Small margins ≠ small profits. 6 ways to optimise for low margins

I work with many low-margin products, which are unfortunately common in Food & beverage and Nutrition brands.

The raw costs of goods are high, and in some cases (such as beverages), shipping is no walk in the park either.

While there are definitely things you can do from an operations perspective to drive these costs down, I rarely have an impact on that side of the business.

So what do I do instead? I don’t just twiddle my thumbs; I get creative. I work with what I have to get the most out of what we have. Basically, I try to improve average order value and profitability in other ways.

Here are some practical tips for dealing with a smaller margin. They won’t all apply to your brand, but I have no doubt you’ll get some inspiration along the way.

1. Test around the shipping rate to drive up your Average Order Value (AOV)

When your shipping rate is too low, you give away margin.

When your shipping rate is too high, people might not strive to hit it to get free shipping.

I’ve found that finding the sweet spot can boost AOV and help achieve a better overall margin per order (as shipping prices rarely correlate exactly with AOV). For one brand I worked with they tested increasing the AOV by £5 from £30 to £35, the end result was a boost in Average Revenue per User despite a small drop in conversion rate.

Combine this with clear shipping messaging and cart prompts, and it should also boost the conversion rate nicely:

2. Focus on bundles that combine low and high-margin products

You need to have high-margin products to make this work, but if you can add extra high-margin products, you can drive up the overall perceived value.

We did this at Whole Supp by making a bundle with two bags of the superfood meal shake (low margin) and the metal shaker (high margin). We could still offer a discount, but the overall margin was much better:

3. Offer high-margin products as gifts to drive subscribers

We see this with AG1’s Welcome bundle, where you get a shaker, storage container and free travel packs as a Welcome Kit when you subscribe:

I feel pretty confident in saying they probably have a 70%+ margin on the storage container and shaker.

They use them as a “look what you get free” to boost the desire to subscribe.

Now, the added benefit is subscribers often have stronger retention, which again helps you make those low-margin products work better as you don’t need to spend much to retain them versus acquiring new customers.

4. Offer quantity bundles to drive up AOV

Making it clear that you get a discount when you buy more works great for driving up AOV; we see this with Vive, natural protein bars:

What I like about them is that they clearly show the discount per bar and how much you can save by ordering more. Don’t make your customer do the maths.

5. Offer cashback on subsequent orders rather than discounts

Discounts eat into margins but can feel like a necessary evil at times to drive urgency to buy.

A good alternative can be offering a cashback or discount for their next order. This doesn’t cost you much; in fact, most people won’t redeem it, meaning the discount is far smaller than a straight-off discount.

On That Ass does a variation of this; every month, you buy a pair of their boxers or underwear, and you get €10 credit that can be used for your next order.

6. Ensure your subscription price is the one you want to charge vs your One Time Purchase (OTP) price

I once got this incredible advice from Toby Winch of Bower Collective. 

They’d increase their prices but keep subscription prices the same. The subscription price then appeared lower and was what they wanted to charge.

Since then, I’ve tested this myself, pushing brands to ensure their subscription price is what they want to charge and trying to increase the difference with the OTP price. For one brand the result was that we went from 15% of customers being subscribers to 52%, with subscribers having at least double the LTV of non-subscribers.

It has a significant impact on AOV, and the drop-in conversion rate is often small.

The Bottom Line on Small Margins

So if you’re struggling with small margins, go through the following five ideas and think of variations and ways you could try this for your brand:

1. Testing around increasing the minimum spend for free shipping
2. Creating a high and low-margin bundle
3. Offering a high-margin gift to encourage subscribers (or higher order values)
4. Offering a cashback for their next order
5. If you offer subscription: ensuring the price difference is big enough.

At the end of the day, low-margin products are challenging because they make achieving profitability harder.

It’s not easy to work with lower margins, but it doesn’t have to be a barrier, it just requires a bit of extra creativity.