In the ever-changing landscape of ecommerce, businesses continually fight with new challenges. Now that we’re at the beginning of a new year, we’re coming off a seasonal sales surge. According to Adobe’s predictions, online spending was expected to grow by 4.8% last holiday season, reaching an astonishing $221.8 billion. This forecast marks a significant jump from 2022’s 3.5% increase, and I hope your sales reflected that.
So, how can ecommerce businesses use those Q4 sales to start out 2024 right and also maximize profitability?
1. Strategic Advertising Spending
One of the pivotal factors affecting both sales and profitability is your advertising expenditure. Here are some key questions to consider:
- Are you aligning your advertising efforts with your inventory levels? It’s essential to avoid spending money on advertising items that may run out of stock. As you forecast your inventory, adjust your ad spend accordingly. Ask yourself whether you aim for a high volume of sales or profitable sales while avoiding stockouts.
- Do you plan your advertising and inventory purchases individually or as a portfolio? Understanding how your cash flow will be impacted by inventory purchases is crucial. Different products have varying gross margins, sales velocities, and demands on your cash based on factors like costs, minimum order quantities, and lead times. Work to protect your cash by steering clear of high-cost items that sell slowly and require substantial upfront orders. Seek out items with attractive margins, low costs, quick turnaround times, and high demand. It’s a bonus if these items can generate sales without a hefty advertising spend. Evaluate all your products in this manner, compare them, and develop an overall plan for your product portfolio.
- Are you getting a return on your advertising investment? Keep a close eye on your media efficiency ratio throughout the year. This simple calculation involves dividing revenue for a specific time period by advertising spend for the same period. By calculating it monthly, you can discern trends as you experiment with changes in advertising channels or individual ads.
2. Navigating the Competitive Advertising Landscape
Avoid trying to do too much at once. To gauge the impact of a change, limit it to one aspect and closely monitor the results. Many sellers have faced cash crunches and decided to cut specific ads, only to witness a minor dip in sales but a significant increase in profit.
As Seth Godin pointed out in his October 5, 2023 blog post, competitive pressures can turn a good deal into an unsustainable one. The cost of acquiring a click can skyrocket, forcing companies to spend vast sums on social media and online ads, payments to influencers, and more, often operating at a loss. In such a fiercely competitive environment, it’s essential to consider alternative strategies. Your existing customers can become your best advocates for attracting new customers.
3. Rethinking Your Advertising Strategies
Recently, I participated as a podcast guest, and the host shared insights into the profitability challenges faced by ecommerce businesses. In one of his ventures, he decided to eliminate all ads on a particular platform. To his surprise, sales only experienced a slight decline for the month, while his net profit increased significantly into five figures. This prompted him to explore and manage his ads with profitability as the central focus.
When I analyze our client database, it becomes evident that those with high advertising spend often have lower profits. However, when comparing the revenue of businesses with high ad spend to those with low ad spend, there isn’t always a proportional increase in revenue. While this data is based on a small sample size, it aligns with the experiences of many clients and the insights of marketing experts like Seth Godin. This suggests that advertising spend merits careful scrutiny and a strategy that incorporates experimentation.
In the dynamic world of ecommerce, staying ahead necessitates constant adaptation. Businesses must strike a delicate balance between aggressive advertising and sustainable profitability. With the new year ahead of us, ecommerce entrepreneurs have the ideal opportunity to reflect, strategize, and pave the way for a profitable future.
If you’re looking for help on your 2024 ecommerce business journey, we would love to help. Reach out to the bookskeep Team today!
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!