Question: I am currently working on the development of an e-commerce that sells healthy dry food. What are the typical margins? I’m launching a webshop with healthy products, nutritional supplements and natural cosmetics from different distributors. What is the typical gross margin for this kind of products? What percentage of my budget should I allocate to marketing? What is the average basket and the purchase frequency?
My answer is below.
I can only speak from the perspective of being the manufacturer/brand/vendor producing and selling products like what you have described direct to consumer via my website (or through my call center). I don’t have experience as a 3rd party e-commerce business. But, I think many of the metrics will be the same, so here’s what has worked for me.
My goal is to set my anchor prices on products so that my net profit is at least 30%, if I sold 1 unit. Think of your profit and loss statement one each product. Back into the anchor prices assuming 30% net income and 36% operating costs, which leaves 44% left over for COGS. Or, in your case, 44% paid to the vendors to purchase product from them so you can resell it. In general, try to get that number down closer to 30-40%, or less, if possible.
If 30% is my net profit goal based on my anchor price – my top most price on a single unit – then think of offering generous volume discounts to attract high average order values. I shoot to maintain at least a 15% – preferably 20% – net profit margin when I do volume discounting.
In general, $75 or greater average order value from each customer seems to be a bit of a magic number for making the direct online operation work. Offer volume discounts upsells, cross-sells, or down-sells in your order process to get above that figure. Any less and you may not be able to pay for all your operating and marketing costs to acquire customers. You might make it up over time through repurchases, but that puts extra pressure on you. Try to adjust your average order value so that you can at least pay for acquiring that customer on the first purchase.
A 30% or more repurchase rate from initial purchase within 3-months is another good metric to exceed.
I don’t think of allocating a percentage of my budget to marketing. I use direct marketing (also called direct response marketing) to acquire customers and my goal is to optimize my entire marketing and operation so that my marketing pays for itself through the sales.
A general breakeven rule of thumb is an ROAS of 2, or gross sales minus cancels/declines/returns, divided by marketing/advertising spend. If your ROAS is hitting 2 or more, in general, your operation will be at breakeven. So you optimize marketing to get you a higher ROAS – say 3, 4 or higher – I have done as high as 7.
It often takes time to optimize, so I may be spending low dollars on marketing to start, but it is returning less than 2 ROAS. As I optimize and it gets above 2, I then spend more and more and keep going up.
When you think of it this way, it’s less about allocating percent to marketing, but more about how much more can I spend because I have optimized and I know the marketing is working and will pay for itself with sales coming in.
But, if I look back, and I have optimized my marketing to a strong ROAS, my P&L generally shows around a 20% marketing spend.
I try to build my operation around the above-mentioned metrics, and if I am successful, will give me a strong, profitable and generally sustainable business.