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Profit Margins For Ecommerce Sites

Which is the appropiate choice?

     
8:45 pm on Jan 14, 2004 (gmt 0)

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Hello All

I have a new ecommerce site and for months I have been battling myself as to which is better.

Low profit margins with more sales? Or higher profit margins with less sales?

I just cannot seem to get the right balance to maximize my sales potential.

Does the profit margin even matter?

Any sound advice on this matter would be appreciated.

Thanks!

9:14 pm on Jan 14, 2004 (gmt 0)

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Personally speaking I'd take profit margins over sales volumes every time. When times are tough and prices get squeezed a business with a higher margin will always be the most likely to survive.
10:17 pm on Jan 14, 2004 (gmt 0)

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I think it depends on your situation and what industry you work in. If you don't carry inventory, then there is little risk in not selling anything. If you keep inventory, then you have consider that cash flow is important along with margins. Certain industries like high fashion, computers, and electronics require you to sell the product quickly or risk having it depreciate in value.

For me, its a mix of both. I have some products with good margins, but I don't expect to sell it every day. While I have other products with decent margins that give me steady income.

8:51 am on Jan 15, 2004 (gmt 0)

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This really is the $64 million question :)

I would look at your competitors and see what they are doing. Do they sell their widgets for less than you? Do you want to offer your widgets at this price or lower? Do you want to compete in other areas, e.g. free shipping, free gifts, service levels...

9:04 am on Jan 15, 2004 (gmt 0)

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Without knowing a great deal about your entire business strategy it would be impossible to give any sound advice.

As a philosophy for small businesses I have always believed it is better to have high margins, even if that is at the price of sales volume.

For small businesses increasing sales volume via lower margins usually means even lower margins because of the increased overheads associated with higher volumes.

But again it depends upon your overall strategy. Amazon might not exist today if it took the advice that it should operate with high margins from day one.

No rule can ever fit all, you really need to find the one that best fits your long-term strategy.

9:18 am on Jan 15, 2004 (gmt 0)

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As a philosophy for small businesses I have always believed it is better to have high margins, even if that is at the price of sales volume.

I think you are right here percentages. Keeping margins high is probably better than getting into a price war with your competitors.

Amazon might not exist today if it took the advice that it should operate with high margins from day one.

They also may not have exsisted if they didn't start offering free shipping if you spend enough money with them.

1:29 pm on Jan 15, 2004 (gmt 0)

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The only correct answer is "the one that makes the most money". The trick is figuring out which one it is ;)

Seriously though, getting into price wars is simply not an option if you want to stay in a profitable business.

That said, price is not the only factor in determining your margin. It seems perfectly sensible to start with low sales/ high margins and try to grow from there as you identify new opportunities. (Possibly outsourcing more functions, even at a higher cost, while you concentrate on those things only you can do).

With recent discussions about exchange rates, and a friends' business laying off people because of poor USD/CAD rates, one more element to consider is how vulnerable you are. If they had a small margin to start with, they could not have taken a 10% blow on revenues with identical cost structures: they would be out of business.

Generally speaking, the more risk you face, the more margin you'll want as insurance.

7:06 pm on Jan 15, 2004 (gmt 0)

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Go with bigger profit margins definitely. You have more options and more staying power. With high volume and low margins there are too many ways you can get taken down faster than you can recover.
9:26 pm on Jan 15, 2004 (gmt 0)

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OK then, so if higher is better whats considered a good average profit margin?
9:42 pm on Jan 15, 2004 (gmt 0)

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I don't think Amazon is really the best business model to be drawing on for inspiration. They only survived (and the future is still uncertain) due to huge VC funding. Anyone in a "normal" business environment wouldn't have survived. Plus I was always told the purpose of any commercial enterprise is to make profit. Amazon has revenue nailed down, but I'm not sure about the most important factor.

At the end of the day "Revenue is for vanity and profit is for sanity"

12:48 am on Jan 16, 2004 (gmt 0)

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Profit margins really depend on what sector you're in. For example, lots of giftware sites operate on a 50% margin or a simple x2 mark-up. But if you were to get into gourmet food you can stick that up to a x5 mark-up. Mark-ups in other markets can be lots smaller, some are bigger.

You need the sweet spot between mark-up, inventory, shipping costs, tax and import customs etc etc. A lot of people see electronic downloads, eg. ebooks, as a great money maker and others go with dropshipping which negates lots of the afforementioned costs.

1:14 am on Jan 16, 2004 (gmt 0)

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This thread has some discussion of why a high profit margin makes it easier to advertise:

[webmasterworld.com...]

1:47 am on Jan 16, 2004 (gmt 0)

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profit margin does depend on the sector you are in - it is horses for courses.

but one thing i have observed, if you do not have a unique product and if other people can sell it, the only way for margin to go is steadily down, competition erodes margin, the internet has fewer barriers to entry than traditional retail

9:11 am on Jan 16, 2004 (gmt 0)

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I find high margin on items people cant readily compare with another like a hand or custom made item.

Lower margins for goods that they can compare - these are also far easier to sell.

You can of course be to low and people just wont buy from you - strange but true.

10:40 pm on Jan 19, 2004 (gmt 0)

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I found this whole thread to be highly informative, with lots of good advice. Don't think I can add much to the original question but to reinforce those who said:

High margins guarantee profit, and profit is what counts. It also enables you to safely do more advertising, until you figure out your ROI over a reasonable time frame.

And add the big "But": your competition and what they are doing, is a driver also. I have found many Internet shoppers to be savy researchers for price. Which is where advertising and visibility counts. If you are more visible than your competitors you might get away with higher prices. But if you charge more than your competitors and they are more visible ... you have an almost lost cause.