Ever asked yourself this question? I’d surely hope so.
As an ecommerce start-up, making short-term wins is always a high priority. But of course you already know that – what you really want to know now is what’s new and how you can make finding those short-term wins easier to identify? Well, for some reason, some online retailers put cash into marketing without tracking commercial returns. This is obviously unsustainable and a very risky approach. Simply understanding whether you’re spend on different online marketing channels delivers ROI is one of the most effective ways of identifying the low hanging fruit that ecommerce start-ups require to keep on growing. Disclaimer. This is a simple way to measure key metrics and doesn’t take into account refunds and expenses, such as salaries, as they are just too varied. This is purely a demonstration of what can be controlled to help develop a profitable return for your online spend. Over the course of this post, I’m going to help you understand the most important metrics and how to track them in a simple way. The metrics you’ll need are as follows
- Total Online Spend
- Average Profit Margin
- Average Order Value
- Cost Per Acquisition
- Total Gross Orders/ transactions
- Average Order Frequency & Lifetime Value
For this exercise, we first need to find the right information. You may need to dip into the following places to pull this out:
- Google Analytics – not got it? See how to set this up here
- Your accounting software
- Ecommerce platform/ CMS (e.g. Magento, Bigcommerce or Shopify)
Total Online Spend[Experts – I know we could break it down by marketing channel (SEO, email, paid, etc). We could then get into attribution modelling. However, this is a simple way a beginner can measure top line metrics and still get data required to make informed business decisions.] Total online spend is all the costs you incur to third parties to run your website. This could be:
- Maintenance/ Support
- Organic marketing
- Paid advertising (e.g. Google Adwords and Facebook Ads)
- Email marketing providers
- 3rd Party Software or agencies When you add all of these costs together, you get your Total Online Spend.
Average Gross Profit Margin
This metric is quite simply what you make in profit on products you sell minus your costs. Don’t worry about going into too much detail on this – we don’t need to play forensic accountants! It’s purely an average to work out movements and a guide to measure other activity.
Working out your average gross margin:
Take the average revenue / income that you make each month and get to a number. For this example, lets say it’s £20,000. Then add up all of your costs of sale in a month (e.g. Cost price of the item) – let’s call mine is £10,000 for this example. Quite simply, this is a 50% gross margin. This is easier to do when you know your average order value (AOV) – see how to calculate this metric below. Imagine my AOV is £50. I then know that I’ve got £25 (50%) to play with. Average Order Value (AOV) AOV = Revenue / Total number of orders You can also get this out of Google Analytics. See how on the screenshots below… Cost per acquisition (CPA) This metric is what it costs you to acquire a new customer. It ties in closely with lifetime value because sometimes if margin is low or competition is high, it’s a loss leader to get the first sale. However, don’t be defeated on this, you can make it work (see Lifetime Value section).
Working out your cost per acquisition:
CPA = Spend / Orders For example, if I’m spending £5000 per month on my website (marketing, hosting, updates, etc) and I get 1000 orders per month, then my CPA is £5. Total Gross Orders The reason for “Gross” is because for this exercise we will exclude refunds. In a later blog post, I will show you how to factor refunds into your digital strategy modelling.
Average Order Frequency & Lifetime Value
In some industries, it’s impossible to make a profit when acquiring a customer for the first time. Equally, this can happen across a specific marketing channel (for example competitive Google Adwords environments – like fashion!). Therefore, it’s important to learn how many times your customers order again from you and their lifetime value. Here’s a scenario as to why it’s important. I also do ecommerce consulting and was told by a client that it’s impossible to make a profit for wine retailer online. I asked them why they thought that and was told, “our margins are less than 20%, our average value order is £20, yet it costs over £10 to acquire a customer”. I asked them how many bottles of wine does that customer go on to buy and how do you encourage loyalty / referrals? This had never been suggested before and they quickly understood that their strategy had been all wrong. We went on to work out that the average incentivised customer would order 18 times (in a one year period) giving them a lifetime value (taken just for 12 months due to churn) of £360. Now we have a profitable model! Unfortunately, calculating this can be quite difficult due to the varied amount of customer relationship management (CRM) software there is out there. I’d recommend talking to your web developer and extracting the information out of the database or looking at a few plug-ins dependant on your ecommerce platform.
Putting it all together:
So now we know how to get all the metrics we need, the next step is to plug in all the numbers. Have a look at this handy tool Spike and I created.