The Two Levers for Margin Improvement
Every margin improvement tactic ultimately works through one of two mechanisms: reducing costs or increasing effective revenue per unit. Understanding which lever applies to each tactic helps you prioritise correctly.
| Lever | Examples | Speed of Impact | Typical Magnitude |
|---|---|---|---|
| Reduce COGS | Supplier renegotiation, volume discounts, product reformulation | Slow (3–12 months) | 3–15% |
| Reduce fulfillment cost | Better carrier rates, 3PL optimisation, packaging efficiency | Medium (1–3 months) | 1–5% |
| Increase prices | Selective price increases, premium tier, bundle pricing | Fast (immediate) | 2–10% |
| Product mix shift | Advertise high-margin SKUs more, delist or reduce low-margin | Fast (weeks) | 3–12% |
| Reduce returns | Better product descriptions, size guides, improved packaging | Medium (1–4 months) | 1–5% |
| Reduce ad waste | Profit-based bidding, exclude low-margin from Shopping campaigns | Fast (days–weeks) | 3–15% |
The fastest wins are usually product mix and advertising efficiency. The largest long-term wins are usually COGS reduction — but this takes time and scale to negotiate.
COGS Reduction Tactics
Cost of Goods Sold reduction is the most fundamental form of margin improvement — but it's often the hardest to achieve quickly.
Supplier Negotiation
Volume commitments typically unlock better pricing. If your purchasing has grown 40% over two years, revisit supplier contracts proactively. Don't wait for annual renewal. Even a 5% reduction in buy price on a 30% margin product moves margin to 33.5%.
Consolidated Purchasing
Fragmented supplier relationships mean smaller orders and worse terms. Consolidating from 8 suppliers to 5 often achieves meaningful volume benefits with each remaining supplier.
Private Label / Own Brand
Moving bestselling commodity products to own-label can improve margin by 15–30 percentage points — but requires capital, lead time, and brand building effort. Best suited to proven bestsellers with stable demand.
Landed Cost Scrutiny
COGS isn't just the invoice price. Import duties, currency hedging costs, freight, and customs clearance are all part of landed cost. Many brands track invoice price but not the true landed cost per unit — leaving savings undiscovered.
Import Duty Optimisation
Duty rates vary significantly by commodity code. Some products qualify for preferential rates under trade agreements. A tariff engineering review by a customs specialist often pays for itself many times over for high-volume importers.
Pricing Strategy: Not Just Discounting
Many e-commerce brands default to competing on price, especially in commoditised categories. This is often unnecessary and consistently destroys margin.
The Price Elasticity Test
Run a controlled price test: increase prices by 5–10% on a subset of products for 4–6 weeks. If conversion rate drops less than the price increase percentage, you're now making more gross profit per unit sold — even at lower volume.
Price Increase Example
Product at £100 with 35% margin: £35 gross profit per sale, 100 sales/month = £3,500/month gross profit.
Raise to £110 (10% increase). If conversion drops 8% (to 92 sales):
New gross profit per unit = £45 (41% margin on £110)
New monthly gross profit = 92 × £45 = £4,140/month (+18.3%)
You sold fewer units, made more profit. Volume isn't the goal — profit is.
Premium and Value Tiering
Instead of one price, offer a premium version at 20–30% higher price that captures higher-margin, less price-sensitive customers. Decoy pricing psychology means the middle option sells disproportionately — and all options have better margin than your single entry-level price.
Avoid Excessive Discounting
A 20% discount on a 30% margin product drops effective margin to 12.5% — more than halving profitability. Use discounts strategically for inventory clearance, not as a routine acquisition tool.
Product Mix Optimisation
The Pareto principle applies strongly in e-commerce: roughly 20% of your products typically generate 80% of your gross profit. The question is whether your advertising is aligned with this reality.
Many brands advertise all products equally — or worse, spend more on price-competitive low-margin items because they generate more click volume. This actively suppresses overall margin.
Identify Your High-Margin Stars
Segment your product catalogue by gross margin percentage. Identify the top 20% by margin — these are your margin stars. Are they receiving proportional advertising investment? If not, reallocating budget toward them will immediately improve blended margin.
Exclude or Reduce Investment in Low-Margin Products
Products with margins below 15% are difficult to advertise profitably. Consider:
- Removing them from Shopping campaigns entirely (keep organic listings)
- Setting very conservative bid caps that only win at low competition
- Redirecting their budget to high-margin alternatives
GROW's Automatic Product-Level Bidding
GROW Platform's ProfitClarity automatically adjusts bids based on each product's margin, naturally directing more spend toward high-margin products and constraining spend on low-margin ones — achieving product mix optimisation without manual campaign management.
Reducing Return Rate
Returns are a direct margin destroyer. In fashion, a 30% return rate may be costing 8–12 percentage points of net margin. Reducing this is often easier than reducing COGS.
Accurate Product Content
The leading cause of returns is unmet expectation — the product wasn't what the customer expected. Better product images (showing scale, multiple angles), accurate size guides, and honest product descriptions directly reduce this type of return.
Sizing Technology
For fashion and footwear, AI-powered size recommendation tools (integrated into product pages) can reduce size-related returns by 15–25%. The cost is typically recouped within 2–3 months of reduced returns in high-volume stores.
Post-Purchase Communication
A well-timed email after delivery ("Here's how to get the most out of your purchase") reduces buyer's remorse and can reduce returns by 5–10% in high-consideration categories.
Return Fee Strategies
Introducing a small return processing fee (£1.99–£2.99) for free-returns categories reduces frivolous returns by 15–30%. Communicate clearly that this only applies to change-of-mind returns, not defective items — it's standard practice for major UK retailers now.
Reducing Advertising Inefficiency
Advertising waste is typically the fastest margin lever available to e-commerce brands because it requires no supplier negotiation, no pricing change, and no product development. It's a data and strategy problem, not an operational one.
The Core Problem: Averaged Bidding
When one ROAS target applies to products with margins ranging from 12% to 55%, low-margin products generate sales that consume more gross profit in ad spend than they generate. This waste can represent 10–25% of total ad spend in mixed-margin catalogues.
Solution: Per-Product Margin-Based Bidding
Set individual ROAS targets based on each product's actual margin. High-margin products receive more aggressive bids (winning more impressions). Low-margin products receive conservative bids (only winning at low cost).
Measurable Impact
Which Lever Gives the Fastest ROI?
The answer depends on your specific situation, but a general ranking for speed of impact:
- Product mix and advertising efficiency — Can show results in days to weeks. No capital outlay, no negotiations.
- Pricing adjustments — Immediate on the revenue side. Test first to validate demand elasticity.
- Return rate reduction — Content and description improvements show results within 4–8 weeks. Technology solutions require integration time.
- Fulfillment cost reduction — Carrier renegotiation typically takes 1–3 months. 3PL changes take longer.
- COGS reduction — Supplier negotiations take 3–12 months and require volume leverage.
Don't Sacrifice Growth for Margin
Margin improvement should not come at the cost of volume. The goal is to improve margin per unit while maintaining or growing revenue. Tactics that simply cut volume (like pausing campaigns entirely) may improve reported margin while shrinking the profitable business underneath.
Frequently Asked Questions
What are the two main levers for improving profit margin?
Reduce costs (COGS, fulfillment, returns, advertising waste) or increase effective selling price (price increases, product mix shift toward higher-margin SKUs, reducing discounting). Most brands have more opportunity in product mix and advertising efficiency than in supplier negotiation.
Which lever gives fastest return on investment?
Reducing advertising inefficiency typically gives the fastest ROI because it improves profit from existing revenue without requiring supplier negotiations, product development, or customer behaviour change. Shifting ad budget toward high-margin products can improve net profit within weeks.
How does product mix affect overall profit margin?
If 20% of your products generate 80% of your gross profit, advertising those products more heavily dramatically improves blended margin — without changing costs or prices. Product mix optimisation is one of the most underused margin improvement tactics.
Can I raise prices without losing sales?
Often yes — especially for differentiated or branded products. A 5% price increase on a 30% margin product raises margin to 33.5% (if volume stays flat). The key test: is your current price below what the market will bear? Many brands underprice out of competitive fear rather than evidence.
How does reducing return rate improve margin?
Returns consume margin from both directions: you refund revenue and incur costs (return shipping, restocking). In fashion, a 5 percentage point reduction in return rate (e.g. from 30% to 25%) can add 2–4% to net margin, equivalent to a meaningful supplier price reduction.
Next Steps
The fastest margin improvement available to most e-commerce brands is advertising efficiency — getting each ad pound to work where it generates the most profit. That starts with knowing the margin on every product you advertise.
Start With Product-Level Margin Data
GROW Platform's MarginStack captures full cost data per SKU and feeds it into profit-based bidding — automatically directing ad spend toward your highest-margin products. Create an account to get started →
