Ecommerce entrepreneurs have many different reasons for starting a business. Maybe you enjoy the freedom of working for yourself, have a great idea for a product no one’s offering, or have always dreamed of saying you own a business. No matter what other incentives you may have, one remains the same across the board: entrepreneurs want to make a profit.
Part of doing that successfully is having a plan for bottom-line growth.
What is bottom-line growth?
Bottom-line growth involves increasing your profits by always keeping an eye on the bottom line. Top-line growth is about increasing sales. That plays a role in bottom-line growth, but isn’t the full picture. To have a bottom-line growth strategy, you need to give as much attention to what you’re spending as what you’re making.
Business growth isn’t just about sales, it’s about net profit. Bottom-line growth is therefore the best path to true success.
8 steps to improve bottom-line growth
1. Know your costs.
A crucial step in achieving bottom-line growth is tracking all your business expenses. Luckily, this is easier today thanks to good accounting software products than it was in the past when you had to use receipts and spreadsheets.
Create a system to track all your expenses as you incur them. Make sure you remember to count all business-related expenses. This includes:
- Employees and contractors you hire
- The cost of inventory
- Website costs, such as hosting and your domain name
- Marketing and advertising costs
- Software you use for your business
- Shipping costs
- Mileage for any business-related driving
- Other travel expenses for business travel
- Storage and office real estate costs
- Utilities costs at business locations
- Payment processing fees
- Membership dues for professional organizations
Any expense that relates to doing business should be considered and tallied here.
2. Analyze metrics that show ROI.
Knowing your expenses is so important because it makes this step possible. To determine your bottom line, you need to calculate ROI. At the most basic level, that means calculating the amount you made in sales for a set period, minus your total costs for that time. That’s your gross profit.
That’s the main number you need, but it’s not the only one. Sometimes taking a hit in total earnings in the short term is worth it for long-term gains. To help you keep the big picture in mind, also calculate:
- ROI (return on investment): You can analyze the ROI of specific activities and expenses with the equation: (Gains – Cost) / Cost. This is important for figuring out if certain business actions are paying off.
- CPA (cost per acquisition): Your business needs customers to thrive, so understanding exactly how much you spent in marketing to earn each customer is valuable. The equation for CPA is: Amount Spent on Marketing / Number of Customers received.
You can do this with the total amount of money you spent on marketing, as well as for the cost of specific channels and tactics, if you have data on the number of customers gained from them.
- ROAS (return on advertising spend): To calculate how much money you’re making in exchange for what you’re spending on advertising, use the calculation: Revenue Gained from Advertising / Total Cost. As with CPA, it’s valuable to do this both for your total advertising spend and for specific channels to see which are working best.
- LTV (customer lifetime value): It costs more to earn a new customer than to keep one. Repeat customers are extremely valuable to businesses, and you have to factor that into your bottom-line growth analysis as well. The calculation for this is: Average Purchase Value x Average Purchase Frequency x Average Customer Lifespan
This one requires some guesswork, especially for newer businesses who don’t know how long a typical customer will stick around yet. Make your best estimate to come up with a number that’s probably in the right realm.
3. Cut waste.
All the math you do in steps one and two will help you in this stage. Inventory that isn’t making enough of a profit for what you spend on it can be dropped. Marketing tactics that aren’t bringing in enough customers to account for the cost (even when factoring in LTV) should be either cut or scaled back.
Really dig into the data you have to look for opportunities to reduce spending. Maybe switching your packaging supplies or switching from offering free shipping to a flat fee can save you money. See if there are discounts you can access that you’re not taking advantage of.
4. Optimize inventory.
Owning the right amount of inventory is tricky in ecommerce. When you have more than you need, you spend more on storage than necessary. With too little, items will be out of stock when customers try to buy, which loses you a sale.
Create a system for tracking your inventory and analyzing the right amount to keep on hand at any given time. As you gain data on how fast different products get sold, you’ll do a better job over time at keeping the right amount in stock to optimize your profits.
5. Continually re-evaluate your contracts.
A common error businesses make is signing up for a product or service once and sticking with it out of inertia. In some cases, you can save a lot of money by switching to a new provider, either because your business needs have changed, or new options have come onto the market since you made your original decision.
Every year, consider the contracts you have with suppliers, service providers, and technology vendors. Spend a little time shopping around and researching other options out there. In some cases, knowing your other options will put you in a strong position to negotiate with your current provider. This is an area where complacency can cost you, and a willingness to re-evaluate can pay off big.
6. Reduce return rates.
Returns are a big part of the ecommerce business. People in the U.S. returned $260 billion worth of inventory in 2016. And for ecommerce, around 30% of purchases get returned. Making matters more costly for online businesses, customers increasingly expect free returns, or they’re less likely to buy from you to begin with.
Returns are always going to be a part of ecommerce, no matter how great your products are. But you can work to reduce them by:
- Making sure you represent your products as accurately as possible. Use high-quality photos that provide an authentic representation of the product.
- Making your website informative. Answer questions upfront to avoid confusion and disappointment post purchase. If you sell clothes, provide an accurate sizing guide. If you sell phone chargers, be clear about which products they work with. You want to do everything in your power to make sure customers know exactly what they’ll be getting.
- Using quality packaging. If products aren’t well packaged, they can get damaged in transit. Then not only are you stuck with the cost of the return—you lose inventory too.
- Collecting data on returns. Data will help you understand which products are getting returned and why. If a certain product consistently fails to satisfy your customers, time to drop it or find a way to make it better. If customers always seem to buy the wrong size for a particular pair of shoes, you know to update the product page with better sizing information.
7. Focus on targeting the right customers.
Some customers are worth more than others. A customer who buys from you once is nice, but the customer who buys from you monthly over a period of years is much better. And a repeat customer less prone to returns is more valuable than one who regular costs you money in return shipping.
Analyze what your most valuable customers have in common. Use that data to create your customer personas so you can focus your marketing on the people who will make your business the most money. Targeted marketing will help you spend less on marketing by only paying to reach the right people.
8. Look for growth opportunities.
Cutting costs is a big part of bottom-line growth, but achieving growth also involves seeking out new opportunities and occasionally taking strategic risks. Keep your eyes open for new product lines your audience shows an interest in based on their feedback. Consider helpful features you can add to the products you already sell, or related upsells that make people likely to spend more.
This is where the creativity of entrepreneurship comes in. Always be generating new ideas and deciding which are worth exploring.
While it’s often true that you need to spend money to make money, it pays to be careful about how much you spend where. To protect your company’s bottom line and achieve the growth you want, pay as much attention to your expenses as your earnings. Ecommerce entrepreneurs who consider bottom-line growth are more likely to achieve success.
Have any questions about bottom-line growth? Ask them in the comments!