Aug 17 2009

The eCommerce Formula for Success

ecommerce einstein

At Blue Acorn, we talk with a great deal of online retailers daily.  And most of those conversations revolve around how to improve revenue.  Many people that come to us have hit that “glass ceiling”, or they just aren’t sure what to do next to keep growing those numbers.  Now obviously revenue isn’t the only important thing, running a lean business and creating some backend efficiencies are certainly other ways to help improve the profitability of your business.  And if you increase revenue while subsequently reducing margins, that is something you’d need to look at as well.

But, focusing purely on revenue for a minute, the other day I was meeting with our new eCommerce Consultant to discuss some clients he will be working with as part of our eCommerce management services.  We are tasked with, on a long-term basis, helping them realize gains in online sales.  This is where we leverage our combined expertise,  and apply those practices to their site on a daily basis.  We use a very simple formula to determine what kind of impact we’ll see on revenue based on specific actions.  We use this formula in our monthly reporting to clearly, and easily communicate how revenue can be impacted by focusing on three specific areas.  So we present to you, the eCommerce revenue formula:

Revenue = Visitors * Conversion Rate * Avg Order Amount

Now, of course this is a much simplified version of a very complicated process of acheiving online sales, and obviously it isn’t this simple.  But instead of giving yourself a headache sorting through the hundreds of factors in a full-blown formula and not knowing where to start, we break it down into its simplest form.  By focusing on these three components, we can reasonably identify opportunity, estimate outcome, and set measurable goals.  But first some caveats and assumptions you’ll need to understand when we look at measuring these values over a period of time:

  • Visitors: Unique visitors to be specific.  Getting traffic to a website can be an easy thing to accomplish, but getting targeted visitors is another story.  For the sake of this formula, we are assuming that any gains in visitors are truly targeted customers, interested in your products, or at least consistent with what you’ve been acheiving to date.
  • Conversion Rate: Conversion rates can vary by traffic source, medium, keyphrase, time/day, macro-economic factors, demographic profile, and a lot more.  We have to make some broad-level assumptions that these factors remain at least consistent with what we’ve seen up to this point.
  • Average Order Amount: Again, this is a sitewide average, that certainly is prone to fluctuation based on a variety of factors.

In addition to these specific assumptions, you also have to take into account the accuracy of your data.  It is a well known fact that no analytics package is 100% accurate, but we can use them as a general guide.  So I think it is clear that this formula is not intended to be the end all say all in what actual revenue you generate, which would be better calculated using a much more complex, drawn out formula.  So now that we’ve established the factors in this formula and have defined some of the assumptions this is based on, how do we use this?

Understanding the “state of”

First thing is first, you should know every number in this formula for your site, and in fact, you should know it from memory.  If you don’t have these numbers, or if your analytics doesn’t provide it, the first step is getting it in place.  There really is no excuse to not having this data.  By understanding where you are today, you’ll be more informed to make decisions on how to move forward. And we suggest tracking this data over time, if you even do this monthly you’ll have a better understanding of some of the fluctuations in sales and how they are impacted by each of these factors.

Estimating Revenue Impact

It’s like a fun math game, plug in some hypotheticals and see what comes out.  Many retailers fall into the trap of thinking if they want more sales they need to increase traffic.  That’s not necessarily so, and furthermore, you might be better off investing in the other two components.  Many retailers don’t have the resources required to focus on all three areas at once, so how can you tell where to focus first?  Plug in some numbers and see how it affects revenue.  But be realistic with it, you can’t expect to easily double conversion rates or traffic, but look at it in terms of small gains.  If you increase conversion rate by 10%, will that work out better than increasing traffic by 10%?  And how about that often-overlooked average order amount?  Certainly each factor requires different expertise, and might require different levels of time invested on acheiving those gains.  But by having a better understanding the “state of”, coupled with some experience with the underlying tactics to improving those factors, you can make educated decisions about where to focus your energy on.

Defining Measurable Goals

After you’ve estimated the revenue impact on some changes, define some acheivable goals, and act on them.  For example, your goal this month might be to increase the average order amount site-wide by 5%.  Don’t try to do too much at once, take it one small step at a time (or large steps if you have the resources), and focus on one specific objective each month.  Identifying opportunity, estimating, and defining are all easy, but execution is key.

Benchmarking

There’s no better feeling than that of accomplishment.  So track your success (or even lack thereof) over time.  Compare where you are today to where you were six months ago, pat yourself on the back for a job well done, and look at the additional revenue you’ve generated over that time vs. what would have been had you not done anything (don’t think back too far, it might make you sick thinking of the opportunity cost).  If you haven’t seen the results you’re looking for, there is a much more complex equation you can look at, but the reality is there is almost always room for improvement, it’s just a matter of finding out how to get there.

So there you have it, an easy, simplified method of measuring, and improving eCommerce revenue.  Print it out, stick it on the fridge at home, or pin it on the wall in your office, and think about it every day.  And every day, ask yourself which metric you’re working to improve.

Kevin Eichelberger

Founder & CEO

Founded in 2008, Blue Acorn is the product of Kevin’s great passion and knowledge of all things eCommerce. Kevin’s data-driven approach has culminated in a strong, growing business that’s success is closely tied to the success of its clients. When he’s not immersing himself in eCommerce, Kevin works toward expanding Charleston’s tech community by serving as a board member for the Charleston Digital Corridor Foundation, and is also a mentor and advisor to several startups. A business-savvy technologist, you can find Kevin evangelizing about data, optimization and eCommerce.

12 Comments

Justin @ Palmer Web Marketing
Aug 21 2009

Great post Kevin. In a recent meeting with the CEO of an ecommerce company, I simplified our growth plan with the same exact formula. It’s amazing how simple yet profound it really is.

Reply
online shop design software
Aug 25 2009

This is the very basic of the ecommerce I have learn from the CEO of a traffic analysing company from Austria during a workshop in Voralberg. So yes, it’s true and applicable.

Reply
Web Copy Expert
Aug 30 2009

Great post and just goes to prove what I’ve always thought – that ecommerce success is by no means cut and dried; it depends on getting so many things right all at the same time.

Reply
articlescreen
Nov 13 2009

Great job and really a great formula of E-commerce;specially the next part “how do we use this?” clears all very nicely…

Reply
Kerrin
Dec 21 2009

“You should know every number in this formula for your site, and in fact, you should know it from memory” is the key for me. Too many people start an online store with the ‘set it and forget it’ mentality. There is as much, if not more, to successfully running an online store than the bricks & mortar variety. It’s a simple formula that can really help clarifying goals for improvement.

Reply
Talking Ava
Apr 08 2010

Nice post, it illuminates how ecommerce should be done in simple workable terms!

Reply
Liz
Oct 20 2012

Kevin – thank you for this revenue potential calculator. Question – should frequency be included in this calculation? For example, if an ecommerce store lists 10 products, and the average conversion rate in the US is 2%, how often does the store sell .2 items? Daily, weekly, monthly, yearly?

Thanks for your help!

Liz

Reply
Kevin Eichelberger
Oct 21 2012

Liz, thanks for your question, frequency is certainly a factor but it is included in the conversion rate metric – it is the average number of orders over a given time period – for which can be measured over any period of time you prefer.

Reply

Leave a Reply

Your email address will not be published. Required fields are marked *