Ecommerce Profitability Is an Inevitability

Turning a Large Ecommerce Business Profitable Is Difficult

Ecommerce Profitability
Ecommerce Profitability. unsplash / Caleb George / URmkfvtK3Qw

It is the story of our times: an ecommerce startup demonstrates substantial promise and gets funded with Venture Capital, and eventually 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 ecommerce 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 ecommerce profitability.

How Do You Turn a Large Ecommerce 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 ecommerce professional should be able to minimize the damage.

Cut Unprofitable Product Lines

I know this sounds obvious, but ecommerce businesses are loath to reducing the number of products they sell. In my article about the advantages of ecommerce, I had mentioned the ability to carry a large product list as one of the advantages of having a virtual store. I think that some ecommerce businesses have taken that to an extreme, and want to sell everything. Analysis can unearth the product lines that are the biggest loss drivers. Those need to be cut off as soon as feasible. Here are some of the characteristics of unprofitable lines:

  • The obvious one is where you are able to 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 ecommerce website that otherwise sells only physical goods.

    Rationalize Capacity

    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 excessive 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 (Capital Expenditure) to Opex (Operating Expenditure) for New Initiatives

    While a capex oriented approach might have some benefits in terms of marginal cost and degree of control, now that you are in a drive to turn profitable, it might make convert capex to opex. 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.

    This is easier said than done. But today the environment has matured enough, and there are third party providers for most services.

    Ensure That Cost of Acquisition of a Customer Is Lower Than the Value of the Customer

    This tends to be a sore point for most large ecommerce 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.

    Final Words

    The ecommerce 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.