5 ways to increase e-commerce profits using the 5% rule

Now that you’ve set up your e-commerce store and you know how to promote it, it’s time to look at increasing your profits. We asked Theunis Stoffberg, CEO of SalesLab, to share his top advice on how to increase e-commerce profits.

Whatever your business, any action you focus on should result in increased sales, decreased costs, or expanding your market share. To get that right, you first need to understand what leads to more sales or an expanded market. Essentially, customers bring revenue and revenue leads to profit. But it’s helpful to understand the ‘levers’ you can use to extract the maximum value out of your marketing investment. We’re going to focus on how to improve efficiency by 5% in Leads, Conversions, Transactions, AOV and Margins.

Sales formula

Before we dive into the sales formula you can follow, let’s take a look look at these e-commerce concepts closer to understand their definition and meaning:

Leads are potential customers.

Conversions are leads who have ‘converted’ and are now paying customers.

Transactions are sales on your website.

AOV is the Average Order Value, the amount an average transaction is worth.

Margins are how much you have marked your products up by.

Now let’s look at a sales formula you can follow:

 

Let’s analyse the formula.

Leads x conversion will give you the total amount of customers you have acquired. Those customers then buy one or multiple items per transaction, which generates revenue. Your margin (% of revenue) determines your ultimately the business profit.

Just 5% improvement in each area

A 5% improvement in each of the formula areas in blue can have a massive effect on profits. Take a look at the following examples of how much difference 5% can make in each of these areas:

 

	Normal		Increase of 5%
Leads	100 000		105 000
Conversions	X 10%	= 110 000	10,5%	= 15 750
Transactions	2	= 20 000	2,1	= 33 075
AOV	R100	= R2000 000	R105	= R3 472 875
Margins	40%	= R800 000	42%	= R1 458 607
Difference in a 5% increase in each area.	R1 458 607 – R800 000 = R658 607

* Please note a 5% increase over 40% is 2%.

Leads

First prize is generating leads without paying for them, but this isn’t always possible.  So you need to determine how you can increase leads by 5% without paying for more traffic. If you focus on SEO and PPC optimization to extract another 10 to 15% efficiency, this should be achievable. There are many SEO and PPC strategies to follow, but as long as you optimise your keywords for sales, rather than clicks or impressions, further optimisation should be possible.

Conversions

From the first touch (a Google ad) to the last delivery (think parcel delivery), all sales and engagement funnels have areas to optimise. It’s here that we need to carefully consider all data points to determine the biggest leak in the sales funnel. Friction, anxiety from customers, possible UX and UI issues are all areas to consider. Remember you are only looking for a 5% increase in efficiency.

Transactions

How can we get customers to buy from us more often? How can we encourage  5% of our customers to increase their spend within a month? Or how can we get 20% of our customers who spend the most to come back and spend again? All avenues which can increase the frequency of spending by customers should be considered.

AOV

One of the ways to optimise a website is to increase the Average Order Value (AOV) of a customer. That is the increase in the basket size of goods they purchase. What could be a good addition to the main products being bought?

Say your customer buys a product for R1000 and is about to leave the website. Instead of directing them to the basket page, you could propose a product or service related to what they just bought, with a 10% discount. You could also cross-sell related products during checkout. If you know a customer’s purchase history, you can use this to target additional sales, or even use live chat to build trust and encourage sales. As long as what you are offering is truly useful to your customer, these attempts to increase AOV should lead to your desired business outcomes.

Margin

One of the easiest ways to generate profit is to increase your margins. The most important question to ask is whether your customers are sensitive to price increases (is your product price elastic or inelastic)? What percentage of customers would notice a 5 to 10% increase and of those customers, who would not buy your products as a result? To gather this information, you can conduct a test or survey from your regular customers.

5% of marginal gains can make a big difference in revenue

While a substantial increase in profits might seem unachievable at first, if you take each of these five areas individually and focus on a 5% increase for each, you will soon start to see results. Optimising the above five methods will result in more revenue – and more profit – from your e-commerce store.