees, packaging, handling and marketing costs, you get a more realistic picture of what the campaigns actually create.
And then it's also easier to give you a proper priority. You can see which products are actually profitable, which campaigns make money, and which parts of the range are more able to market.
It also gives algorithms better signals than when they only optimize for marketing.
Business must become part of culture
My main point is really pretty simple:
Business can not only be a matter of being viewed in meetings of directors or in the accounts once a quarter. It has to be part of how to work operationally throughout the business.
The market department, procurement and operation must understand which products are profitable, what discounts actually cost, how much marketing is tolerated and what activities build healthy growth over time.
This does not mean that everyone has to become economists (successfully). But more people need to understand the simple contexts that affect margins every day.
What should you do now?
If you wanted to work more efficiently with online commerce, I would start with some pretty simple grappling.
- Makes business-related data available throughout the organisation and makes it part of everyday discussions.
- Take a margin into the campaign planning process. Before you decide the discount rate, you should count on how much more you have to sell to be left with the same coverage contribution.
- Evaluate campaigns on more than turnover. Look at the coverage, the margin and what you actually have left after discount, shipping, the cost of the goods and marketing.
- Test small price increases. Start with a few products that are already selling well, and follow both volume and profitability.
- Test lower discounts. You don't always have to go from 20% to 0%. Often it may be enough to test 15%, 10%, a gift on purchase or a discount ladder.
- Consider profit tracking in advertising. If you control according to ROAS, it may be difficult to see which campaigns and products are actually profitable.
The most important thing is not getting perfect numbers from day one. The main thing is to start using profitability more actively in the decisions that are taken every day, not just in a board meeting.
And that might be what my former colleague from the neighbouring town had understood.
Think what would happen if everyone in a company thought like he.