Is eCommerce profitable in Australia?

Oath!

(For the non Aussies, yes.)

However, as with any business it depends how you run it.

Remember an eCommerce store isn’t just a website. Your business needs to be set up in a way that allows you to make a profit.

(You know taking more money than it costs to sell stuff)

What profit margins can you make?

The term profit gets thrown around a lot. It has many different meanings, and can be before or after taxes and include other costs etc.

So lets define what profit is for an Australian based eCommerce business.

Our geeky accountant friends call it “Net Profit”. That is the money left after everything is paid for except for income or corporation tax.

I say income or corporation tax, because this depends on your businesses setup (sole trader, limited company, partnership etc).

Just to hammer home the point, Net Profit is profit left on paper (not cash in the bank, which is different) after all expenses are paid for.

In an eCommerce business, the main expenses are…

  • Paying for the product (Cost of Goods Sold COGS)
  • Getting the product to your warehouse
  • Advertising
  • Website fees
  • Staff
  • Delivery
  • Office/warehouse rent
  • Accountants and other “professional” fees

To name a few, but there are others, depending on your business.

Yeah, yeah, yeah we get it, what percentage can you make?

I’ve seen good eCommerce businesses consistently make a net profit of between 5% – 25% (And lots of badly run ones lose money).

For example, if the eCommerce business sells $1,000,000 AUD a year (It’s always AUD because Boom Ecommerce is about helping Aussie eCommerce businesses), then they are making a Net Profit of between $50,000 and $300,000 a year.

The (Net) Profit margin depends on your eCommerce setup.

Successful eCommerce businesses with high volume sales often make lower margins. For example, Amazon is all about growth and its net profit margin in 2019 was 3.6%.

But lets face it most people reading this aren’t Amazon (If you’re reading this, Hi Jeff).

Lower volume business can achieve high profit margins, this is where you see the 15% + profit margin businesses.

More on those types of businesses later in the post.

Ecommerce business types

Not all eCommerce business are the same. The profit and longevity of them often depends on the business model.

What is the point of making 40% profit margin for 2 months, when you can make 25% for 5 years!

If you’re all about the get rich quick scheme dream, you might as well stop reading now. We’re dealing with reality here, not Insta ads selling you the dream of a no work lots of cash business.

With that out of the way, lets look at some different eCommerce business models and the profit they can make.

Dropshipping – Bad

It sounds simple, all you do is find a product someone else has made (normally on Alibaba). Set up a website, run some ads, cross your fingers and hope you sell loads.

You’re aiming at high volume sales (if it’s high margin, everyone and their dog copies you. Then you end up competing on price which ends up in a race to the bottom on price).

If you’re lucky, after all your costs (mainly advertising) there is some money left. In most cases not because you’re dealing with 1%-9% profit margins.

Then you’ll have to deal with all the angry customers who have been waiting a month or more for the product they fell in love with on Insta because dropshipping delivery times are REALLY slow.

You may be sensing I’m not a fan of this type of eCommerce business? You’d be right, it’s not a sustainable business model, it’s get a rich quick scheme that works for less than 1% of people.

That in my humble opinion isn’t a business.

Great article here by Wired UK from a drop shipper on the reality of it.

Reselling – Better

You buy products from brands and resell it. For example, Footlocker is a reseller (mainly). They buy Nike and sell them.

The amount they make from each sale is less because Nike has to make a profit too. Foot Locker doesn’t have to to pay for all the advertising, Nike does that and creates the demand.

Although this eCommerce business model is vastly better than drop shipping and very common, you’re competing with other eCommerce businesses that sell the same product.

The challenge here is eCommerce businesses often resort to discounting to sell, which reduces your profit margins and profits.

Add to that, it’s easy for the product manufacturers to sell direct. Nike announced in Aug 2020 it was starting to shut down wholesale accounts. This shows a clear intention to cut out the resellers.

Not ideal, but all being well you can get 10% – 15% net profit margins.

$1,000,000 in sales $150,000 profit on top of what you have paid yourself (depending how you structure your business, there is always a “depends” with accounting!)

Direct To Consumer (DTC aka making and selling directly) – Best

Get it made, sell it directly online.

An example of this is All Birds. If you haven’t heard of them they make stylish, comfy and environmentally friendly shoes.

Then sell them gloably through their site.

Because they cut out the middle men, manufacturing brands (i.e. a Nike) and the retailer (i.e. a Foot Locker) they get their product for cheaper and control the price (very few other sell them, so less competing on price).

They do have to deal with the manufacturing, but that has become much easier these days.

These Direct To Consumer brands, if run well and aren’t spending everything on growing, can get sustainable profit margins of 15% – 25%.

Another poster child DTC eCommerce business is Gym Shark, which is a well built profitable business.

If you want to know more about Gym Shark there is a great review by Jason Andrews from SBO (Specialist eCommerce accountant in Brisbane).

Hello to you Direct To Consumer eCommerce business model!

Why is DTC (making and selling directly) the best eCommerce business model?

In summary of above…
(You read all of the above right?)

Better more sustainable Gross Margins which allow you to pay your other bills like staff rent and marketing and still have money left for profit.

Is Australia a good place to run an eCommerce business?

Yes, but it does have some challenges compared to other English speaking countries.

On the plus side

  • Less competition
    The population of Australian in 2020 is 26 million, which is significantly less than other English speaking countries, so the basic economics means there is less competition, lowering advertising costs and choice of products for customers.
  • Less savvy competitors compared to the US and UK
    When I first arrived in Australia in 2011 I was amazed at how little eCommerce activity was happening, especially from big retailers.

    Things have changed since then, but the competition here in Australia generally isn’t as savvy (don’t take that as slur, I love being an Aussie citizen). This means you can take inspiration from overseas and be one of the first people to do it here.

On the negative side

  • Population is smaller
    The pool of people we get to sell to is smaller, so if you just sell in Australia your growth will be limited. Not a bad thing but if you have a low margin product that you need to sell high volume of, you’ll need to expand overseas.
  • Delivery is difficult
    S’traya, she is a big old place. In fact, it’s roughly the size of Europe. This makes it difficult to delivery quickly and cheaply, which is key for eCommerce success.
  • Less people shop online
    The COVID pandemic in 2020 has changed this, but the percentage of online shoppers in Australia is still behind the UK and US.

Do I need a big eCommerce business to be profitable?

To the contrary, big eCommerce business can be very unprofitable.

Large eCommerce businesses have this strange fascination with growing really quickly (I think they get jealous of software businesses that can scale quickly).

To grow quickly they spend a lot on advertising which often means they lose money.

They justify this with saying we’re worth $X.XXX,XXX because someone bought 10% of our business that is losing money for $XXX,XXX.

Koala mattresses in 2018 was a very good example of that, they were losing money on revenue of $40m (AUD) See this AFR article.

How can I make sure my Aussie eCommerce business is profitable?

5 main areas you need to get right…

  1. Have a product that people want (Duh)
  2. Use the right technology for your needs (Your nephew can’t or won’t build it for free)
  3. Have a healthy gross profit margin
  4. Make sure target customers see it (promote it)
  5. Hold stock in Australia so you can deliver quickly (Customers don’t like waiting)

If you want to learn more about these 5 areas, sign up for the Boom No BS Ecommerce Tips.