How to Lower Overhead Costs in Ecommerce

how to lower overhead costs ecommerce business

Nearly 95% of all retail sales could be conducted through eCommerce in 2024. 

While it is clear eCommerce is here to stay, you must analyze your expenses because excessive overhead costs can harm your business. 

Perhaps you are planning to lower overhead costs but you are not sure where to start. Sound familiar? If so, you have come to the right place for an online retailer overhead overhaul. Here is how to do reduce your eCommerce expenses effectively. 

What Are Overhead Costs? 

Before we dive into how to minimize costs, it is important to explain the term. Overheads costs include rent, wages, insurance, supplies, and legal fees. Basically, it is all the necessary payments to keep your business running. 

Although there are many overhead cost examples, they fall into three groups. 

First, fixed costs are expenses that never change such as rent, insurance, and staff salaries. 

The second is variable overhead costs that depend on your business’s activity (shipping or repair expenses, for example). 

Lastly, you have semi-variable costs that fluctuate depending on how well your business is doing. 

In fact, there’s even an overhead cost formula that determines how much your business spends on your products in relation to profit. 

You can calculate this by dividing the indirect costs by the direct costs then multiply by 100. Aim for a low rate as it proves your business is efficient and has a healthy profit margin. 

How to Reduce Overhead Costs 

Now we’ve explained what overhead costs are, it’s time to get practical. There are many ways to reduce overhead costs in your eCommerce store so you can reap in more profits. 

Here are some expert tips to consider to lower your e-commerce overhead costs. 

Address the Problem 

You can’t make any changes until you figure out where the money is going. It’s often not several big transactions but smaller ones that haven’t been identified. 

Analyze every step in the sales funnel and you may discover excessive shipping costs or examples of bad bookkeeping. Once you pinpoint the issue, you can reduce these overhead costs. 

Use Efficient Packaging 

Many eCommerce vendors overlook the packaging they use as it’s often the cheapest. As a result, sellers pack products in oversized boxes and use extra packaging material which adds up. 

Instead, choose packaging that’s the perfect size for your most popular orders. Use the right amount of packaging material so that orders arrive safely. 

You can also reduce overhead costs by running an energy-efficient office. Turn off lights and reduce cooling or heating so you don’t have enormous energy bills. You could even consider installing solar panels so you save money in the long run. 

Leverage Your Discounts 

Use discounts whenever you can, whether it’s a deal with your web hosting provider or marketing team. Discounts are available at a specific time of the year while others depend on how many orders are placed. 

For example, you can find bulk or bundling discounts, holiday discounts, and clearance discounts. Don’t be afraid to contact your supplier and ask them for a discount based on how long and profitable your working relationship has been. You may be pleasantly surprised! 

Focus on Quality (Not Quantity) 

You have a range of products where several are highly profitable but the others aren’t. If this is the case, remove the less popular items so you can focus on your top-tier ones. 

A major benefit of narrowing your scope is that you save on storage costs. To get rid of less popular items, offer them at a discounted price or bundle them with your best sellers to reduce overhead costs. You can even donate surplus inventory to charity so your business benefits from a tax write off. 

Also, make sure you’ve correctly priced your products. Don’t sell an item at a low price if it prevents you from making a profit. Otherwise, you won’t be able to funnel money back into your business which puts its longevity at risk. 

Or, aside from physical items, sell a niche-related ebook guide or video course to generate sales. It doesn’t cost you anything except time. 

Market to Existing Customers 

You must decrease acquisition cost because selling to an existing customer is far cheaper than marketing to prospective ones. 

Keep in touch with your customer base by sending a monthly newsletter with special coupons. You should also be engaging them on social media and creating a loyalty program to keep customers returning. 

Consider Shipping Fees 

It’s no surprise that free shipping entices customers to spend at your eCommerce store. But this doesn’t mean you have to cover shipping only to please the customers. 

Offer free shipping to customers who have placed a minimum order or limit free shipping to your most profitable products. 

Reinvest in Your Business 

Strive to reduce overhead costs so you can reinvest in your company. It’s important that a chunk of your profit goes into improving your products and your store. 

You can also use this money to hire employees or invest in equipment to help your business run more efficiently. This will allow you to concentrate on the most important aspects of your eCommerce store. 

Regularly Do Inventory 

Monitoring your inventory helps reduce overhead costs. This lets you decide which products can be discounted and ones that need replacing. 

Once you do this, you’ll discover sales patterns to help you place orders from your supplier in the future. 

How to Lower Overhead Costs 

There you have it: Now you know how to lower overhead costs in your eCommerce store. 

Streamline your inventory and sell less popular items at a discounted price so you can focus on your best-selling ones. Use efficient packaging and offer free shipping for certain orders. 

Finally, reinvest in your business so your profit margins are greater than your overhead costs. Good luck on your ecommerce biz! 

Did you find this article on reducing overhead costs for your e-commerce company to be helpful? If so, check out our posts on everything from retail businesses to e-commerce plugins!

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