Understanding eCommerce Margins: Key Insights and Strategies
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Chapter 1: The Importance of Margin
In this episode, I aim to delve into a crucial parameter that influences the sustainability of any business model. If this factor is overlooked, the business may struggle, find its growth stunted, and face increasing challenges. Interestingly, this parameter is reported to be quite low in eCommerce models.
But what exactly is it, and why is it so minimal? Before we dive in, let's catch up on some recent eCommerce news.
GOTO Living Launches in Jakarta
GOTO has introduced a new service called GOTO Living, focusing on offline retail. Their first store in Jakarta follows two successful openings in Tangerang. This initiative aims to expand profit margins by selling first-hand products, akin to stores like NiceSo or Mr. DIY. Best of luck to GOTO with this new venture!
The Body Shop Closes Numerous Stores in the US and UK
The Body Shop has filed for bankruptcy in the US and ceased operations as of March 1. In Canada, 33 out of 105 stores closed, while 50% of stores in the UK shut down. For a detailed analysis of this phenomenon, I recommend watching Pak Indrawan Nugroho's video. The Body Shop's restructuring efforts stem from difficulties in keeping pace with the fast-changing fashion and skincare markets.
TikTok and Tokopedia Merger Nearly Complete
The merger between TikTok and Tokopedia is reportedly 90% complete, allowing for seamless checkout via Tokopedia on TikTok. This integration will likely enhance social commerce and live streaming commerce experiences in the coming years, posing challenges for competitors such as Blibli, Lazada, and Shopee.
Now, let's transition to the main topic of today's podcast.
Chapter 2: Understanding Margin
Earlier, I mentioned a key parameter determining business sustainability. Can you guess what it is? If you said revenue or sales, you're close! The real focus here is on the margin.
What is Margin?
Margin is often confused with profit. While they are related, they differ significantly. You can think of margin as the space you have available. A larger space allows for more freedom and movement, whereas a cramped area restricts your activities.
In financial terms, margin is typically expressed as a percentage. For instance, if a product sells for 1 million and has a 50% margin, you can easily visualize the distribution with a pie chart representation.
Defining Margin
To clarify, margin does indeed include profit. Using our space analogy, if you fill your room with furniture, the remaining space represents your profit.
When asked for gross profit, you provide a specific number. However, when asked for the margin, you relate it to revenue and express it as a percentage.
For example, if you sell a product for 1 million and it costs you 500K to produce, your gross profit is 500K, resulting in a margin of 50%.
Average eCommerce Margins
From my experience in eCommerce, my margins typically range from 20% to 25%. During discussions with industry peers, I learned that companies achieving margins of 30% or higher are often considered successful.
According to Shopify's data from NYU, average eCommerce margins in the US are as follows:
- 5%: Lowest
- 10%: Average
- 20%: Maximum
This indicates that a 25% margin is relatively strong in the eCommerce sector.
Margin eCommerce in Indonesia
Curious about Indonesia's figures? In Q3 2023, Tokopedia's margin was reported at just 0.7%. Blibli managed a margin of 7%, while Bukalapak was around 1%. This highlights the challenges faced by eCommerce platforms in controlling their margins.
B2C vs. Marketplace Models
When discussing business models, B2C (Business to Consumer) or D2C (Direct to Consumer) models tend to have more control over margins compared to marketplace models, which must balance interests between buyers and sellers.
Strategies to Improve Margins
Here are three actionable strategies for eCommerce businesses to enhance their margins:
- Brand Development: Standing out in a crowded market is crucial. Strong branding can significantly increase margins on similar products.
- Operational Efficiency: Analyze your Cost of Goods Sold (COGS) to identify areas where you can cut costs without sacrificing quality.
- Strategic Promotions: Be cautious with promotions. Avoid excessive free shipping offers that could lead to losses.
In conclusion, while eCommerce margins may be perceived as slim, they are highly dependent on the business model. By focusing on branding, efficiency, and smart promotions, businesses can work towards improving their profitability.
Thank you for tuning in to this episode. If you found this information valuable, please share the podcast, and I look forward to our next discussion.
Wassalamualaikum warahmatullahi wabarakatuh.
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