Shop Optimizations: What to Do When Your Best-Selling Products Have Low Margins
Products with low gross margins can be an indicator that you are not making a sustainable profit from certain goods.
“A low gross profit means that relative to industry peers, you struggle to create profits on sales,” says Marketing Professor Neil Kokemuller. Though your profits on certain products are low compared to competitors, it doesn’t mean there isn’t room to use these products as part of your overall selling strategy.
If brands are not happy with the profit margins on a product, they can turn to their marketing and sales strategies to raise prices and increase margins. Alternatively, they can focus on sales volumes.
For either of these approaches, your website should be one of the first places you turn to optimize your profits. Below, we explore three ways to optimize your website around your low-margin best-sellers to drive revenue.
1. Elevate Your Brand
An easy way to increase per-product margins is to simply increase their purchase price. However, you have to earn that higher price point with brand equity.
High-end brands are experts at this kind of positioning, and their websites are designed to make their products look expensive, says Peep Laja, Founder of CXL. “Start by making your website look expensive, then make your product look fancy, too.”
Your products don’t have to change in quality, but your branding does. You can convince consumers that your products will make them happier with a more sophisticated website.
Start with your site’s visuals when positioning yourself upmarket. “People are wired to value images,” says Michael Del Gigante, President and Creative Director at MDG Advertising. “67% of consumers say that the quality of a product image is ‘very important’ in selecting and purchasing the product.” Consumers rank a site’s visuals as more important than product descriptions, ratings and reviews in their decision-making process, he adds.
eCommerce managers already know that visuals are important. But it’s not just about creating high-quality product visuals. A brand needs consistent visuals that convey the brand’s identity across their digital channels.
“You need to make sure that the graphic design shows that you are unique, shows how you’re different from competitors, and shows the value of your product or service,” says Goran Paunovic, Founder of ArtVersion. Improving your branding is not something that happens with a few changes to your site. It takes time. But your online presence is a good place to start when making these changes.
2. Leverage Low-Margin Products for Upsells and Cross-Sells
High-selling, low-gross-margin items create great opportunities to promote higher-margin items.
One way to do this is with upsell or cross-sell recommendations on your site. A low-margin product might have high-margin complementary accessories you can recommend as a bundle. Francesca Nicasio at Total Retail reflects on a time when she worked with a tea retailer with this exact situation. By pairing low-margin, frequently sold accessories with higher-margin teas, the retailer increased revenues by 300%.
Just don’t ask too much from your customers, advises online business consultant Brian T. Edmondson. You don’t want to pressure them with too big of a price jump or a product they simply aren’t interested in.
3. Use Low-Margin Products as Entry Points for Your Customer-Retention Strategy
In addition to being a catalyst for upsells and cross-sells, low-margin products can be a great first step to gaining loyal customers.
“Customers are likely to spend more with companies they’ve already done business with,” says Amanda Stillwagon at Small Business Trends. “Particularly with small businesses that don’t have a lot of brand recognition, a customer’s first purchase or two can be considered somewhat of a risk. So they are likely to keep the cost relatively small, and then increase spending as the relationship grows.”
It is up to you to take full advantage of that initial purchase, delight them with what makes your brand stand out and encourage them to come back again for higher-margin products.
One strategy for encouraging first-time customers to become repeat customers is to inspire them to use the product more than once, make the product a normal part of their lives and eventually come to rely on the product. Jackson Noel, Co-Founder and CEO at Appcues, says that if you can go through these stages with customers, you will greatly improve customer retention. Granted, Noel is talking about selling software, but this notion of onboarding can apply to any consumer product.
There are two useful tools for incorporating these retention strategies: user-generated content and branded content. User-generated content showcasing how other customers regularly use the product can be a practical way to inspire others to do likewise.
Hannah Sears at Pixlee writes about how connecting real customer photos from Instagram and other social media to an eCommerce site can boost sales and improve the overall authenticity of brands. When consumers see other people using a product in their everyday lives, those customers will feel inspired to also use those products. Social proof on your website is good for a number of reasons, but in terms of building a loyal customer base you need to show that other customers use your product regularly, not just once.
Branded content can also provide expert tips on how to regularly use the product. The key is for that content to be compelling enough to keep customers onboard. Will Phung at Internet Retailer points to the example of Away. Away sells quality luggage for a lower price than competitors and also maintains a digital magazine full of high-quality travel content.
“We see a brand brave enough to provide value to the consumer for no immediate return with the understanding that the brand equity built will lead to return down the line,” Phung says.
The Role of Customer Experience in Driving Revenue
Phung is talking about an alternative strategy to the one we laid out in the first point. What Away is doing is building brand equity, but not for the sake of brand positioning so it can raise prices. Instead, the company recognizes the lifetime value of a customer and has built a marketing strategy around repeat sales.
Either way, both strategies depend on a brand’s ability to create a great customer experience. That experience can encourage customers to come back later, it can lay the groundwork for premium product offerings and it can do both at the same time.
That’s why brands shouldn’t see low-margin products as a drain on profits. Rather, they’re a sign that the eCommerce sales funnel is working, and there are opportunities to strengthen this sales channel.
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