Don’t worry, coffee isn’t one of the costs we’re going to cut! 🙂
Recently I’ve been reading Michael O’Leary: A Life in Full Flight – O’Leary is the CEO of Ryanair, Europe’s equivalent of Southwest Airlines. You’re probably wondering how a book about an airline CEO can possibly relate to ecommerce, right?
There are actually a number of parallels that can be drawn between the aviation industry and the ecommerce industry. But, the main thing I want to touch on is costs – and costs apply to every business, in every market, in every country.
From page one, the book hammers home costs – and how Ryanair’s relentless pursuit of cutting costs allowed the airline to survive (at first), and then thrive.
And that got me thinking – I’m always looking to grow sales on my website, but I rarely look at other ways to increase profit. If I could cut ecommerce costs, that would certainly be a way to make more money. I searched online for ways to cut ecommerce costs, and I couldn’t really find a whole lot – so I had to think outside of the box a little.
Over the last couple of weeks I’ve been cutting costs like they’re going out of fashion – I’ve managed to save in excess of $3,000 per month. That $3,000 per month is more than enough to hire a new member of staff.
The basis of any ecommerce business is to procure stock, then sell it at a higher price. Since I launched the website, our sales have increased steadily on a monthly basis – to that end, I thought I had a pretty good case to request bigger discounts on stock suppliers.
A few said “no”, one I’m meeting on Friday to discuss things further, and a couple of others are going to put together discount packages for me going forward.
Aside from shipping, the cost of goods is my biggest expense – so it makes sense to seek savings in this area. Even an extra 5% discount could lead to several thousand dollars saved each month – which is a lot of money.
I didn’t save as much as I’d hoped on stock initially, but I’ll continue this initiative as we grow. For now though, I have to look to other areas for bigger savings.
Shipping rate discounts
We offer free shipping on all of our orders, so we tend to spend a fortune on postage on a daily basis. In the UK, we use Royal Mail for about 70% of orders, then a private courier for the rest.
Royal Mail weren’t able to offer any discounts, but they did advise on some different services we could use to claw back a few pennies on each item. The private courier were able to advise on some different services for us to try, which could save us up to 30% on each item shipped – which is a great result!
One of the reasons we used to spend so much on shipping is that our thresholds for delivery upgrades were quite low. Customers spending £11 ($17) or more would have their delivery upgraded to a signed-for service. Customers spending £50 ($75) or more would have their delivery service upgraded to a next day service. As postage is free on our website anyway, it cost quite a lot to work to these thresholds.
After crunching some numbers, we’ve increased the thresholds to a figure that still offers great value to our customers – while reducing our monthly shipping costs by over $1,000 in total. We’ve decided to increase the signed-for threshold to £20 ($30), and the next day threshold to £75 ($115).
Bearing in mind that delivery is free, customers still get a fantastic deal! This decision has allowed us to make huge savings, which will continue to build going forward.
Packing material efficiency
We already get a great deal on our packing materials, and we have since day one. I wanted to see if I could squeeze an extra 20% discount from our main supplier though – so I called them to see. After much deliberation they honored my request for a larger discount. We primarily purchase bubble mailbags, in quantities of 10,000 or more each month. The 20% discount on these mailbags only represents a few cents per order packed on average, but when you add the number up it comes to a far grander figure on a monthly and annual basis.
In addition to reducing the cost of packing materials, I’ve asked staff to try and use the smallest mailbag possible for each order – ensuring that small orders aren’t dispatched in larger, more expensive envelopes. Again, if this saves a couple of cents on every order then it might not seem like a ground-breaking saving, but the overall monthly saving will be well into the hundreds for us.
Because nail polish is classified as a hazardous product, we’re obliged to affix a special hazard sticker to every single envelope or box that we dispatch. In the past we’ve been paying around $0.80 per sticker, which is ridiculously expensive in my opinion! I bought some special labels to fit in our existing printer and I had one of my employees design our own hazardous goods stickers. I’ve managed to reduce the cost from $0.80 per sticker to less than $0.05. That’s another great saving.
Payment processor fees
We’ve not spoken to our payment processor since before we started the website. We opened a merchant account with them and that was it. I had a quick look at the payment processing rates we were paying and decided there must be some room for movement. I also looked at what other payment processors charge, and decided to call my payment processing company. They were super-responsive to my call, and in the end I managed to save around 30% on our monthly payment processing fees.
We also use PayPal to process payments – by switching from a micropayment account to a Website Payments Pro account, we’ve been able to secure further savings by doing this. We’re only talking savings of a few cents per transaction, but when you look at how many transactions we complete, those small savings soon start to add up.
Custom development costs
In the past I’ve been quite wasteful when it comes to website development. If I wanted a new feature, I’d give a developer my budget and have them do it for me, custom. Nowadays the Shopify app store is full of great applications for you to plug in – there’s no need to pay silly money for a developer to create a function just for you. Recently I’ve saved a lot of money by employing the use of existing Shopify apps to add functionality to my website – as opposed to paying a developer to create something from scratch.
It’s easy to create a website overflowing with great functionality without spending tens of thousands of dollars on it. Shopify is a brilliant platform and I highly recommend it, but there are also lots of other great shopping platforms out there, like Bigcommerce, that benefit from lots of great [cheap] add-ons and plugins.
If you’re looking to boost profits don’t discount the idea of cutting costs. Growing sales is always a smart idea, but sometimes a little effort spent renegotiating existing deals with suppliers can lead to big savings.
Here are five top tips for you to consider when cutting costs:
- Settle for something… anything!: Start out asking for a decent discount – you will find a few suppliers flat out refuse to honor your discount requests. So ask for “just 5%” – a pathetically low figure. It’s a figure so pathetic that suppliers will say yes, just to get you off their backs. Sure you didn’t get a 30% or 50% discount like you might have hoped, but a 5% discount can still save a few hundred dollars each month. You certainly won’t be complaining about that!
- Pay invoices on time: It goes without saying that you should pay invoices on time, no matter to whom the invoice is due. I always pay invoices on time because it lends my company extra credibility – some companies even offer a small discount for settling on time. One of my favorite lines when negotiating a bigger discount is: “Well, we always pay our invoices on time… so you know we’re good for the money!” It works like a charm, every time. If you don’t pay your invoices on time, why on earth would a company want to deal with you in the first place – let alone give you a bigger discount?
- Shop around: With my payment processing company I was able to present a list of prices their competitors charged. Armed with a list of real figures, I presented the facts and asked them to beat their competitors. Shop around and get a feel for the market – use competitors’ pricing to beat down the price of existing your suppliers. I also used this tactic with the courier.
- Have no shame: Lots of people are too embarrassed to start asking for bigger discounts. Unfortunately, in life and in business you have to take your chances and you have to live outside of your comfort zone on some occasions. I can think of things I’d much rather be doing than asking for discounts – but asking for discounts presents me with the opportunity to make thousands of pounds more in profit each month. And that’s why I do it. After a while I started to get a “buzz” from discounts and seeing how much I could save – so now I like to set myself mini challenges to save as much money as I possibly can on an on-going basis. This “being frugal business” is a way of life!
- Disable old voucher codes: Got old, expired voucher codes still activated on your website? They could be killing your margins! Remove any old/expired voucher codes. It only takes a minute to check the codes you have enabled.
You’ll notice that I’ve not mentioned cutting back on any form of advertising or marketing. Lots of businessmen and women have told me that the one thing they never cut is their marketing budget – you should only ever increase that particular budget.
Sure, certain forms of marketing might not work particularly well for you – but you shouldn’t just withdraw the money from your budget altogether – that money should be reassigned to another area of your marketing budget instead.
One of the biggest mistakes people make is to cut their marketing budget as we enter a recession. In fact, the best thing to do is to increase your budget under such circumstances, to keep sales rolling in.
When an ecommerce business matures and the hectic day-to-day struggle of adding new products has subsided, you’ll have time to look at the bigger picture. The goal of your website is profit – and the way to achieve profit is usually to make more sales.
Just remember, however, that by cutting costs you can also make more profit. That money can then be reinvested in your business, or it can form of a bigger compensation package for yourself, or your employees.