Friday, February 5th, 2021
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The popularity of online stores makes sense. With just a few hundred dollars, you can have a fully-functioning online business.
While online stores tend to have fewer expenses, e-commerce overhead can quickly add up. As a business owner, you should always be looking for ways to cut costs.
Where do you start?
Which costs can you forgo, and which do you need?
How can you ensure you’re not stunting your business’ growth?
That is what this article will cover. Let’s look at the most effective ways to reduce your online store costs.
What Are E-Commerce Overhead Costs?
Overhead is an accounting term that refers to most business-related expenses.
Overhead refers to the ongoing business expenses not directly attributed to creating a product or service.
Many people mistake their operating expenses for overhead costs. However, these are not the same.
Here’s how to tell the difference:
Operational costs are any expenses that help you run the day-to-day operations of your business. For an e-commerce store, these include the materials you buy, labor, production, packaging, shipping, marketing, and other related costs.
On the other hand, overhead costs are ongoing expenses that you incur whether or not you’re producing or selling anything. For an e-commerce store, these include insurance, software, web hosting fees, employee and management salaries, etc.
This graphic helps break it down a bit further:
Before you can cut back on these expenses, you’ll need to divide them into different categories to understand what can be cut and what cannot.
You can divide your e-commerce overhead into three different categories:
1. Fixed Overhead Costs
As the name suggests, these costs are fixed and can’t be changed. For example, the warehouse rent you pay every month.
2. Variable Overhead Costs
This refers to expenses that differ from month to month, such as an electricity bill. The electric bill might be higher during certain times of the year (like winter or summer) and lower at other times. There is no fixed month to month payment.
3. Semi-Variable Overhead Costs
Semi-variable costs mean that a portion of the payment is fixed, while the other part may depend on your activities. For instance, your email marketing platform may have a base charge to pay every month and then another charge based on how many emails you send or how many contacts you have.
To reduce your e-commerce overhead, focus on your variable and semi-variable costs because these are the expenses that can be cut back on with a little planning and strategy.
Predicting E-Commerce Overhead Costs and Setting a Budget
It’s challenging to reduce costs when you don’t pay attention to what you spend. Unfortunately, that’s what usually happens. These expenses quickly add up without most businesses noticing.
To help you get started, you’ll need to first predict your costs.
Here’s how to get started:
1. List All Your Business’ Overhead Costs
These include the costs for rent, utilities, software, salaries, and other related expenses you incur, regardless of whether you’re producing or selling anything.
2. Divide These Into Fixed, Variable, and Semi-Variable Costs
Once you have a good understanding of all your overhead costs, it’s now time to divide them into three categories: fixed, variable, and semi-variable.
This is an essential step so you can understand what you can cut back on and what you can’t.
For instance, if you have a website for your store, you may pay a certain fixed monthly or annual web hosting fee.
On the other hand, fees such as an electric bill, depend on your business activities from month to month.
3. Understand Your Problem Areas
It’s often not significant transactions but smaller, more hidden costs that can damage your ROI.
When you understand where every cent is going, it is much easier to see what you need to address.
Look for expenses you don’t use, like software or even storage. Note areas that could be cut without impacting your budget, such as a cheaper but just as effective hosting platform.
4. Create a Budget
Creating a budget is an essential part of any business. This helps you understand every expense your business incurs and where you can cut back.
When you create your budget, divide your expenses into their different categories (fixed, variable, and semi-variable), so you can see the specific costs.
Focus on your annual e-commerce overhead expenses, rather than looking at it from a month-to-month basis, as this will help you get a clearer idea of the bigger picture.
How to Reduce E-Commerce Overhead Costs
The e-commerce space allows business owners to reach more customers, regardless of geographic location. This can result in higher profits because your customer base isn’t restricted to your city.
However, your overhead costs can slowly sap away profits—sometimes without you even noticing.
Here’s how to reduce your overhead to help you maximize profits.
1. Re-Evaluate Your Packaging
Packaging costs are easy to overlook because they’re often inexpensive compared to other expenses. Unfortunately, over time, the cost for these materials can add up quickly.
To cut down costs, package your most popular items in the perfect size packages. This will ensure you don’t waste money.
For less popular products, package them in large boxes and use the right amount of material (and not too much) to ensure your packages arrive safely, with no unnecessary additional expenses.
2. Freight Fees
Most online sellers source products from various countries around the world.
The following are some factors that can affect how much you spend on transporting your goods:
- whether you choose to use air freight or ship your products
- how heavy your packaging is
- the dimensions of the packaging
- where you’re transporting your goods from
- getting your supplier or a third party to label the goods
Generally speaking, shipping your products will be a lot cheaper than air freight.
Aim for bulk orders, rather than ordering in small quantities. This can help you save on supplier and transportation costs.
3. Pay More Attention to Your Current Customers
Studies show that it’s cheaper to retain a customer than to acquire a new one.
For a potential new customer, you’ll incur costs for lead generation as you try to show them how amazing your product or service is–but your current customers already know this because they’ve bought from you before.
While it’s essential to continue growing your brand and acquire new customers, make sure to focus more on your existing customers to help reduce costs.
You can send coupons, offer discounts, and regularly keep in contact through weekly or monthly email newsletters.
You can also keep in touch through your company blog and use social media channels to build a connection.
4. Focus on Your Top-Tier Products
It costs a lot to ship and store your products at a warehouse. One way to cut down on this cost is to reduce the number of products you offer.
At first glance, this might not make sense—surely, the more products and variety you offer, the better?
The reality is, not every product will be popular with your customers. Some products will naturally perform better than others.
Instead of shipping and storing everything (and incurring costs for products your customers don’t particularly like), pay attention to your popular products.
What do your customers love? What flies off the shelves and what takes forever to sell?
There’s no use in keeping a product in a warehouse if it’s going to take months to sell.
Instead, focus on the products that are already doing well, and cut down on those that aren’t. This may also give you more budget to test new products.
Understanding these numbers will also help you plan better for your future orders.
You’ll get a clearer understanding of which products you’ll need to order in bulk and which you don’t need at all.
5. Take Advantage of Every Discount
Nearly every bill you have likely offers a discount of some kind. These discounts can be seasonal or available throughout the year.
For example, Bluehost charges $7.95 a month for a 12-month hosting plan, but just $5.95 a month for a 36-month plan.
Pay attention to the discounts available and use them to help you save on your overhead costs. For an online store, these discounts can include:
- web hosting fees (annual vs. monthly)
- bulk orders from suppliers
- seasonal and/or holiday discounts
- clearance discounts
- co-advertising credits
- discounts for paying suppliers early
These discounts might seem small, but they can drastically reduce your e-commerce overhead costs.
Top Benefits of Focusing on Overhead Cost Reduction
There are many reasons why focusing on reducing your overhead costs makes sense. These are just a couple:
1. Greater ROI
The reality is, people go into business to make money. As we highlighted earlier, your variable and semi-variable costs can quickly add up, and this will naturally affect your profits.
Paying attention to your overhead helps you see where you’re wasting money so you can improve profits and ROI.
2. Transfer Gains Into Other Areas
Standing out in the e-commerce space has become increasingly challenging, especially over the past few years.
While e-commerce offers great benefits, such as having the opportunity to connect and engage with your market online, competition has also increased, even within niche markets.
To drive sales and continue to grow your business, you need to invest capital in marketing so you can get your audience’s attention in the crowded virtual world.
Of course, online marketing can be costly.
If you reduce your e-commerce overhead, you may have extra money to channel into your online marketing, which will ultimately help your business grow.
Tracking Overhead Costs
After following the above steps, you’ll be able to reduce key overhead costs.
At first glance, the reduction might not seem much. You might even start to question the whole point of reducing your e-commerce overhead.
Keep in mind that reducing overhead costs makes a difference in the long run.
While you might not see that much of a difference in the first couple of months, as you look at your accounting books at the end of the year, you’ll likely see significant gains.
To help you get a clearer picture of your e-commerce overhead and how much you managed to save, you’ll need to track the following critical KPIs:
- gross profit
- average margins
- inventory levels
- overall labor effectiveness
- cost variance
Running an online business allows you to connect with your audience and build a successful platform from anywhere in the world.
However, out of control overhead costs can make it difficult to reap these benefits.
Understanding your overhead costs can improve your profits and help you better serve your customers.
What does it really cost to keep your business operational? Focus on areas where you can cut back that will make a significant difference in your profits.
Are you running an e-commerce business? What are some ways you’re keeping your overhead costs to a minimum?
Here’s a question for you: How well do you know your customers?
I ask because the better you understand your customers, the more effectively you can reach them. If you know what makes them tick and what influences their individual buying decisions, you can adapt your marketing strategy to increase conversions.
The answer? Psychometric profiling. Let me show you why it’s such a valuable tool for increasing marketing effectiveness and how you can deploy it across your business.
Psychometric Profiling: How Does It Work?
Psychometric profiling is a measuring tool. It allows you to “measure” someone’s personality and use the findings to develop highly targeted, individualized marketing campaigns.
Did you know that customers prefer personalized messaging? 83 percent of customers are OK sharing data with you if it means a more personalized shopping experience.
The takeaway? Psychometric profiling makes it easier for you to give customers what they want.
To be clear, it’s not the same as demographic profiling. Demographic profiling means categorizing customers based on “generic” measurements, like age and gender. Psychometric profiling offers a new, more diverse way to categorize your audience base. Here’s how it works:
What It Measures
Psychometric profiling measures six things:
- personality traits (openness, conscientiousness, extroversion, agreeableness, neuroticism)
- opinions and beliefs
In other words, personality profiling helps you understand why your customers behave the way they do. Once you know what drives people, you can devise highly effective and targeted marketing campaigns.
Building a Psychometric Profile
The data you need to profile your customers and improve your marketing outreach? It’s already out there.
Think about it. Over 4.5 billion people use the internet, including email and web browsing, and roughly half of the world’s population uses social media.
These people are:
- shopping online
- reading marketing emails
- sharing Facebook posts
- following brands on Instagram
- tweeting about things they care about
All of this is data you can use to understand your customers better and discover which marketing strategies they’ll respond to best.
Are There Any Limitations to Psychometric Profiling?
Psychometric profiling helps you connect with your customers, but it has limits like anything.
You still need to collect demographics and other user data for a complete picture. Plus, it’s no substitute for reaching out and engaging with customers directly, for example, on social media. You also can’t use psychometrics to measure marketing performance. In other words, it doesn’t show you whether your strategy’s working or not.
5 Reasons Why Psychometric Profiling Helps Marketers
There’s no such thing as a perfect marketing tool, so don’t let the limitations deter you. Here are five reasons to try it:
Psychometric Profiling Helps You Understand Buyer Intent
Say you own a cosmetics store. Your demographic profiling and analytics testing reveal that your customers are typically middle-class women aged between 21 and 45, and they respond well to promotional emails.
Why, though, did a 21-year-old single woman and 45-year-old mother buy the same cosmetics set at 50 percent off? You won’t know until you profile your customers’ personalities and behavior.
With the help of psychometric profiling, here’s what you might discover:
- Some women bought the set as a gift.
- Others treated themselves “just because.”
- Another group bought the set because their favorite influencer promoted it.
Based on buyer intent, you now have three subgroups:
- gift-givers motivated to buy discounted products
- women who purchase products because they enjoy pampering themselves
- those who try new things to feel part of an in-crowd
Personality profiling fills in the gaps left behind by other analytics tools.
Psychometric Profiling Helps You Improve Conversions
Do you know why you’re losing people at a certain point in a sales funnel? Psychometrics can help you play detective by eliminating some of the guesswork.
If you have assertive, no-nonsense customers who value efficiency, check your page loading speed. Slow loading speeds could be the culprit.
Do your customers love it when companies share their values? Check your copy. Maybe your message is unclear or goes against what your audience believes in.
Psychometrics speeds up your troubleshooting process by helping you pinpoint exactly where the problem lies. The outcome? More conversions and lower abandonment rates.
Psychometric Profiling Helps You Widen Your Social Media Audience
Social media platforms like Facebook let you get pretty specific about who you target. Want to target local moms who love fitness and care about the planet? Facebook’s got you covered.
Using psychometrics, take a look at your followers and delve a little deeper. Let’s stick with our moms for this:
- Chances are if they’re into fitness, they probably care about health and nutrition.
- If they love green products, maybe they care about your attitude toward sustainability.
- Do these moms see themselves as progressive? Reflect their beliefs in your copy.
Take what you discover from profiling to refine your social media ad campaigns and draw in more followers.
Psychometric Profiling Helps You Target Your Marketing Outreach
Harness the power of psychometric profiling to target your marketing outreach.
Those women who buy cosmetics because their favorite influencer promoted it? Use more influencer marketing to reach these customers.
The moms who care about sustainability and green products? Send them emails talking about the eco-friendly causes you support.
Here’s something to think about: 68 percent of customers will shop elsewhere if they feel you don’t care about their business. Target your outreach to show people just how much you value their custom.
Psychometric Profiling Helps You Build a Stronger Brand
Don’t underestimate the power of brand personality. Over 60 percent of men and women prefer brands to build an emotional connection. 77 percent of customers remain loyal to brands that share their values. According to PwC, 64 percent of customers walk away from companies that don’t share their values or political beliefs.
With psychometrics, you can:
- Identify your most loyal customers or followers.
- Profile them based on their personality, beliefs, lifestyle, and values.
- Ensure your branding reflects what your loyal customers want to see.
TALA, a fitness brand, clearly knows its audience base. They’re all about diversity, sustainability, and inclusivity, and they target millennials who love eco-friendly fashion.
Through hashtags and slogans, they reinforce their branding across all platforms, including their website:
Don’t forget their social media:
The takeaway for marketers? TALA understands why its customers shop the way they do and draws in followers through strong, personality-based messaging.
You can do the same.
How to Use Psychometric Profiling in Your Marketing
Don’t let the idea of “profiling” your customers intimidate you. Remember, the information you need is out there already. It’s just a matter of bringing it all together and analyzing the results to improve your marketing strategy.
1. Survey Your Current Audience
Don’t worry; there’s no need to formally interview your top clients or run expensive marketing focus groups. Instead, here’s what you can do.
First, try making casual conversation with your most loyal (or highest-spending) clients. How did they spend their weekend? What matters to them?
The questions you ask vary depending on your consumer base and how you do business. For example, if you don’t have a physical store where you speak with customers, this may be less practical. You could still ask these questions online, though, if your customers respond well to social media engagement.
Next, send out some customer questionnaires and be honest about what you’re doing (remember, transparency is key). Ask them questions like:
- what they care about
- how they prefer communicating with you
- what else they’d like to see from you
Spend some time crafting questionnaires and reflect on the results.
For example, maybe your customers hate marketing emails, but they respond well to social media messaging because they’re friendly and love interacting with businesses. The answer? Send fewer emails and spend more time talking to customers online.
2. Analyze Existing Website Data
Don’t have this data on hand? No worries. You can start now using quick and easy tools like my free A/B testing calculator.
Once you have the data, look at it from a “why” perspective and put yourself in a customer’s shoes. Ask why:
- certain posts get the most interaction
- some emails have great click-through rates
- people drop out your sales funnels at certain points
This approach is great because you’re finding new ways to put existing data to work. It’s efficient and cost-effective.
3. Collate the Data
You’ve got the data, and now it’s time to use it.
The goal here is to create demographic and psychometric profiles to segment your customer base into target groups. Once you have your target groups, you can try out new marketing techniques and refine your outreach strategy.
Think back to our women aged 21-45 who bought the cosmetics set on sale. We categorized them into three separate audiences based on motives, but it’s possible to go deeper.
Use all the tools at your disposal to learn as much about these women as possible. Why do they shop the way they do? Who are they as people, and what drives them?
Try psychometrics tools if you need a little more help, and compile demographic and psychometric data for the most accurate possible profile.
4. Use Tests and Tools
Once you segment your audience, test out new marketing strategies on them. Tweak your plan based on your findings. You can also try these techniques:
- Run different UI flows.
- Make targeted product recommendations to personalize the shopping experience.
- If your customers are extroverted, fun, and friendly, make your sales funnels more engaging.
- Do your customers love to feel like they’re part of something exclusive? Use scarcity tactics to encourage them to buy now.
There’s no right way to do this, so try a few things and see how they affect conversion.
5. Improve Ad Relevance
Use your personality profiles to improve ad quality and relevance.
For example, say your customers are usually middle-aged men who love tinkering with cars. They often work alone, and they have plenty of time on their hands.
Chances are, they’ll respond better to ads showing other middle-aged men working on cars alone in a relaxed environment. Families working on cars together or mechanics racing to get the job done? These images may be less effective.
The more relevant your ad, the better your ad performs, which ultimately helps grow your business.
6. Write More Compelling Emails
Since you now know who your customers are and what they want, you can craft highly relevant and emotionally engaging emails. Here are some tips:
- Analyze your most successful email blasts from a psychometric perspective. Why did customers respond so well?
- Use your findings to replicate these marketing campaigns.
- Try out new techniques (based on your profiling, of course) and analyze performance as you go.
For example, maybe discount codes perform great, and promotional emails less so. What does that reveal about your audience, and how can you integrate this info into your email marketing strategy?
7. Craft New Content
Are you looking for new content ideas? Turn to psychometrics. Here’s an example:
Your followers work in cybersecurity. Through social media and website analytics, you discover they care about general IT trends. They care about IT trends because they’re concerned about how they affect their cybersecurity strategies. Thanks to psychometric profiling, you can tap into these concerns and write new content.
Use psychometrics to cater to a user’s every need.
Psychometric profiling offers a window into your customers’ personalities. It tells you why your audience behaves the way they do, what influences their buying decisions, and, most crucially, what you should do to keep their loyalty.
Want to get the most out of personality profiling? Take the psychometric data you uncover and compile it into your findings from other analytics tools like Ubersuggest to build the richest possible picture of your audience base.
Have you tried psychometric profiling in your marketing strategy? How is it working for you?