Last Updated Dec 16, 2010 2:23 PM EST
Last year, we had a big problem: We were having trouble getting some of our most profitable children's furniture products and many of our most popular small items, such as diaper bags, from our suppliers. We were forced to cancel many thousands of dollars worth of customer orders. Simultaneously, many of our suppliers increased their drop ship and handling fees to boost their profit margins. Our overall sales held up fairly well, but we knew that a pattern of not being able to fulfill orders would do long-term damage to our profit margins and the loyalty of our customers.
The situation worsened through the beginning of 2010, to the point where our order cancellation rate had doubled to 6 percent. We had to address these problems quickly. Changing suppliers was out of the question in most cases, since many of our products are custom made. So we decided to make some significant changes to our Web site that would make the backordered products less visible -- and put more profitable products front and center.
Our suppliers have become slightly more reliable in recent months, but it's the changes we made to our own systems that have really helped us lower our cancellation rate and increase profits.
Highlighting in-stock items
It turns out that our suppliers had reduced the amount of stock they held as a response to the decline in demand for durable goods throughout the economy in the second half of 2009. Their decreased inventory led to product shortages and lengthy backorders, which subsequently caused them to cancel far more orders than they'd ever done before.
Put simply, they were hurting our business. As an online retailer, our Web site was a key part of the solution. Many e-commerce sites -- including ours, until recently -- make a big mistake by offering visitors products that are unavailable. It's important to make sure that those products never become visible, even if there's one that's very popular. Otherwise, you waste the customer's time -- and test her loyalty -- when she orders the product only to learn that you must cancel it.
We already knew we needed to make backordered products on RosenberryRooms.com less visible in order to encourage customers to view products that are available and in stock. But the supply chain problems made it a priority.
So we programmed our site to automatically reduce the rank of backordered products on each product category page -- and remove them entirely if the backorder was more than five business days out. Luckily, I was able to do the programming myself, so we could make this change without spending any extra money.
As a result of this change, we needed to ask our suppliers for more accurate inventory and backorder data. A lot of our smaller suppliers don't have automated systems that can integrate with our online inventory system, so we had to figure out how to process that information manually.
Volume vs. profit
In order to deal with the other issue -- our vendors' increased fees and our reduced profit margins -- we performed a profitability study on all of our suppliers that took their fee structures into account. I learned that it's easy to aim for a larger volume of traffic without focusing on the profit per transaction. So increasing the profitability of each transaction became my new goal.
Until this point, we had been sorting products on our Web pages according to their conversion rates, which is a measure of how many people who click on a given item actually purchase it. We re-sorted all products on the site according to their conversion rate multiplied by their gross profit margin. This means that if two products have an equal conversion rate, the one with the higher profit margin will rank more highly. The end result: The products that are more profitable have become more visible to our customers.
By increasing the visibility of products with higher profit margins as well as those with better availability, we have reduced our order cancellation rate by one third, from 6 percent down to 4 percent. We've also increased our gross profit margin by 7 percent, which has allowed our company to continue growing steadily. As of early November, our revenue for the year had reached more than $7 million, which already tops our 2008 revenues of $6 million.
Peter Fougerousse is a father of four and an expert in e-commerce marketing, business strategy and brand management. He and his wife Susanne are co-owners of RosenberryRoooms.com.
-- As told to Zack Anchors