Increasing net profit (the money you actually keep) requires either an increase in sales (turnover) or a reduction in costs. No kidding Adii – tell us something we didn’t know…
This recent Twitter thread from the founder of Doe Lashes, Jason Wong got us thinking. The fundamental foundations of business are so easy to overlook once you are in the thick of it and for many, getting more exposure (marketing), selling more product (sales) and upping turnover (revenue) become an all too shiny obsession.
A business isn’t a business without money, it’s a hobby, right? So, a focus on driving revenue up with the intention of increasing net profits is an obvious one to have. BUT, what if we are putting too much emphasis on the shiny ways to up revenue and not enough on the basics when it comes to HOW we do this…
What if our pursuit of top-line growth is plastering over the cracks of our below-the-line inefficiencies?
If you google “how do I make more money for my business” the vast majority of answers detail shiny marketing strategies and “how to steps” centred around growth initiatives both of which lend themselves to being the shiny plaster for the below-the-line cracks. Very few focus on the fundamental principle of lowering costs alongside the idea of increasing revenue – not so shiny but just as, if not more, effective.
Lowering your Cost of Goods Sold (COGS)
Easy to say but not always so easy to do - so where should you start?
Begin where you have an abundance of real-time information, and often the upper hand: your supplier relationships.
Suppliers inevitably want, and need, long-term relationships with brands that buy consistently. CAC is also a consideration for them so, in most cases, you can rely on the fact that retaining you, their existing customers, will be a priority. By building trusting relationships with your suppliers (by submitting reliable, consistent and regular orders) you are subsequently stacking your bargaining chips. This allows you to look at trading your order predictability for a reduction in costs with them.
Don’t be afraid to ask for a bigger discount on bulk orders or look at offering to commit to minimum future purchase orders in return for a reduction in unit price on those orders. By employing demand forecasting or inventory planning software to predict when future demand for your best-selling products is going to continue to rise you could also give your suppliers their own holy grail of greater predictability, too.
Protect Your Working Capital
Working capital is the fuel that drives business growth.
The availability of capital to be used to fund growth initiatives is dependent upon cash in the bank, debtors, creditors and, often the biggest component, the size of your inventory. For ecommerce brands, holding the wrong stock, or even too much of the right stock could mean the business is running the risk of tying up cash that could, and should, be used to fund growth instead.
When it comes to inventory, not all products are created equal. When was the last time you looked at your slow-moving SKU’s?
No one is saying it isn’t wise to keep best-sellers on-hand but for those items that don’t move as fast – elimination is a simple and effective way of releasing capital. This extra cash can then be put towards funding larger, predictable supplier purchase orders (PO’s) and upping your bargaining strength when it comes to lowering unit or shipping prices. Look towards being clever with your capital spending.
Real-time prioritisation of SKUs based on the current trends within your business can be done by looking at product sales velocity and volume as well as the lifetime value of the customers purchasing them and the average order value of carts containing that SKU.
Another way to protect your working capital is by taking control of those times that you do run out of stock on certain SKUs. By offering customers the option to order products that are temporarily out of stock, the brands are able to enjoy continued sales and an uninterrupted revenue stream for that SKU, even when it isn’t physically on the shelf. Definitely something to consider when protecting capital to free up and use to leverage lower COGS.
Understanding your delivery costs
How intricately do you understand your delivery costs? Do they change across specific products, customers or locations? If you sell abroad, how often do you research new shipping companies and for national deliveries when was the last time you asked for costs from other delivery firms?
Closely monitoring delivery optimisations on a monthly or quarterly basis will allow you to identify any incremental optimisations you could utilise to reduce your shipping costs.
Side note: Make sure you weigh up any reduction in your shipping or delivery cost with the quality of the service that you are providing your customers. Reducing your cost is a good optimisation for you, but not ideal if you incur new - and often hidden - costs in the form of missed / lost deliveries and unhappy customers.
Packaging – how luxe does yours really need to be?
Investigating your assumptions or lowering your own standards (just a little) when it comes to how premium your packaging needs to be, opens up options for lower-cost and/or -weight which could directly influence delivery costs.
Being aware of the cost of delivery per product is also vital – looking at bundling items at point-of-sale to increase AOV and decrease the cost of delivery versus individual item sales.
Evaluating Shipping Zones
What zones are you shipping to? Where are the bulk of your orders going to and how much is it costing you to get them there? Aaron Rubin of ShipHero busts some shipping zone misconceptions over on Twitter with this tweet resonating the most.
The key here is to look at optimisation – can you re-locate or even introduce fulfilment centers to the areas that you ship to most often?
Forbes shares how US-based electronics retailer Best Buy have used spotting a 2020 trend into a move to transform physical stores into fulfilment centers. Following in Amazon’s giant footsteps, they now own much of their fulfilment process and can ensure that they are able to control the delivery date of a product, that that date it is accurately communicated to the customer and that their shipping costs are competitive.
Flipping The Growth Equation
Rather than focussing on plastering over the cracks that form due to below-the-line inefficiencies in our pursuit of top-line growth, we should be prioritising not letting them form in the first place by ensuring the various below-the-line activities are always moving in the right direction.
Of those, your COGS - which should ideally include your shipping / delivery costs too - is often the biggest lever to move to be more profitable and generate more cash.
Small, incremental improvements of your operations that, in turn, lead to a reduction in your COGS, will not only protect and optimise your working capital, but will strengthen the core of your business, setting it up to not only grow, but grow well.