Grossify-ing margins is not a real word, but its kind of a word. Now that we got that out of the way, I want to talk about the importance of protecting your margins in e-commerce.
Gross margins of a product are defined as the difference between the cost of the product and what the product sells for (divided by the sales price to express it in percent form). It doesn’t take an MBA to realize bigger margins are better, but I think we forget is how easy it is to have margin creep, or the inadvertent shrinking of your margins. If we unable to identify and predict every cost that goes into producing a product (hard to do), we better have the cushion to continue to maintain a profitable product (aka protect our margin). You do not want to get in a situation where your costs get too close to your sales price, but you are unable to raise your sales price because the market will not support it.
If you find your margin shrinking, you may be faced with a few options. You could find a way to lower the cost of your product (don’t forget this also includes packaging, labeling, printing, shipping, and so forth). Second, you could add additional value to your product to permit raising the product’s sales price (something that may raise your costs as well). The best solution, albeit the hardest, would be to create something SO valuable, that people will pay for it anyway regardless of price – think Apple iPhone.
I’d like to share an example of one of the mistakes I made when developing and launching one of the first manufactured products I sell online. This particular product cost about $7 to manufacture and I estimated that I could sell this product on Amazon for about $14.
However, the real cost of production was more than $7. I had to develop a printed marketing insert with every product. I had to buy plastic packaging and labels for each device. I had to incorporate the cost of shipping from the manufacturer to me so I could prep the package, then add in the cost of shipping from me to the fulfillment service (in this case, an Amazon warehouse). These costs all factor into the “cost” of a product, or in business speak, the “cost of goods sold”.
Can you see how quickly my perceived 50% gross margin eroded? Your margin may be at the whim of market forces as well. Perhaps a new competitors comes in with a similar product, and the only way you can compete is to lower your price. Perhaps your manufacturer/supplier decided to increase your cost because a new tax was placed on them. Margins can be squeezed from both directions.
Today, this product sits with margins in the low teens, and because it is such a small (i.e. low priced) product, I will need to sell a boatload to make any significant money. Another lesson learned.
Bottom line: Calculate your costs as thoroughly and accurately as possible, and then allow some extra cushion on top of that. The chart below shows what typical gross margins are in e-commerce. In general, if you are starting out, I wouldn’t accept anything less than roughly 25% gross margin for your product.
