Improving Your Online Profitability
by Larry Slusser on January 24th, 2008
To improve the profitability of your online business there are only two options: raise revenues or cut costs. There are many different avenues and objections to raising revenues. The focus of this article will be on how to lower the costs of your business, which will improve the profitability of your online enterprise.
In most businesses, including ones online, the two largest cost factors are cost of labor and cost of materials. Labor costs include wages paid, benefits such as insurance and 401K savings plans, taxes, and any other benefits that are directly tied to you and your employees.
Look at your bookkeeping records and print off every cost you have had related to labor for the last 6 months. How much is the total? Are there quarterly costs that you need to average out into a monthly amount such as bonuses or quarterly premiums? Do you see any surprises?
If you have any employees, take these labor costs both direct (e.g., wages, bonuses, etc) and indirect (e.g., health insurance premiums) and total them up per employee. You will find the amount staggering when you total it up. Employees cost money, there is no doubt of that; but many are worth the cost depending on your industry and reliance upon quality staff. You need to look at the revenue an employee generates or the costs they are saving you versus what you are paying total to have them on your staff.
Say you don’t have any employees – what do you analyze then? If you pay yourself, you need to analyze how much that is and what it is costing your company. While you won’t lay yourself off you can find some ways to make sure you are spending your time and your company’s time effectively and making the most money or saving the maximum you can in costs for your company.
If you are doing your own accounting, web content writing, marketing, writing your own e-books, and dabbling in web design, you need to consider outsourcing some of those tasks. There are many quality providers of these services that can be found online for a very reasonable price. How best is your time spent for your enterprise? That is really the question to ask yourself about your skills and that of your employees (if you have any). If you are the best at sourcing new products, then that is where you need to spend your time, not doing the books or struggling to design a new web page.
For example, let’s say you source a new product line of 50,000 widgets that cost $5 a piece. Because of your superior research and negotiation skills, you lower the cost to $4.50 per widget and you are able to sell them for the same price as before. You just added $25,000 to your bottom line!
Material costs include the cost of your raw goods or the cost to you for the products you offer. You have heard it said that one of the best business tips is to buy low and sell high. This somewhat overused anecdote couldn’t be more accurate and it is critical you buy right no matter what you are selling. This principle holds true for housing, cars, and all sorts of manufactured goods. If you can buy for the right price, you can offer a great price to your customers, who will buy a lot and be happy because you are giving them a great deal.
Spend your time on your business, not in the middle of it. You want to know what’s going on and keep track of things, but you can’t do absolutely everything involved in your growing online business. Stay big picture, make good strategic decisions, and always, always, buy low and sell high.