Dozens of KPIs measure different aspects of your website’s health, including Click-through rate (CTR), bounce rate, and average order value (AOV), to name a few. When assessed together, each gives you insight into your e-commerce strategy and website performance. But how do you gauge the effectiveness of your site as a whole? Do you mash together as many variables as possible and hope for the best?
FORTUNATELY, THERE’S AN EASIER, MORE LOGICAL WAY:
(V x CR x LTV)- VC=$
The preceding equation lets you pinpoint vital metrics and use them to determine your site’s profit.
Establishing the variables
You may have seen a simpler version of this equation before:
(V x CR x AOV)=$
This version determines revenue rather than profit by multiplying the available number of site visitors by the number of sales they generate, multiplied by the average amount each sale brings in.
Just as the e-commerce landscape has evolved, so has the equation, however. Let’s take a look at the modernised version.
The equation mentioned above took a general cross-section of your visitors in a given time. The updated equation uses a more representative demographic consisting of:
- Visitor generation
- Visitor capture
- Visitor retention
This schema includes both paid and organic visitors. Calculating the V as a cross-section rather than a total gives you a more specific view of site traffic with more utility.
CR=Funnel-based conversion rates
Targeting site-wide conversion rates won’t give you meaningful results; it is the antithesis of marketing. To calculate the CR in our updated equation, you have to create specific marketing funnels aimed at different demographics, and then use the conversion rate generated by each. This gives you critical marketing data separated by customer type.
LTV/ AOV is more slippery than the other components of the equation. Depending on the variable you choose, the equation can become problematic. The three possibilities are:
- Lifetime value (LTV)
- Average order value (AOV)
- Cash modifier (CM)
AOV only gives you a relatively small window into customer behaviour. Your marketing efforts aim to build a rapport with your customers, resulting in a long-standing business relationship. LTV does a far better job of anticipating the real business each customer touch generates. But even that is problematic.
It’s far more helpful to establish a cash modifier as a stand-in for LTV. LTV does not account for your operating cash flow. To be sustainable, you must keep funds liquid.
To get the most meaningful variable, use a subdivided LTV, such as a 60-day LTV. You choose the time frame that makes sense for your business. To establish the variable, figure the amount each sale generates, then work out additional revenue in 30-day increments. Add the total revenue generated over your chosen time to establish the proper cash modifier.
Account for variable costs
Figuring out your variable costs is relatively straightforward as long as you take a comprehensive view. Relevant cost categories include:
- Delivery costs
- Material acquisition costs
- Operating expenses
Subtracting these costs from the rest of the equation will net you a clear view of your eCommerce site’s overall profitability.
Scaling your eCommerce business comes down to one equation. Getting the correct numbers for each variable will give you the most accurate picture of your business’s health.
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