3 ways to improve your E-Commerce profitability

Things are constantly changing in fashion E-Commerce. Gone are the days of maxing out your revenue growth rate at all costs. Now the focus is back on maximizing profitability. For each collection, it is crucial to sell as much as possible at the best price possible, to maximize the profit made.

However, knowing that you need to maximize profit from each collection is one thing. But having the right tools and approach to be able to do it is something else entirely.

At Depict, our expertise lies in improving key metrics for fashion E-Commerce stores. Therefore, we have some solid advice when it comes to improving your E-Commerce profit margin.

In this post, we’ll discuss 3 important stages that items in a fashion collection can pass through, and how E-Commerce fashion retailers should act in each case.

Maximizing profit during the Novelty stage

Any collection starts with the product development, design and procurement, and pre-marketing of the items in the collection.

Once the collection is launched, the items in the collection are all in the first stage. Let’s call it the Novelty stage.

This means that the items are fresh and they are in season. Ideally, the new items will have benefited from any hype and marketing done before they land onsite, which is an excellent way to maximize profit before the product even launches. The result? Items can sell pretty well even at their original list price.

As an example, imagine a unisex fashion retailer that launches a collection with 200 new items. Collections are launched 2 times a year, in spring/summer and in fall/winter. In this case, imagine it is the spring/summer launch, with lots of colorful dresses, shorts, shirts, and light jumpers.

Many items in the collection may almost entirely sell out organically before ever leaving the Novelty stage. They are popular with the customers, so there isn’t a problem achieving 80-100% sell-through rate (STR). These are the items that will be looked towards for inspiration when deciding on future collections. Note that an ideal STR in fashion is 80%, and the average performance is about 68%, according to Shopify.

Let’s say 100 of the 200 items in the collection reach 80% STR while still in the Novelty stage. That leaves 100 items which move on to the next stage, the Expiring stage.

Maximizing profit during the Expiring stage

In the Expiring stage, the items in the collection have lost their newness-novelty, and are starting to go out of season - think June/July when customers are likely to have already got their summer clothes and are starting to think about colder weather clothes.

The technical definition of a product being in the Expiring stage is that you project the item will not achieve 80+% STR if you take no specific action on it. That is why the Expiring stage is where you need to really take action as an E-commerce retailer to change your fate. Your actions here decide whether you make a profit, or not.

So, what are some ways to improve profitability in this Expiring stage?

If a product starts falling behind the desired STR trend, the first thing you’ll want to do is to bring these products back to the user’s attention. This can be achieved by elevating their position on category pages, something which can be done quickly in most merchandising tools.

You can also make these products more likely to show in recommendation panels and in search results, which is a great way to lift a product’s performance and maximize E-commerce profit using machine learning. Using an AI-Led product recommendation tool, you can target customers who would be most likely to be interested in this item, without any manual work.

Again, doing this is simple and efficient with the help of the right tools. A personalization engine, like Depict, will mean you can do this in just a few clicks.

Other, more elaborate, ways to increase a product’s attention are by potentially offering it as part of a bundle if a customer adds another, more popular, product. Or, you can even showcase the items in your email newsletters, if you have one!

Often, high-potential items just haven’t been able to get proper exposure to the customers. Boosting them can give them the nudge they need to improve their profitability.

If this still method of improving profitability still doesn’t work, then most likely the customers have now seen the item, but aren’t really interested.

This could be for a number of reasons, maybe they just don’t really like the item, or perhaps it reminds them of a celebrity they dislike, or maybe it just feels too expensive. The point is, if you want to sell it, you need to do something from your side to make it more enticing.

Typically, we’re talking about discounting. By reducing the price, you make it easier for customers to “take a chance” on an item they don’t value that highly.

So, how much should you discount?

Typically you’ll want to start with a small discount, around 10% could work. After all, you don’t want to make a huge discount if the item could sell with a smaller one.

Plus, excessive discounting will let customers know you don’t have faith in your product and can hurt their trust in the long term. If they see you discounting your items by huge percentages, they may think your original price points are massively overblown, impacting future sales.

If the original discount isn’t having an impact then over time, you’ll want to dynamically increase the discount, at least until an upper bound is reached. This should be done in relation to how close the product is to nearing the end of its lifecycle, in order to maximize profit. So, analyzing your product’s performance weekly is important.

Depending on the margin of the product, you might end up setting your maximum discount a few weeks before the season ends, so that you break even on the product. Though, it is worth keeping in mind that the more you discount, the less you are maximizing your profit.

In this case, let’s say we manage to achieve an STR of 80+% on 80 out of the 100 items in the Expiring stage.

That leaves 20 items, which enter the dreaded Cut your Losses stage.

Maximizing profit during the Cut your Losses stage

In some cases, a product will be so unpopular that you cannot sell it out, even with discounting and increased product visibility.

At this point, it is probably no longer worth the opportunity cost and the brand impact of pushing this bad product instead of showing newer, more relevant items. You are potentially harming your customer’s trust by showing heavily discounted items and taking up space with older-season pieces.

Here, you may want to cut your losses and just bury the product altogether. Depending on your inventory strategy and approach to perishability, you may want to try selling the items during next year’s spring/summer, sell them to a discount retailer, or just cut them altogether. The point is, you shouldn’t be showcasing these unpopular items on your site.

Further ways to improve profitability

To summarise, each of these 3 stages has different ways to maximize a collection’s profitability.

During the Novelty stage, items in the collection are new and benefit from early marketing efforts, often selling well at their original list price.

If items do not sell at an 80% or higher sell-through rate (STR) in the Novelty stage, they move on to the Expiring stage, where they’re going out of season and are no longer new. During the Expiring stage, retailers can look at maximizing E-Commerce profit using machine learning, by elevating the position of the items on the website and personalizing recommendations.

If those efforts do not work, items move on to the Cut your Losses stage, where they should be marked down significantly or removed from the collection.

However, improving E-Commerce profitability isn’t limited to item performance in these stages. For more tips on how to maximize your retail performance, check out our article on navigating turbulent markets, or our fashion E-Commerce trends report for 2023!