Ecommerce revenue shot up during the pandemic and gains were widely distributed among online retailers. But competition, including the pressure to offer free shipping, is compressing profit margins. Here are how some online retailers are adapting to keep profits healthy.

Ecommerce revenue grew at an annual rate of 20.7% for North America’s Top 1000 online retailers during the three years of the pandemic, up from 17.7% in preceding years and producing $75 billion in additional revenue. And it wasn’t just the biggest retailers that benefited, as the bottom half of the Top 1000 grew faster than the top half in 2022 and 2021.

But revenue does not always translate into profit, not when ecommerce competition and the costs for everything from labor to paid search ads keep increasing. For example, Dover Saddlery says increased competition during the pandemic at least doubled the prices it paid for cost-per-click paid search ads for the equestrian products it sells. And the pressure from Amazon.com Inc., No. 1 in the 2023 Top 1000, and other big players to offer free shipping only makes matters worse.

You have to be end-to-end smart if you want to eke out that profit, because profits are harder to come by today.
Mike Ritter, president
CPO Commerce

How are midsized and smaller online retailers staying profitable? By knowing their customers and their competition and being smart about everything from free shipping policies to where they invest in new technology and equipment.

“You have to be end-to-end smart if you want to eke out that profit, because profits are harder to come by today,” says Mike Ritter, president of CPO Commerce, an online retailer of power tools that’s No. 274 in the 2023 Top 1000. The database ranks North America-based retailers and consumer goods manufacturers by online sales.

Smart online merchandising and marketing

A critical factor for CPO Commerce is understanding what buyers of power tools want, Ritter says. Unlike how consumers buy other types of products he’s sold in his career, such as pet supplies, shoppers buying products like drills and saws tend to be loyal to a particular brand, such as Milwaukee or Dewalt.

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Mike Ritter, President, CPO Commerce

Mike Ritter, President, CPO Commerce

“If I’m a Milwaukee guy, I will buy Milwaukee up and down the product line,” Ritter says. “So we play off that, showing him products that are compatible with other Milwaukee products. We don’t talk about Dewalt.”

“Shop by Brand” is also a prominent navigation choice at the top of CPO’s ecommerce site, CPOOutlets.com.

CPO Commerce also pays attention to market signals and adjusts its strategy accordingly, Ritter says. For example, if a CPO buyer learns a supplier is low in stock on a certain product, that may mean a major competitor has bought a lot of the item and plans to put it on sale. If CPO has a lot of the item on hand, it may step up its digital marketing to move its inventory before the rival cuts its price, lest CPO gets stuck with unsold merchandise.

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Free shipping is not much of an issue for CPO Commerce, Ritter says, but fast shipping is. CPO ships orders of $149 or more for free, and most orders qualify as the e-retailer’s average order value is $186. But buyers often need a product in a hurry to get a job done. Many times, he says, “if a customer knows you have a part number and can ship it overnight and a competitor can’t, they’ll buy it from you.”

Making a profit on every Amazon order

For Dover Saddlery, which sells horseback riding gear and apparel, controlling fulfillment costs is key, say CEO Brad Wolansky and vice president Dana Springfield. And it’s not easy, given the high expectations consumers have today, largely as a result of their experience shopping on Amazon.com. Not only do they expect shipping to be fast and probably free, they expect retail sites will have the items they want in stock too.

Brad Wolansky, CEO, Dover Saddlery equestrian supplies ecommerce

Brad Wolansky, CEO, Dover Saddlery

It would tie up too much capital to keep enough of every item in its ecommerce distribution center, so Dover Saddlery fulfills orders in three ways: through that distribution center, from its 37 stores (with two more to open this year), and by having suppliers drop-ship products directly to consumers. The problem is that a single order may include items coming from all three sources, which means the retailer has to pay three shipping charges for that order.

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Dover Saddlery, No. 711 in the Top 1000, can only cover those costs if it prices goods at a level that provides a solid profit margin. Fortunately, Springfield says, surveys and experience show many online shoppers choose where to buy as much for selection and service as price.

“If we have a good assortment that’s priced fairly and have good service we can compete,” he says. “We don’t always have to have the lowest price if we’re good at other things.”

Dana Springfield, vice president, Dover Saddlery

Dana Springfield, vice president, Dover Saddlery

The retailer also takes the approach that it must make a profit on every order it sells on Amazon.com, despite the pressure to offer free shipping to Amazon Prime members. To accomplish this, it prices some items slightly higher on Amazon than on its own website, a practice Amazon once banned but now allows as long as the price differential is not too great, Wolansky says.

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While some online retailers believe their exposure on Amazon helps them acquire new customers who buy at their websites or brick-and-mortar stores, that’s rarely the case for Dover Saddlery, as more than 80% of its Amazon sales go to consumers who have not previously purchased from the retailer, Wolansky says.

“That tells us we can’t look at Amazon as an investment in customer acquisition,” he says. “We need to make money on the initial order, and every order has to be profitable.”

That requires careful management of its Amazon business. Dover Saddlery at one time fulfilled all its Amazon orders itself and could offer free shipping in many cases as long as Amazon allowed third-party sellers to offer free shipping to Prime members on a regional basis, even if they could not make that offer nationwide.

Dover could guarantee two-day shipping from its Massachusetts warehouse to much of the northeastern U.S. and fulfilled orders from stores to shoppers in Texas and California. But once Amazon required sellers to offer free Prime shipping nationwide, Dover turned over fulfillment of its best-selling items to Fulfillment by Amazon so that those products would qualify for the Prime badge that many consumers look for.

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With profit margin in mind, however, Dover does not store slow-moving products with FBA because the Amazon fulfillment service charges fees when merchandise sits in its warehouses for too long.

Building brand loyalty with category expertise

While managing fulfillment expenses is critical, Wolansky emphasizes that consumers will only shop with a retailer like Dover Saddlery if it offers good products and service. He says Dover is in a good position because it sells specialized products, equestrian supplies, that lots of other merchants do not offer.

“If you have a little black dress to sell, you’re probably going to be out of luck,” he says. “It really comes back to the product, as always.”

But because its products are specialized, Dover needs sales associates, both in its stores and contact centers, who are knowledgeable about horseback riding, Wolansky says.

“Every one of them is a rider themselves,” he says. “It’s a prerequisite to be hired. If you can’t stand in the shoes of the customer and don’t understand the sport, you’ll never sell them anything.”

Product expertise, covering shipping costs and a smart Amazon strategy also are crucial for smaller online sellers like Ann Clark, which is not ranked in the Top 1000. The retailer’s ecommerce site, AnnClarkCookieCutters.com, is full of recipes, how-to videos and tutorials on baking. It emphasizes that its products are made in the United States.

“We lean into the fact that this is a family-owned business founded by Ann Clark, a little old lady in Vermont, 30 years ago,” says ecommerce director Tom Funk. “The kind of baking traditions we’re selling into are family-focused and culturally beloved. People gravitate to a trusted brand and are willing to spend a little more with it.”

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How to profitably sell low-priced items online

One of Ann Clark’s challenges is that its best-selling products are cookie cutters, which typically sell for around $3, providing a modest product margin. To build up average order value, the retailer expanded its assortment to include such items as baking mixes, rolling pins and parchment paper, and by offering bundles, such as five cookie cutters or three food colorings.

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Tom Funk, ecommerce director, Ann Clark

It also invested in importing an expensive tube-filling machine from Italy so it could manufacture and sell tubes of food coloring.

“It wasn’t cheap, but that enabled us to be one of the biggest sellers of food colorings on Amazon,” Funk says. He declined to disclose the machine’s cost, but similar equipment is offered online for several tens of thousands of dollars.

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Amazon represents more than 70% of Ann Clark’s online sales, the bulk of its revenue, and the retailer uses Fulfillment by Amazon to offer free and fast shipping.

“People are just thinking about what they want to bake for next weekend the prior weekend, which is why a presence on Amazon is important because fast shipping is pretty key,” Funk says.

Funk says many of Ann Clark’s products qualify for FBA’s Small and Light program that, until recently, offered lower fees — about 25% less — for products that are under three pounds, not overly bulky and priced at $12 and under. Amazon changed the Small and Light price threshold to under $10 in June.

On its own site, Ann Clark used to charge a $4.99 flat shipping fee, but it revised that late in 2022 when it began offering free shipping for orders of $25 or more. That’s been a big success, Funk says.

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He says A/B testing shows free shipping above that $25 threshold drove 23% more visits, a 16% higher conversion rate and 58% more revenue than when there was no such offer. Email campaigns promoting the free shipping offer produced 2.6 times more revenue than a prior week’s campaign without that offer, and the average order value went up 42%.

“Our foregone shipping revenue amounted to 20% of the week-over-week revenue increase — a small price to pay to please consumers and boost sales,” Funk says.

To keep those sales coming, Ann Clark continually introduces specialized products for special events, such as crown-shaped cookie cutters to celebrate the recent coronation of Britain’s King Charles III and molds for shamrock-shaped cookies for St. Patrick’s Day. In all, Ann Clark’s marketing calendar focuses on 26 holidays over the course of the year, including some that are specific to countries like Germany and Japan, two of the 18 countries the retailer reaches through selling on Amazon marketplaces.

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A small company like Ann Clark has to seize every opportunity in today’s highly competitive ecommerce market.

“The easy money is kind of gone, and the hard money takes a lot of money and craft and passion,” Funk says. “But that plays to our strengths, and it’s a more fun way to do business.”

Passion, smarts and enough money to take advantage of opportunities when they arise are what allow online retailers that are more Davids than Goliaths to remain profitable and survive.

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