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Profit margins determine whether businesses sink or swim and this is especially true in the hypercompetitive ecommerce industry.

So what can retailers do to improve profit margins?

There are a myriad of barriers that online retailers face and it can be difficult to respond adequately to them all.

The top five price related issues that they must address are: increased price competition, consumer price sensitivity, the need to protect the brand’s price image, increased price transparency, and improving return on inventory investment.

It may seem like a daunting task to address all of these issues, but a solid pricing strategy can do just that.

profit margins 1.PNG

Standard profit margins for retailers can vary widely, but generally are between 20 and 50%. Improving profit margins is on the top of the list for retailers and pricing strategies are central to reaching that goal.

Only 27% of retailers said that their pricing strategies were effective, while 62% said that they were somewhat effective, and 11% said they were ineffective. How can retailers overcome these issues and optimize to increase profit margins?

These five tips can help them make it happen...

1. Automate as much as possible

Repricing manually requires a hefty budget and lots of time. More resources than most online retailers can or want to devote.

Why not automate it, along with other functions that are essential for retailers? Automating can reduce operating costs significantly and increase productivity.

profit margins 2.PNG

2. Increase average order value with discounts

The key to providing great discounts is making it enough so that the shopper feels like they’re getting a deal.

The relative price is much more important than absolute or nominal price. Retailers need to use psychological pricing to optimize for profit.

While it may seem counterintuitive at first glance, discounts can increase profit margins for retailers if they make the minimum purchase higher than their average sale.

Most shoppers (73%) are influenced by discounts. Free shipping is another great way because consumers don’t want to pay for shipping and can justify spending a little bit more to get it for free.

profit margins 3.PNG

3. Manage inventory

In order to sustain sales, all retailers must manage their inventory effectively. Running out of a product should be avoided at all costs because 77% of shoppers will leave your site for a competitor.

Inventory is highly correlated with profitability. There is a 77% correlation between overall manufacturing profitability and inventory turns.

profit margins 4.PNG

4. Customer service

Customer service is incrediblty important for online retailers because sometimes things go wrong, but many companies don’t have physical stores in which disgruntled customers can get immediate support.

The way that call centers and email support handle issues makes consumers more or less likely to purchase from that retailer again.

Companies like Zappos that provide excellent customer service are able to command higher prices.

The majority (66%) of shoppers are willing to pay more for great customer service because they know they’ll be taken care of no matter what happens.

profit margins 5.PNG 

5. Dynamic pricing

Pricing strategy is essential to improving profit margins. Dynamic pricing is a new and effective pricing strategy for the retail industry that allows businesses to have flexible pricing.

There are many external factors that retailers must be able to react to, such as: competitor pricing, site traffic, conversions, seasonality, and more. When retailers include dynamic pricing in their pricing strategy, they are able to better keep up with market fluctuations.

Doing this manually is a pain and 40% of retailers are planning to use cloud or SaaS solutions to implement a dynamic pricing strategy.

Dynamic pricing, when automated, helps retailers react quickly which is essential given the frequency of price changes. Industry leaders like Amazon and Wal-Mart reprice their products anywhere from about every 10 minutes to 50,000 times per month.

Other retailers are playing follow the leader, with 36% of retailers planning to start using pricing software in the next 12 months. Retailers are catching on because there is a huge opportunity at hand, as revenue can increase up to 8% and profits can see up to a 25% boost when using dynamic pricing.

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What are some other ways that retailers can boost profit margins? Please comment with any ideas or examples.

Arie Shpanya

Published 13 May, 2014 by Arie Shpanya

Arie is the founder and executive chairman of Wiser and a contributor to Econsultancy.

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Comments (7)

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Jyoti Chauhan

Hi Arie,

Great way to boost profits! Providing discounts at products is good strategy to get instant more traffic. People prefer to buy product from that brand website who are offering some discounts.

Thanks
Jyoti

almost 2 years ago

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Arema Connect

"Customer service is incredibly important for online retailers because sometimes things go wrong, but many companies don’t have physical stores in which disgruntled customers can get immediate support." That's the key element of customer service online. Business need to think about their eCommerce website as another store. You will not have your shop without shop assistants, then why would you have your online store without an online shop assistant?

Technology enables to be there for online buyers through live chat software (for example).

almost 2 years ago

Arie Shpanya

Arie Shpanya, Founder & Executive Chairman at Wiser

I agree, Jyoti. Thanks for your comment.

That's a great point about customer service in online retail. Chat is a great way to discuss merchandise in real time.

almost 2 years ago

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Suner Tom, Social media Marketing, Promotion, Business, markketing at facebook Tips tricks

55eru

over 1 year ago

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Suner Tom, Social media Marketing, Promotion, Business, markketing at facebook Tips tricks

Your ideas good, Now Business or marketing also very hard, You know Facebook also adding sell this button in people updates, Coming you can sell and Buy on Facebook, So I think it will affect 100% eCommerce site's sell.

over 1 year ago

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murali krishna, Posting at CouponMachine

Hii Arie Shpanya,
Great Article.
I have Learned something through this article which I have never came across..... thanks for sharing this informative Stuff.
My Website is getting lot of visitors but very few conversion,How to solve this problem?

6 months ago

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Prakhar Shrivastav, Blogging at 3nions

Hay arie,
You've shown the best ways to boost the traffic and profit. Competitors pricing and the site traffic are things one should note and the customer service is a must.

24 days ago

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