Many eCommerce sites are completely missing one or more of these key metrics. The most important data points about your business. Without knowing each and every one of these points, there is no way you can know if your business is sustainable. Make sure when starting out, you are tracking every one of these metrics so that you know if you are going to survive, let alone make money.
CPA (Cost in Marketing to Acquire Each Customer)
CPA is your main marketing metric. You calculate this by taking your marketing spend and dividing it by newly acquired customers.
i.e. Let’s say you spent $150,000 in marketing in the month of July. Now let’s say that you got 7,500 new customers during July as well. You would calculate your CPA as 150,000/7,500=20. Your CPA during July was $20. That means that for every $20 you spend given everything stays the same, you will get a new customer.
LTV (Lifetime Value)
Now that you have your CPA, it is extremely important to know your LTV. LTV is measured by the average amount of revenue generated by a customer in their lifetime. When analyzing this, it is also important to know how long this lifetime is usually as well (do they spend mostly over 3 months, 6 months etc.), that way, you can then calculate an estimated ROI taking your CPA and your LTV.
Let’s say that using the same case as above, the LTV of your customer is $200 over 6 months. Now you know that, if all things remain constant, if you invest $20 in your business, you will make $200 over 6 months.
Gross Margin
This is where a lot of ecommerce businesses aren’t looking. You have your LTV, but that is just based on revenue. What percent of that do you actually take home after your cost of goods? To calculate this you take your retail price, let’s say it is $50, and then you take the cost it takes you to get it out the door, let’s say this is $20. You take 50-20=30, then 30/50=.6 which means your Gross Margin is 60%.
This means 60% of the revenue coming in actually goes to your business and the other 40% goes to cover the goods you are selling.
Overhead
Keep your overhead low! All the costs of running your business other than your goods. Your employees, office, equipment, anything at all that you are spending money on to keep your business open. Make sure you know what you are spending (this may seem obvious, but you’d be surprised how many people don’t know this number). Taking the case from above, let’s assume that your overhead is $50,000 per month to pay yourself, your employees, your office rent, equipment and all of your business expenses.
Profit
Don’t let anyone tell you this number isn’t important. You want to make money and this is where you do. Focus on getting your “bottom line” or Profit up by make sure to keep your costs under control as well as growing your revenue.
Now let’s look at the examples.
$20 CPA
$200 LTV over 6 Months
60% Gross Margin
$50,000 Monthly Overhead
$150,000 spent for 7,500
This means:
You will make $1,500,000 in revenue over the next 6 months (7,500 customers x $200 LTV)
$900,000 after your Cost of Goods are covered (1,500,000 * 60%)
Your overhead will cost $300,000 over the next 6 months (50,000*6)
After 6 months you will end up with $600,000 (900,000-600,000)
So if you invest $150,000 in marketing, it will take approximately 1.5 months to make that money back (150,000/(600,000/6 months)) and then you will make approximately $450,000 profit over the remaining 4.5 months.
Recap
CPA, LTV, Gross Margin, Overhead, Profit
Know these key metrics and you will know how to analyze your business.
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