People start businesses with different objectives – some want to make money, some want to invoke their passion or an idea, for some, it is a legacy passed on from their family. Whatever the objective may be everyone strives to generate profits to build a healthy, sustainable business.
While a business is running one tends to lose focus to other things and very often forget the basic economics, the balance to maintain between income and expenditure. You must have witnessed scenarios either in your own case or through other campaigners where the seller ends up in loss even after being able to generate good sales for their products.
This happens mainly because of the lack understanding of cost and market dynamics
Well, the aim of this blog is to sensitize you with the factors that directly or indirectly impact your Profitability and help you understand the price and market dynamics.
First, let us start with the basic Profitability Equation
Looks simple right! But when it comes to reality, businesses need to do lots of other stuff to drive their Sales Revenue. Transport costs, promotion costs, manpower costs, operations costs, rents etc.
Let me explain you with a simple case study
Similarly, online businesses also have promotion costs, return costs apart from the product cost which in your case is the base price. So the profit equation for your t-shirt business looks like this
Gross Profit: Profits /Income Earned from Delivered Orders
Return Debit: Deductions from Returned Orders
Return Credit: Profits earned from orders fulfilled from in stock returns
Ad Spend: Amount invested in your Facebook ad campaigns
Example, Net profit for selling 100 T-Shirts each at Rs.599 with 10% Returns, 0% Reuse and Cost per conversion Rs.150 looks like this
Now let us deep dive into the factors that will significantly affect your profits
- Pricing – Pricing is, of course, the most important factor that affects your profitability. Poor pricing results in poor margins and thus your overall ROI.
Many times, users ask us what is the ideal price to sell their custom products. We recommend the following prices if you are driving sales from online promotions.
- Payment Mode – India is a COD predominant market. Trust issues, Low penetration of internet banking, cards are the main factors why people prefer COD options.
Higher COD orders result in Higher Returns thereby affecting the margins. We have even noticed some campaigns with 90% COD orders have Return Rate as high as 54% which ultimately results in losses.
We recommend keeping a check on COD vs Prepaid order percentage and maintain COD orders to less than <70%. One way of doing this is to go to your campaign settings and disable COD payments when you notice higher proportion of COD orders coming in.
- Return Percentage – Although COD orders contribute to the majority of returns, there are other factors related to logistics, buyer psychology that will affect your overall return rate.
The major reasons why customers refuse the products are
- Non-availability of the buyer at the time of delivery
- Non-availability of cash at the time of delivery
- Incorrect address and other information
- Reduced interest levels at the time of delivery
- Impulsive behavior, no purchase intent at the time of placing an order
- Longer delivery schedules viz in Tier 2,3 cities, towns.
We have also noticed that states Bihar, Mizoram, Nagaland have higher returns compared to other states. Request campaigners also to analyze the data available from the Orders Dashboard
- Design and Niche – There are Amazon, Flipkart, Myntra etc where there are lakhs of t-shirts. Brands like UCB, Aeropostale selling tees from as low as Rs.499. But have you ever thought why people should buy your products? It’s all about the DESIGN!
A good design makes your campaign, product desirable. A good design allows you to demand a premium. If people really like it they will wait for any length to get hands-on and wear it. We have noticed that some niches have almost 100% acceptance rate (zero returns) irrespective of delivery duration.
Make designs that are unique, exclusive and ensure that your niche has a very passionate audience. This leads to higher acceptance rates thus lowering you return percentage.
- Ad Campaigns – People often launch the ads and forget about it until the moment they realize things are not working in their favor. You need to dig deeper, analyze and cutoff demographics like age, gender, segments, locations, placements and other parameters that have poor performance, higher conversion costs.
Also, try the flex targeting to target premium buyers. You can try intersecting your adsets with interests like Online Shopping, Online Shopping Websites, Mobile Wallets, Consumer Segments interested in High-Value Goods
Profit is not something you count at the end, it is something you plan from the beginning. So next time before you launch your campaign, have a clear understanding of the factors discussed in this article and drive towards profitability. We hope these inputs will help you make better decisions and give positive results for you.
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