# The 6 Ways to Increase E-Commerce Revenues and Profits

My e-commerce clients typically  ask me “How can you increase my e-commerce revenues?” My answer usually references what I have dubbed The E-Commerce Equation.  In its simplest form, monthly revenues = average number of new customers (C) per month X the average monthly revenue per customer (R/C)). So R = C x (R/C).  This simplest of equations doesn’t help us figure out how to increase the number of new customers per month or the amount that customers spend per month. To inform our strategies and tactics for increasing e-commerce revenues, we need to understand how these numbers are derived. NOTE: those who find math to be tedious may want to skip this analysis and jump straight to the section entitled 6 Ways to Increase E-Commerce Revenues and Profits, below. But I encourage you to hang in there with me to better understand the rationale for focusing on these 6 steps to optimize your overall e-commerce revenues and profits.

## The E-Commerce Equation

For  purposes of simplicity, I have broken the overall e-commerce equation into three separate equations.

Number of New Customers. The first calculates the number of new customers you can obtain each month:  The number of  new customers (NC) is a function of UV (the number of unique visitors per month) x L/V (the ratio of leads per unique visitor)  x C/L (the ratio of customers per lead)

NC = (L/UV) x (NC/L)

Let’s illustrate this formula with a simple example before the other variables are introduced.  Let’s say your site receives 1,000 unique visitors per month, converts 5% of these visitors into leads and 6% of these leads to customers.

NC = (1,000 x .05 x .06) = 3 new customers per month.

Total Customers.  Of course we need to add existing customers (EC) to determine the total number of customers (C)

C = NC + EC

C = (3 + 1,000) or a total of 1,003 customers

Revenues. Let’s now look at the revenues (R)that the are generated  by customers  (C).  This is calculated by understanding the average order value (AOV), frequency of purchase (F), and the number of months (M) your average customer remains with you.

More specifically:

R (revenues) =  C x AOV x F x  M

Again, let’s try an example.  Assuming the average order volume is \$50, that the frequency of purchase is twice per month, and the average customer spends 36 months with you:

R = 1,003 x \$50 x 2 x 36 = \$3,610,800

## The Six Ways to Increase E-Commerce Revenues

By definition, there are thus 6 ways to increase e-commerce revenues.  To optimize your e-commerce revenues you need to increase the:

1. Amount of traffic coming to your site
2. Percentage of visitors that convert to leads
3. Percentage of leads that convert to customers
4. Average order size per purchase
5. Frequency of purchases made by your average customer
6. Long-term customer loyalty

Once you learn the tactics that increase each of these variables, you will be able to markedly increase your overall e-commerce revenues.  Because the effects are multiplicative, even small improvements in each of the variables.  Let’s assume you are able to increase:

1.  The number of unique visitors per month (UV) from 1,000 to 1,300
2.  Convert 9% of your unique visitors to leads instead of 5%
3.  Convert 10% of your leads to customers instead of 6%
NC =  (1,300 x .09 x .1) = 12
These modest improvements  enable us to quadruple the number of new customers each month.  When we add in the existing customers
C = 1,000 +12 = 1,012
On the revenue side, let’s assume that we can make the following modest improvements:
1. Increase the average order size from \$50 to \$60
2. Increase the frequency of purchase 2x per month to 2.5x per month
3. Increase customer loyalty so that the average customer stays with you for 42 months rather than 36 months.
R= 1,012 x \$60 x 2.5 x 40 = \$6,072,000
What seem like modest improvements–in the number unique visitors, conversion rates, average order value, frequency of purchase and lifetime customer value–almost double e-commerce revenues.  That’s why it is important to focus on the each variable in the e-commerce equation.  Start making improvements to your “lowest” hanging fruit and get to the other issues over time.
The following chart shows the various tactics a business can utilize to maximize e-commerce revenues by increasing the values of each variable in the e-commerce equation (Click to enlarge)

## Increasing E-Commerce Profits and Return on Investment (ROI)

It’s important to state, however, that revenues only represent the top-line of your income statement.  To improve your bottom-line profits you will need to leverage the most cost-efficient ways to increase each of these variables.  Thus you not only need to increase your customer acquisition rates, but reduce your costs-per-acquisition to improve the profitability of your e-commerce site.   To ensure profitability, you will need to have the metrics, knowledge  and discipline required to test different tactics to increase the value of each variable so that you leverage those that optimize your ROI, or return on investment, for each dollar spent.