It is the story of our times, an e-commerce startup demonstrates substantial promise and gets funded with venture capital, and eventually acquires funding from private equity. With so much investor's money in its belly, it loses focus on profits and focuses on sales. In the absence of a profit motive, the e-commerce business grows its transactions and user base. Then the unthinkable happens: investors get jittery, markets lose steam, and suddenly the game becomes one of converting traction to profits. That is the inevitable path to e-commerce profitability.
Turn a Large E-Commerce Business Profitable
There are methods that can boost the bottom line. The challenge is that several of these might have an adverse effect on the top line. But an astute e-commerce professional should be able to minimize the damage.
Cut Unprofitable Product Lines
Quantify and identify your best sellers and your poorest performers. Those underperforming products and lines need to be cut off as soon as feasible. Here are some of the characteristics of unprofitable lines:
- The obvious one is where you can command a price lower than your purchase price.
- Products that have nightmarish logistics and reverse logistics should be one of the earliest to eliminate.
- Products, where human customer service requirements are very high, should also be eliminated.
- Products that require significant costs in technology investments, despite the fact that they are not your mainstream business should be eliminated. An example of this could be digital music downloads on an e-commerce website that otherwise sells only physical goods.
When the business is showing double-digit growth month-on-month, and triple-digit growth year-on-year, it is prudent to have far greater capacity than one presently needs. This excess capacity could be office space, warehouse space, vehicles, devices, people, equipment, server capabilities, customer service seats, and the like. But when you are trying to move from a revenue-oriented business to a profit-oriented business, you have to pay attention to capacity utilization. Eliminating excessive capacities is an option. If you do not exercise that option, then at least stop capacity growth until existing capacities are largely utilized.
Convert CAPEX to OPEX for New Initiatives
The capital expenditure (CAPEX) oriented approach had benefits as you were gaining your footing with setting up your website, vehicles or shipping structure, office equipment, and inventory processes. These expenses will support you in the future as their costs are slowly recaptured.
Now, you may need to turn your attention to an operating expenditure (OPEX) approach. Here, your focus is on the ongoing cost of running the business on a daily basis. This category includes not only your rent and salary costs but also research and development costs.
Of course, there is also the question of how one defines profit. For instance, if you want to turn profitable in accounting terms, it might make sense to be CAPEX heavy and OPEX light. But if you want to turn cash positive, then cutting down on CAPEX might be a good idea. It is easier said than done. But today, the environment has matured enough, and there are third-party providers for most services that e-commerce businesses had to cover in the past.
Customer Acquisition Cost
When you are struggling, you must make sure that your cost to get a new customer is lower. It tends to be a sore point for most large e-commerce businesses that are running up huge losses. They tend to advertise (often PPC) excessively to gain customers. Sometimes the cost of acquisition of a new customer is absurdly high by any yardstick. At other times, fancy LTV (lifetime value) of customer computations are used to justify what is an irrationally high cost of acquisition.
The e-commerce sector is galloping ahead. It will be good for all participants if they start turning profitable. This article provided you with some of the basic cost-cutting ideas. It is impossible for any business to survive in the long term without making profits.