In 2020, approximately two billion people purchased goods or services online. But while ecommerce can be a highly accessible and profitable business model, it comes with its fair share of challenges. One challenge that will greatly impact the success of your business is overhead costs. Here’s what you need to know about overhead and how you can reduce overhead costs to boost your profits.
What Are Overhead Costs?
You must understand what overhead costs are before you learn how to reduce overhead costs in your business. Overhead costs (costs not linked to creating a product or service) are those associated with running your ecommerce business. A few examples of overhead costs that you might be familiar with include paying to store your inventory, shipping costs, and office supplies, to name just a few.
Seeking to reduce overhead costs will boost your business’s profitability. The lower your costs, the more money you have to invest in your employees, your business model, and the products or services that you design.
Types of Overhead Costs
Think about the financial habits of your business. If you track your finances closely and budget for future expenses, you know that budgeting doesn’t always look the same across the board. For example, you might put aside a specific amount of money each month for software that your business relies on, whereas the cost of utilities may fluctuate from month to month.
When you’re first learning how to reduce overhead costs, the same budgeting principles apply as there are different types of overhead costs to consider. There are three main types of overhead costs you should know if you want to know how to track and reduce overhead costs. These include:
- Fixed Costs: Fixed costs remain the same over time. Examples of fixed overhead costs include rent, insurance, and taxes. These costs are easy to budget for given that you always know how much you will be spending in these areas.
- Variable Costs: Variable costs are subject to price fluctuations, meaning that you may pay more or less over time. Some examples of variable costs include supplies, shipping, or some utilities. Variable costs can be a bit more difficult to anticipate, and they may sometimes fall over or under the amount you expect month-to-month.
- Semi-Variable Costs: Semi-variable overhead costs fall in between fixed and variable. Examples include freelance salaries or seasonal utility cost changes. These are a bit easier to navigate as you seek to reduce overhead costs, although there will be variations at times.
Now that we’ve gone through the main types of overhead costs, let’s take a closer look at some of the strategies that will shape the success of your business as you seek to make overhead costs less burdensome.
How to Track Overhead Costs
The ecommerce industry is massive, and it generates a lot of revenue. However, that doesn’t mean that everyone succeeds. Around 80 to 90% of ecommerce businesses fail, and in many cases, this can be attributed to poor business management. If you don’t keep track of how much your business is costing you and where your money is going, you will be less likely to succeed.
But how exactly are you supposed to track your overhead to reduce overhead costs? This all boils down to key performance indicators (KPIs). For those who are new to running an ecommerce business, a KPI is a measure of performance that is quantifiable, and you’ll use it in every aspect of your business to understand how effective each department is. In the case of sales, KPIs can be invaluable to help you determine where you’re spending too much and where to cut back to increase your profits.
When learning how to reduce overhead costs, some of the most important KPIs for your business to actively track include:
- Gross profit: This is the cost of goods and services subtracted from your revenue.
- Inventory levels: These are important to track when you’re seeking to reduce overhead costs to ensure you’re not sinking too much into inventory you don’t need or having too little inventory and impacting your business operations.
- Cost variance: This KPI involves comparing your actual expenses and your forecasted budget.
- ROI: Every business activity will have an impact on your business operations. Measuring ROI will allow you to measure the efficacy and profitability of various products and services employed in your business to see if they’re promising the desired returns. Overall labor effectiveness can also help you determine the effectiveness and ROI of your workers.
- Average margins: This helps you better determine the profitability of each unit.
The deeper you dive into the various areas of your business, the more you’ll learn about where money is going, whether or not it’s being spent efficiently, and which areas you need to cut out or streamline to reduce overhead costs. With the understanding to analyze these metrics, you’re better positioned to make major changes in your ecommerce business that will allow you to save money and boost profits!
Strategies to Reduce Overhead
Learning how to reduce overhead costs is essential for ecommerce businesses. A recent report found that the average cost to fulfill an order is 70% of the average order value. For the average online retailer, this is a massive blow to profits. There are a ton of costs that can end up impacting your bottom line, but fortunately, there are also plenty of opportunities to cut those costs. So, how can you reduce overhead costs to lose less of your profits? Here are a few helpful strategies that will support your business moving forward.
Track Your Spending
It’s never too late to establish systems and processes that give you greater insight into how much you’re spending and where your money’s going. If you haven’t already, now is the time to implement an expense tracker or other software that gives you a comprehensive overview of how much you’re spending and where your expenses are going. This will provide you with the information you need to make effective changes in your business model.
Cut Down on Costly Operations (and Take Advantage of Deals)
When looking for how to reduce overhead costs, you’ll find that there are many different options. For example, how much are you spending on packaging for your products? What does your current shipping model look like, and are there inefficiencies that could be done more cheaply? Are you relying on too many expensive tools or services for your business? Evaluating your business and reducing the number of costly operations or streamlining them is an effective way to reduce overhead costs.
Of course, there are some products and services that will play an essential role in running your business. You can’t get rid of these, and the good news is that you don’t have to. If one of the products or services you rely on is having a promotion or a sale, make sure to take advantage of these deals. If a product or service you rely on is too expensive and is eating up too much of your profits, see if you can find deals for other products or services you can switch to and save money.
Eliminate Unnecessary Products
When you first start your ecommerce business, it can be easy to focus on developing and offering an extensive product line to reach as many prospective customers as possible. However, the reality of any business, no matter how well planned, is that not all products are going to sell equally well. Some products will be a hit, and others won’t. If you’re looking for ways to reduce overhead costs, one of the best ways to do this is to place a greater emphasis on selling popular goods and eliminate any products that aren’t selling well.
Products that don’t make the cut will inevitably cost you as you continue pouring money into producing them. That being said, if you really believe in a product, consider looking for ways to improve it and reduce the number of these products in your inventory until you can determine whether or not these changes have an impact on their popularity.
Focus on Customer Retention
Some tips on how to reduce overhead costs might not be as obvious as others on this list. For example, consider customer acquisition versus customer retention. Did you know that you can reduce overhead costs by focusing on the latter? Research shows that it costs almost five times more to acquire new customers than it does to keep the ones that you already have.
This will, of course, apply more to businesses that already have an established customer base. However, if you do, focusing on retaining customers and encouraging them to keep purchasing from you can boost your profits more than trying to draw in new customers. Once your business has a customer base, make sure to prioritize keeping them engaged!
Improve the Quality of Your Products
Another common pitfall for many new ecommerce business owners is the belief that if you build it, they will come. Dropshipping has exploded alongside ecommerce, and some ecommerce owners may have decided to purchase cheap products, list them online, and wait for the profits to roll in. With all this in mind, the reality is that customers want high-quality products and services. Having a wide selection of products does not always equate to better sales.
Instead, to reduce overhead costs, focus on producing fewer, higher-quality products and keeping close tabs on your inventory to make sure that you’re only storing and selling products you believe in that customers will truly want. At the end of the day, this will be a much more effective strategy for your ecommerce business.
Remember, You’re in Control of Your Overhead Costs!
Overhead costs can make or break an ecommerce business, but there are ways that you can reduce overhead costs and boost your profits to ensure that your business has the momentum it needs to thrive in the future. If you’re just now learning how to reduce overhead costs, these tips offer invaluable advice to help you learn more about your business’ spending habits and how to address this common issue.
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