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.
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:
- Amount of traffic coming to your site
- Percentage of visitors that convert to leads
- Percentage of leads that convert to customers
- Average order size per purchase
- Frequency of purchases made by your average customer
- 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:
- The number of unique visitors per month (UV) from 1,000 to 1,300
- Convert 9% of your unique visitors to leads instead of 5%
- Convert 10% of your leads to customers instead of 6%
- Increase the average order size from $50 to $60
- Increase the frequency of purchase 2x per month to 2.5x per month
- Increase customer loyalty so that the average customer stays with you for 42 months rather than 36 months.
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.
For example, you do not want to pay for traffic (via banner adds, pay per click campaigns, etc.) that do not become leads and, eventually, customers. That’s why it’s so important to be able to track the effectiveness of each campaign all the way to a conversion event on your site. Their are several tools that enable you to embed short codes into every keyword, email message, blog post or social media post that will help you do this, including solutions from Hubspot, Yodle, and Arkli. These short codes are used to integrate campaign analytics (which show click-through rates for each keyword, email message, blog and soical media post) and website analytics, which show conversion events on your site (e.g. completed lead forms, purchases). For full-disclosure, it is important to note that the author is a reseller of all three of the above products. The benefits of my relationships with these companies is that I can get you discounted prices for the software and am skilled in their use. It’s also possible to embed short codes into your web analytics software, which I could also help you with. Google naturally makes it relatively easy to integrate their AdWords (pay-per click) service with Google Analytics, their free web analytics package. By the way, as long and you know the costs and results of each marketing campaign, you can determine it’s ROI, as:
ROI = (Revenues gained from investment – Cost of investment)/Cost of Investment
Bottom Line? By continuously improving the effectiveness of each marketing tactic deployed to increase variable in the e-commerce equation, you will increase both your revenues. By calculating the ROI for each of these marketing tactics, moreover, you also ensure that you do not increase your revenues at the cost of profits.
Meanwhile, what other variables do you think impact the revenues of e-commerce sites? What are some of the tactics you would deploy to increase the amount of traffic coming to your site, the conversion rates on your site, the average order value, the frequency of purchase and the lifetime value of your customer? And how would you measure their effectiveness to improve your return on investment?