The Side Hustle 03: The Guide to Achieving a 20% Net Profit in Ecommerce

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Welcome to edition 3 of The Side Hustle. I'm thinking of abbreviating it to TSH. We'll see.

In this edition of my Saturday yarn, I introduce you to a framework that I created, called the 50/30/20 rule.

This framework is designed by me to help ecommerce businesses hit a 20% net profit margin - a number that I think all online retailers should be aiming for.

Whenever I talk about 50/30/20, I always get a lot of comments. Usually it goes two ways.

1) The online retailers who have learnt the framework, or have experienced something similar, who give it a big 'Amen'.

2) The low margin miners who live in hope that sales volume fixes everything, who sing out that the framework isn't quite applicable to all.

So, let me tell you about it.

The 50, refers to your gross profit margin, which needs to be at 50% or more. This is not your product or intake margin, that needs to be around 70% and above. 

The 30 refers to your operating expenses, or OPEX for short. You should aim to run your business spending 30% of your monthly revenue on your operating expenses (think rent, marketing, wages etc). 

The 20 refers to the net profit margin that you're left with, of 20%. The formula for net profit is gross profit (50) less operating expenses (30) which equals your net profit margin of 20.

This is the framework that I run with my clients 100% of the time. Now - here's the catch. You might say, well hey, my gross profit margin is more than 50% because my intake margin on my products is 80%. Or, you might say that your gross profit margin is 45% because you're a middle man (or woman) buying and selling other brands, like the online shoe store selling Nike or Reebok. That's fine. Ratios can move, but the principle remains the same. If you want to achieve a 20% net profit, you need to adjust your ratios - So if your gross margin is 40%, you need to run your business on 20% operating expenses, to achieve a 20% net profit margin (40 minus 20 = 20).

A brilliant brand possesses attributes like a problem solving product, or a community of hyper engaged followers, or a mission or purpose that resonates with the masses. A brilliant business possesses attributes like discipline.

Staying within a framework like the 50/30/20 rule requires little more than discipline.

Ecommerce doesn't have to be complex. Often, asking a business to operate within a framework is the key to unlocking high profits. Staying within those frameworks requires the one habit that I think drives more profits than anything else in ecommerce - scrutiny. 

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