When I first started in ecommerce I fell into a lot of mistakes, some of them I only realized when I became a professional retailer. Knowing these mistakes at the time could have dramatically improved my ecommerce business performance and my net profits from it.
These days when I watch creators and influencers launch their own product lines, I see them falling into the same mistakes and wished I could tell them that they can make more money through ecommerce if they just avoided those classic mistakes.
So in this article I am going to lay down the top 5 mistakes that new merchants fall into and why avoiding them will make a difference.
Mistake # 1 : Not Budgeting for Their Ecommerce Operation
When I first started I knew nothing about sales forecasting or budgeting. I just had an idea and decided to execute it.
The only thing that I calculated was maybe how much it will cost me to start. How much will the equipment cost, the domain, hosting… so basically I only budgeted for the costs.
I didn’t know at that time that the retail budgeting process consists of three parts:
- Sales Budgeting
- Cost Budgeting
- P&L Budgeting
Read more: Retail Budgeting Process
Why Did This Matter?
It mattered because failing to budget for my expected sales also meant buying the wrong amount of inventory. Buying the wrong amount of inventory also meant that I ended up losing money on most of this inventory (see point no. 2).
How I went about buying inventory was to just speak to the factories to get quotes about the prices and their minimum order quantity, and then just placed an order with this MOQ for each color of t-shirts that i wanted. I only realized my mistake when the season ended and I was left with a lot of unsold inventory and now I need cash to order new colors for the new season, so I ended up pumping more money into the business to buy even more inventory… also without planning.
Read our complete guide on Open to Buy: How Much Inventory Do You Need?
Clearing all this inventory online by putting it on discount also took a lot of time, so I ended up looking for bulk buyers to take it, and these will only buy at below cost price.
Read Also: How to Reduce Amazon Storage Fees?
Mistake #2 : Not Planning Their Markdowns
When I first bought my inventory I assumed (wrongly) that I am buying this t-shirt at 5$ and selling it at 20$, so my profit will be 15$ per tee. Since I am buying 5000 pcs, then my total profit will be 15$ x 5000 = 75000 $.
Sounds familiar? I know ..
What happens though is that you only sell a portion of your inventory at full price and then put the remaining at the end of the season on discount, right?
It turned out that professional retailers structure their discounting and plan it in advance
Instead of waiting until the end of the season to start discounting their products, they structure their discounting at different stages with gradual increase in markdown % from around 20-30% after few weeks up to 70-80% after few months.
The reason they do gradual discounting is that this allows them to extract the most margins out of their products. So instead of giving a flat discount of say 75% at the end when they are not getting sales on this collection to clear it, they start selling it at full price in the first few weeks. Then they put it at mid-season sale of 30% off and maybe have another promotion at 50% off afterwards, and finally they put the remaining at up to 70% in the end of season sale.
Why Does This Matter?
It matters because to make profit out of your ecommerce operation, you need to plan for your gross margins in advance and ensure you get those margins out of your inventory. These gross margins will then pay your expenses and you will still have profit at the end of the year.
If, however, you end up giving too much discount or pricing at a low level from the start, this could result in your gross profit not covering your expenses. This will lead to net loss at the end of the year.
Read Also: P&L Management
When you first order your inventory, you need to know how much money you can make out of it at the end. As we have shown here, to know this you will need to plan your markdowns in advance and factor them into your margins to get the realized margin and not the margin you bought the product at.
Planning your markdowns in advance will be during the sales budgeting process, where you draft your marketing events calendar and forecast your sales and margins accordingly.
Read Also: Intake Margin vs. Realized Margin
As you can see in this picture, pricing your products at a low margin that doesn’t accommodate your level of discounting can result in loss on your inventory.
This can only be known by planning for markdowns from the start and making sure your initial pricing is correct.
This takes us to the next point..
Mistake #3 : Pricing at a Fixed Margin
There is a common (but wrong) practice called keystone pricing, where merchants just take their cost price and double it, and this would be their retail price.
Example: Buy it at 5$ and sell it at 10$
Or some people will price all their merchandise at 60% margin, so they see what the cost price is, then add a fixed markup % to it and that would be the retail price.
However; using a fixed pricing strategy for your products can lead to following:
1. Leaving Money on The Table
If you apply a fixed markup on all your products, you will be leaving a lot of money on the table for the products that you could have been selling at higher price.
2. Losing Marketshare
If you insist on applying a fixed markup on all products, you will end up not selling some of your products, simply because the competition is selling the very same product at a lower price and you don’t have any differentiating factor to charge higher.
What’s The Solution
In order to make the most money out of your inventory, you need to price each product at the highest possible price that the market can tolerate.
Due to the fact that the market factors will be different for each product category, you need to set a collective pricing strategy for your entire product portfolio that will let you sell some products at lower margins, yet make up for that on other product lines.
This will require you to incorporate different pricing strategies into your collective pricing strategy.
Please also read our article on Pricing Considerations.
Mistake #4 : Not Building Their Own Ecommerce Platform
Fortunately for me I realized this from the start and made sure to continue to develop my own ecommerce website despite being very successful at an ecommerce marketplace.
At that time I was selling on a marketplace here in the region called Souq.com (Now Amazon). I became the best seller in the fashion category and was getting lots of orders everyday from this marketplace.
Meanwhile, I kept working on my own Magento store under my own domain name. I kept creating content and applying SEO until one day my sales from my website surpassed my sales from the marketplace.
Read Also: My Private Label Journey
Why is That Important?
For me it was about having ownership and full control over my brand and my customers.
Imagine putting so much money & effort into social media advertising and sending all your customers to a marketplace, just to be shut out one day from the marketplace for one reason or another and lose all your customers because you never had access to their data in the first place.
Unfortunately this is one of the most serious ecommerce mistakes among new merchants. They go all in on a marketplace and risk losing everything at some point.
Mistake #5: Leaving Their Customers Guessing
I was browsing an ecommerce website yesterday looking for a jeans, where I found this product.
Unfortunately it only left me guessing: How does the jeans look on body?
There were other products with model images but this one wasn’t, and for fashion products this is actually essential.
Other areas where your customers could be left guessing include:
- Your return policy
- Size charts
- Your shipping fees
- Your payment options
- Product arrival time
- Who are you and why they should trust you?
All these uncertainties might lead to your customers dropping out of the purchase process altogether, and avoiding these online selling mistakes could improve your conversion rates.
Avoiding Ecommerce Mistakes
As you have seen here, most of these ecommerce mistakes can easily be avoided through proper planning and learning from other peoples’ mistakes.
Ecommerce is still a relatively new field and a lot of people just jump right in.
However, taking time to process and learn everything about this industry first can help make a lot of those startups successful in the future and not having to go through the classic phase of trials and errors.
This is especially important because a lot of those small businesses are bootstrapped, so they only have one shot at it. If you put all your money into inventory, chances are you will not be able to have more money to buy new stocks if this inventory remains idle for long.
Just make sure to plan correctly.
Read more article on Budgeting & Planning
Retailer & Founder of Retail Dogma, Inc.
Rasha has 14 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She’s lived in 4 different countries, speaks 3 different languages and holds an MBA in Strategic Management & Marketing.
You can connect with her on Linkedin.