Many e-commerce 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 each of these metrics so you know if you are going to survive, let alone make money.
CPA (Cost in Marketing to Acquire Each Customer)
- For example: Let’s say you spent $150,000 in marketing in the month of July. Now let’s say 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, given everything stays the same, for every $20 you spend, you will get a new customer.
LTV (Lifetime Value)
Now that you have your CPA, it is extremely important to know your lifetime value (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 (do they spend mostly over three months, six months, etc.), that way, you can then calculate an estimated return on investment (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 six months. Now you know that, if all things remain constant, if you invest $20 in your business, you will make $200 over six months.
This is where a lot of e-commerce 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=0.6 which means your Gross Margin is 60 percent. This means 60 percent of the revenue coming in actually goes to your business and the other 40 percent goes to cover the goods you are selling.
Keep your overhead low! Overhead is 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.
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 making 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 six months
- 60% Gross Margin
- $50,000 Monthly Overhead
- $150,000 spent for 7,500
- You will make $1,500,000 in revenue over the next six 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 six months (50,000*6)
- After six 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.
CPA, LTV, Gross Margin, Overhead, Profit—know these key metrics and you will know how to analyze your business.