E-commerce Profitability

Optimize your ecommerce marketing for maximum profitability

Henrik Hoffman
August 28, 2023

Are you looking for ways to increase your e-commerce marketing effectiveness while also optimizing for profitability? There's no question that the right strategies can make a substantial difference in driving revenue and success. Unfortunately, many performance marketers are blind when tangibly moving the needle on their company's bottom line. And they are often only asked to optimize for ROAS and perhaps CAC. But it's 2023 now, and everyone needs to do what they can to grow the bottom line, not only the top line.

And that's what Dema does: arm marketers and the rest of the commercial team with all the profit data they need to optimize for profit. And if that wasn't enough - of course, Dema supercharged you with the power of AI. Predictive models and an always ready-to-help AI Analyst with whom you can have conversations to get actionable insights out of your data even faster.

But for those who don't have an e-commerce analytics platform like Dema to support this work, you can at least get started on this journey towards profitability optimization. Below, you will get some proven tactics and cutting-edge strategies that allow you to shift. Let's review our top approaches for increasing success and profitability in e-commerce marketing!

It all starts with the most important ground pillar for profitability within e-commerce:


Why Return on Advertising Spend (ROAS) is not suitable for optimizing e-commerce profitability

High ROAS does not necessarily mean high profitability. Everyone has been through a situation where, whether you know it or not, ROAS goes up, but profitability goes down. An example could be this: An aggressive discount campaign is launched but might not improve AOV that much. This results in a significant loss in Gross Margin 2 (what's left after COGS and logistic costs) since the discount decreases the Gross Margin 1, and with the same, or less, AOV, there is frankly less money left to pay for logistics. In general, the increase in ROAS, meaning Marketing Spend efficiency, cannot offset the GM2 effect; therefore, the Gross Margin 3 also decreases. All in all - you can't look at ROAS when you care about the whole business.

In the above example, we haven't mentioned perhaps the most significant profit killer for many e-commerce businesses—the effect of the returns.


The switch to epROAS is your first step to profitability optimization

The first and most crucial step in e-commerce profit optimization is transitioning away from relying on ROAS as the key performance indicator (KPI). By making this shift, businesses can effectively prioritize profitability and enhance their overall success. To enable profitable growth optimization, you need to switch ROAS to epROAS.

epROAS = Net Gross Profit 2 / Marketing Spend

When using epROAS, marketers and buyers are finally aligned! Now, you can work with the two most important sales drivers: Marketing Spend and Discounts. If you are not using discounts at all, Net Gross Profit 2 includes the effect that both returns and logistics have on profitability, which is highly relevant for anyone driving profitable growth.


The three new components for marketers when optimizing for profit

When you start to use epROAS you will automatically act like a business owner, being aware of any significant change to return rates, logistic costs, discounts, and marketing efficiency. All of a sudden, you see that the marketing efficiency, i.e., ROAS, is only a piece of the puzzle, and quite often, it is easier for you to improve the other parts than get that extra points improvement in ROAS.

How a marketer in e-commerce can improve the profit without improving ROAS

When it comes to returns, dig into this

  • What campaigns lead to the most returns?
  • Break it down further by creative, audience, and products sold.

You need to track the effect of discounts daily

  • What is the average Gross Margin 1, and does any of your campaigns differ significantly from the mean?

Unfortunately, Some performance marketers don't have Gross Margin 1 data but sometimes have the average discount level. If that's the case for you, use that as a start because it must be better since you must understand the Gross Marin 1 to know what's left to pay for logistics and marketing. In this case, it's better to have a number than no number, so you can find out what one or more average(s) of the starting Gross Margin 1 to later, then extrapolate the average Gross Margin 1 that your marketing campaigns contribute with.

Logistics is usually not a concern for a performance marketer, but when looking into this, you will always want to:

  • Know different logistic costs for other markets
  • Look at what Average Order Value your campaigns contribute and slice it by markets
  • Compare and see if the AOV x GM1 can carry the logistic costs

When using Dema as your e-commerce analytics platform, you get all profitability metrics in real time

Here are three examples of highly effective dashboards that let you get in control of your profitability and always know how it goes, why, and what to do about it.

You can follow epROAS on every channel, channel group, and campaign, and of course, follow the blended epROAS per day, per market etc.
When you use Dema, you can quickly see what campaigns are profit-driven and which are bad for profit, making it easy to act in real time.
A performance marketer in 2023 needs to know the inventory and see how it relates to your efforts - track it in real-time and get actionable insights in no time.

When getting this into your daily and weekly routine, you quickly find ways to improve the performance of commercial efforts to grow with an increased profit margin.

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