Profit margin is one of the key factors reflecting your business’s financial health and determining your company’s financial success. In short, profitability in business is a matter of survival.

So, if your business is currently struggling to manage and improve profit margins, it is an issue that demands top priority! 🚨

In this article, we'll go over what profit margin is, why a good profit margin is important for your e-commerce business, and how you can increase your profit margin.

Let’s dive right in!

What is profit margin?

Profit margin is a measure of profitability, namely a company’s earnings or profits relative to its revenue.

Profit margin is usually calculated by finding the profit as a percentage of the overall revenue. It can be calculated using a simple formula:

Profit Margin = Total Profit / Total Sales

Where Total Profit =Total Sales — Total Expenses

In general, successful businesses with strong financial health tend to have higher profit margins.

What is a good profit margin?

Now, you might be asking yourself: “Is my e-commerce business doing good? What is a good profit margin for my company?”

Frankly speaking, a good profit margin can vary considerably, depending on your business’s industry, location, company size, and other particular circumstances.

But, as a general rule of thumb, a net profit margin of 10% is considered average. In comparison, a 20% margin is considered high or good and 5% low.

Why is profit margin important to your business?

Profit margin is important because it fundamentally uncovers a company's profitability and financial health.

Low-profit margins could shed light on a wide range of issues, for example, errors in pricing strategy, inability to manage expenses, accounting problems, and so on. Among these issues, pricing errors usually lead to cash flow problems, which will in return, threaten your business. 😰 Therefore, closely monitoring your business's profit margin is crucial.

So, I hear you ask, what can you do to improve profit margin of your e-commerce business?

The 4 best ways to increase your profit margin

While talking about increasing profit margin, the most-mentioned tactic is to raise your prices. But, like many business owners, you might fear that if you raise prices, your customers will abandon you immediately as there're many other sellers that offer the same products at lower prices.

Don't worry! You don't have to raise your prices, as there're other ways to improve your profit margin effectively. 😉 We’ll show you four tactics to help you generate more revenue while lowering the costs.

1. Sell more high-margin products

High-profit margin products allow your business to be more profitable per item, while low-profit margin products make you work hard for less. The benefit of increasing the sales of high-margin products is crystal clear 🔮: Your business can make more profits by selling those!

Many e-commerce websites nowadays have massive catalogs with a vast selection of products for customers to choose from - some have high-profit margins, and others have low margins. Clerk's merchandising feature makes it possible for you to ensure that high-margin products receive more exposure and views from customers across site search and product recommendations. Doing so will significantly boost the sales of those high-profit margin products.

The example below is from Executive Shaving, the largest UK online shaving store. It shows how Clerk's backend can be configured to give high-margin products more visibility in site search results.

2. Target customers interested in high-margin products

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In addition to promoting high-margin products across your e-commerce site, there is another way to increase the sales of those highly profitable products. That is to target customers interested in high-margin products, and correspondingly, run targeted advertising campaigns on Google and Facebook.

With a simple click, you can use Clerk’s Audience Segmentation tool to quickly identify customers who have bought high-margin products in the past or are interested in buying them in the future. Here’s an example of using Clerk to create a segment of customers that are interested in high-margin shoes:

And then, you can send the data of these customer segments to Facebook or Google to run targeted ad campaigns. Doing so will not only improve the profitability of your business but also help you achieve better ROAS (return on advertising spend).

You can find a step-by-step guide here.

3. Increase basket size & AOV

One of the most effective ways to improve your profit margin is to increase your customers’ basket size and average order value (AOV).

Why? Because in addition to selling more, you can indirectly raise profit margins by dividing all the shipping and administrative costs on more products.

Here’re two examples of how Munk Store drives cross-selling and upselling revenues using Clerk’s dynamic, personalization product recommendations.

In an attempt to increase basket size, Munk Store promotes the “complete the look” type of product recommendations (cross-selling) to customers who are interested in buying this Gestuz sweatshirt:

Moreover, by placing personalized product recommendations on the shopping cart, Munk Store can encourage shoppers to continue exploring more items before completing their purchase.

4. Reduce manual processes & operating costs by letting AI take over

Interestingly enough, higher revenue doesn’t always translate into higher profits, especially when businesses are running at high operating costs.

So, when it is difficult for you to improve profit margin, ask yourself: Are you or your employees spending too much time and energy on tasks that can be handled by advanced technologies instead?

A good example is Friluftsland, who leveraged Clerk’s AI-driven email tools to dramatically reduce the production time for email marketing campaigns by 40%. In particular, Clerk makes it much easier for their marketing team to pick out and display the best products for a specific campaign. This is accomplished through Clerk’s dynamic product recommendation feature, which allows Friluftsland to choose from 23 different product logics to decide what products should be shown to recipients in each email campaign:

As a premium AI-powered software, Clerk can help your business minimize manual processes and ultimately cut back on operating expenses. In return, you can easily achieve a better profit margin by lowering costs even while generating the same revenue.

Do you want to create a strong financial foundation for your business and succeed in such uncertain and challenging times? Get started by talking to one of our e-commerce experts today 👨‍💻: