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As a business owner, you may already know what gives your product a competitive edge. But have you considered the competitive advantages built into your company’s business model?
Andrew Faris, an ecommerce expert with more than a decade of experience, says profit-and-loss strategy is where most ecommerce founders have untapped potential. “What is it in your business where you can uniquely generate outsized value because of the way your business is structured?” he asks. Some examples are businesses that have low fulfillment and shipping costs or many customers on subscription plans.
There are many ways to strategically increase your business’s profit through good P&L design. Throughout his career and as the founder of boutique agency AJF Growth, Andrew has helped grow ecommerce sales for brands big and small. Here are some of his tips for maximizing your margins.
Understand your fixed and variable costs
“ Having more margin is a gigantic ecommerce cheat code,” Andrew says. To be able to make adjustments, first you’ll have to take a hard look at your P&L regularly. Calculate your fixed costs (like employees, office space, etc.) and your variable costs (like the costs of shipping, packaging, credit card fees, etc.). Then, take a look at how much you are spending on advertising and marketing.
Andrew’s benchmarks for a good direct-to-consumer (DTC) business are getting 60 to 70 points of margin after fixed and variable costs. “ Your forecast and your P&L is the treasure map that tells you where that gold is,” Andrew says. “ My most successful clients live and die by that document.”
Compare prices when searching for suppliers
To keep prices low, start at the source. Andrew recommends searching high and low for the right manufacturers and suppliers to keep the cost of making the product as low as possible. He says that in sourcing a product for his own upcoming consumer brand, he worked with a company that specializes in finding production partners. That company reached out to about 45 manufacturers (from an initial list of 60).
If you don’t have the capital to outsource this research, you can still do a lot of the legwork yourself by shopping around and negotiating prices. “Understanding what the manufacturer’s best interest is for their business … ends up being the crucial point,” Andrew emphasizes. By exploring options like volume discounts and better terms, founders can reduce production costs and improve margins.
Maximize efficiency with your ad buying
In an era where the digital advertising landscape is constantly changing, Andrew advises against chasing after every new trend. Instead, he recommends focusing on tried-and-true advertising principles.
Andrew does most ad buying with manual bids, such as cost caps, bid caps, and target return on ad spend (ROAS) campaigns. “That ends up being the most efficient distribution of your dollars on ads,” he says. “ They end up suppressing the spend on their worst ads and more efficiently scaling the spend on their best ads.” Instead of allowing the ad platform to spend through your budget every day, these types of ad campaigns ensure that the budget is allocated efficiently, helping to reduce costs.
Leverage AI to iterate on creative
You might also be able to save on the cost of advertising by utilizing AI tools. “AI is just making a lot of things cheaper …, especially the cost of creative production,” Andrew says. For instance, he uses AI to help cut down an existing script into shorter formats, so he can make several iterations of the same creative. This makes testing different creative in an ad environment a much faster process as well, saving you time and money.
To learn more about P&L strategy, listen to Andrew’s full interview on Shopify Masters.
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Credit: Original article published here.