This article examines creative ways to lower costs and improve your eCommerce pricing from the supply chain perspective. As in any business: good pricing starts with excellent buying. Lower costs in purchases mean higher profit margins and competitive pricing. We suggest 20 ways to improve your gross margins by improving your purchase operations and supply chain management.
1. Reverse engineer competitor pricing
To get started, gather competitor Key Value Item prices manually or by using web scraping. Then match competitor prices to yours. You get the best result if you have periodical data to compare how your competitors change their pricing. Also, collect their discount details to understand how many discounts they use.
After that, analyze their distribution channel by interviewing wholesalers and try to understand their purchasing power against their suppliers, and potential to buy higher amounts directly from manufacturers with lower costs.
After a reasonably clear understanding of their supply chain, you can first set margin levels they either pay or save. Then take your gross margin as a starting point and see how much more they might have gross margins from landing on their price. To sharpen your analysis, you can also interview people that have worked in the industry.
2. Understand what your product portfolio really is
First, gather all your product data and product sales history data. Then check that you have relevant data grouping (categories, subcategories, brands, and other details). Next, do a product portfolio analysis and try to find answers to the following questions:
- What are your main product areas that generate revenue and profit?
- Which products are growth drivers?
- How well does your product portfolio satisfy the needs of your customers?
- Which products should you use to be or become a market leader?
- Which products should be removed or added to strengthen your position?
- Which products are potential for you, and which ones might be a risk?
Finally, make a concise presentation on the products to focus on and find ways to make it appealing for your suppliers to support you. They might be willing to help you to lower costs, if you can promise them more focus on their products.
3. Try to find compelling new products with low return rates
Ecommerce is a special kind of trade. A significant amount of product purchases often end up in returns. In many cases, the retailer is not able to resell returned products. Trying to find products with lower return rates means you have a higher potential on the actual gross margin. Lower returns means lower costs.
As an example, you can do the following for products with high returns and especially return losses: come up with innovating ideas on how to develop instructions for people to try out the item so the returned ones are in perfect condition. The easiest way is to interview your competitors, suppliers and other key players in the industry. You will be amazed how much people are willing to help, when you talk to them.
4. Remove potential delivery delays to lower costs
Keeping your product inventory on the right level is the key to success. A high stock level means your capital employed increases. The faster your supply chain is, the less cash you need. Try to understand the stability of your demand and how you could organize faster deliveries in smaller batches. That way you have more cash to operate at any time.
To fine-tune your analysis, you can calculate the cost impact for product margin if you decide to lower stocks. With this approach you will find the optimal delivery times for each product. This in turn, can lower costs.
5. Ensure quality inspections to lower unnecessary returns
Firstly, returned items cost you the lost sale, and secondly, they might end up in damaged goods. In cases where you have high losses in returns, you should ensure quality inspections to study why some products have more visible damages than others. Then try to create better return policies and instructions to avoid unnecessary losses.
6. Build relationships with several reliable suppliers
Having to rely on a single supplier might be a risky game. By creating a list of different vendors, you ensure trouble-free deliveries in each and every situation. Build relationships with several reliable suppliers to ensure product flow in all situations and have alternative suppliers when possible.
7. Create a list of backup vendors
Getting the best purchase price from a close partnership is evident. But in many cases, you might be better off having several partners, or at least options, if the primary partner is unable to deliver. Create a list of potential supplier partners for future purposes and negotiate preliminary purchase prices with them. So, create a list of backup vendors and negotiate preliminary price levels with them, in case you need those. Best is to do some ordering from the also to keep the relationship developing.
8. Create Key Performance Indicators (KPI’s) for suppliers
Ensure you and your suppliers are on the same page on what smooth co-operation means. Set clear Key Performance Indicators that you both monitor to lower costs. KPI’s could be:
- Forecastable pricing
- Payment terms and cashflow
- Delivery times and accepted variance
- Defect levels
- Lead times (from order to shipment)
- Contract compliance (delivery preciness)
- Customer service
- Discounts and rebates
Having a common understanding makes you both focus on smooth co-operation. This will lower costs and improve your margins.
9. Collect all costs involved for purchasing and start to monitoring those
When calculating product price, you can use purchase and delivery costs as your cost base. But there are other costs you should take into the calculation. Such as warehousing costs on average. An easy way to calculate this is to take the total cost of warehousing divided by the number of products. This way you also include the time it takes to sell your products. Other similar costs consist for example of rebating products that do not fit your quality level and the cost of handling inventory. All these are important to understand and take as an average added cost in your calculations.
10. Implement a cost reduction program for Key Value Items
Competitive pricing needs competitive purchasing. The better the purchasing price, the better the selling pricing. Ensure you have mapped your Key Value Items right. Then create a cost reduction program for those. Areas where you can find potential cost savings to lower costs are:
- Delivery size
- Forecastable delivery schedule
- Volume discounts
- Campaign support
- Retro payments when achieving certain thresholds in sales
11. Review and rationalize your supplier base
Build a reliable supplier base and stick to it. You can monitor suppliers as mentioned above. Unreliable suppliers expose you to delivery shortages and to losses in the worst case. By monitoring your KPI’s for your suppliers, you are able to focus on your reliable suppliers.
12. Consolidate your purchases to get extra leverage in cost reductions and supply terms
Once you have found the best suppliers, you can get extra leverage in price negotiations by concentrating your purchases only on them. In such a case, ensure you also have backup suppliers. This technique is easier to implement in cases where you have wholesalers. In cases where you buy directly from manufacturers, this might be harder. In such a case, consolidation often needs negotiations on pre-manufactured products kept as a security inventory at the warehouse of your manufacturer.
Manufacturers usually prefer to keep extra stock at their disposal if you can accept the product details to be modified so that they can sell the products to someone else instead of you if you are unable to. Such details include for example product labelling and special EAN codes.
13. Find opportunities to leverage better buying power and logistics costs by joining forces with other retailers
Sometimes you are selling products that you can purchase with other retailers. Co-operation is an effective tool in scenarios where you sell ordered items in smaller quantities. Other retailers might need more products than you. When you order larger quantities together, you get a lower purchase price. Try to find joint ventures with other retailers when possible.
14. Use demand forecasting to plan your purchases and lower costs
To buy products in exact amounts, you need to know how much you need. You can achieve that quickly by analyzing how much you sell based on your demand. Use your sales history data to calculate product price elasticities. When you know how product pricing affects your sales volumes, you can estimate feasible ordering frequency.
Based on your current pricing, you can predict how many products you need and when. The Key Performance Indicators you should then measure are for example Days of Supply, which tells you how many days your current inventory will last with your current volumes. As an example. If your Days of Supply is ten days, you sell ten units daily and have 100 units in stock. In such a case, your order and delivery must ensure you receive the following products before the ten-day limit. By monitoring such KPI´s your demand forecasting accuracy will improve and you can easily improve your profitability.
There is softwares specifically designed to do demand forecasting per product.
15. Look for opportunities where customers are willing to get less service with decreased payment
In many cases, retailers think customers need pampering and are happy to pay for that. But what if you would give less service and charge less? It might mean you deliver slower or sell returned products with a discount. Many customers are happy to give out service levels or product quality if they get affordable products – especially when it comes to price-sensitive customers. Suppose you sell returned products (which might be close to pre-used or are somehow damaged) even at significantly lower prices. What happens? Your overall profit margins increase.
16. Use dynamic ABC analysis to react quickly
You most likely have an ABC analysis for your inventory in place. The next thing is to make it dynamic. With a dynamic ABC analysis running daily in the background, you can easily see which products are losing demand. Reacting to lowering demand gives you two options. Firstly, you ensure you will not be left with excess inventory, and secondly, you know which products should get less focus on. Focusing only on products that sell well ensures profitability.
17. Follow inventory rules per product to minimize inventory and lower costs
The simplest way to release cash is to have the right amount of products in stock. Set clear rules for inventory levels. The most uncomplicated rules are:
- What is too high of an amount?
- What is too low of an amount (set alarms)?
- What products need higher stock (upcoming campaigns)?
You can automate the above inventory rules in the pricing rules. The rules can include scenarios for upcoming price changes if your stock is too high or low. For example, you can lower inventory by increasing demand with a lower price. Too high inventory is a cost that you can easily avoid. Improve profitability by having clear inventory rules, which you can quickly adjust with your pricing.
18. Make sure your Key Value Items are competitive on purchase prices
Let’s face it. You won’t be competitive if your most valuable products have a too high purchase price. So identify your Key Value Items (the 20% that makes up 80% of your business) and ensure your purchase price is right. If you are a smaller eCommerce company, this is critical for you. Although you might think you can compete with price, unfortunately it is unlikely. Unless you are the cost leader in your industry, you cannot compete by always having the lowest price. Therefore the lower you can negotiate the KVI purchase prices, the better. In some cases, explaining that to your supplier will psychologically justify their efforts to give you a lower price.
19. Act on over and under stocking situations
Most likely you have set clear rules for inventory levels. The next question is how to enforce those. Lowering stock means you release cash. It also tightens the leverage in pricing. If you are required to adjust prices too low, then the inventory you are having might end.
A good and clearly communicated plan for pricing your products and acting on different situations will save you money as people know how to act on individual level. Manage your stock levels for over-stocking and stock-outs to ensure you have an optimum inventory level and a balance for cash and profitability. The tip is to combine the pricing data, live inventory with demand forecasting.
20. Review contracts with critical suppliers on liability issues
As long as everything goes well, you do not need to meddle. But what happens when your supplier or warehouse loses your products? What happens in case of a delayed delivery or the delivery contains wrong products? Your customers are angry and you get the blame. In such a case, clear rules for action is the road to victory. You can promise compensation for your customers, and your supplier helps you to cover it.
So, remember to review contracts with critical suppliers on liability issues to avoid costs on supplier related loss, supply shortage, delivery problems etc.
Hopefully this article gave you ideas on how to lower costs and improve you profitability.
Get more resources for your pricing
Visit our Resource library to find out more valuable tools to improve your pricing.