To understand and forecast how much money you’re actually going to be making, it’s best to understand every marketing metric that will affect your profitability. You’ll also be able to ‘financial model’ and forecast your future earnings and revenue.
Although math can be boring – knowing how much profit your business is not.
And just by knowing your numbers better, you will gain so much clarity in your business, allowing you to make better decisions.
Why read this article?
Understand every single important metric related to e-commerce when you run paid advertising
The only article, the definitive comprehensive guide that you can refer to whenever you are ever lost about marketing metrics and e-commerce
FOR FACEBOOK ADS:
Reach: determines the number of individual unique people that you have managed to reach.
Frequency: the number of times that the person has seen the same advertisement
Impressions: the total number of times people see your ads overtime
CPC (cost per unique outbound click): how much you would be paying for someone to click on your advertisement to come onto your website
Add to cart: the number of people who visited your website and pressed the ‘add to cart’ button
Initiate checkout: the number of people who visited your website and went to checkout page
Purchase: Number of people purchasing your website
Cost per purchase: How much money is being spend for 1 customer to buy 1 product
Purchase ROAS (return on ad spend): refers to the amount of revenue generated for every $1 spent on advertising , a 22x ROAS refers to $22 being generated for every $1 spent
PRODUCT RELATED COSTS
Gross Profit = Total sales – cost of goods sold (COGS)
Gross Profit margin = (Total sales – cost of goods sold (COGS)) / Total sales x 100%
Having a high gross profit margin is extremely important because besides costs of the actual product, you still have to pay for shipping, software, manpower, advertising – and you have to pay YOURSELF.
For a standard ecommerce, it’s best to keep your product costs to <30% so that your gross margin is a healthy 70% that you can play around with marketing and if there are mistakes with refunds or discounts you want to give.
On the paid advertising side, this would also allow you to be much more aggressive in your marketing efforts. For example if you and your competitor were selling the exact same product at the same $100 price point – and if your gross profit was $80 versus his $70, you could spend $10 more than him for every single product.
Thus if you your gross margin is more than 35% and you’re doing some decent volume in sales already, try to negotiate with your supplier because that could break or completely turn around your business in terms of the unit economics.
‘The person who can spend the most to acquire the customer wins” – Dan Kennedy.
CAC aka CUSTOMER ACQUISITION COSTS
Although a lot of high tech companies obsess over this figure, this is something that you should consider as a key metric that you are tracking as well.
CAC considers how much money you would have spent to get 1 x paying customer.
The reason why it is important to know what this figure is, so that if you are budgeting and forecasting on how much money you need to put into marketing, you know on average how much you need to put into your marketing channels.
Because is very difficult to track as there are several platforms that you may use at one time, facebook, instagram, tiktok, google ads, it can be calculated simply by:
CAC = Total marketing spend/number of customers acquired during period
AVERAGE ORDER VALUE (AOV)
AOV is very important to understand because knowing how much a customer generally spends with you everytime they purchase your products affects your ROAS and profitability significantly.
For example, in a really dumbed down example – if I were to sell a hair brush at $40 alone. My ad costs stand at $10 CPP. Product costs at $10. Net profit before all other expenses = $20
However if i manage to just double my AOV by upselling a hair comb and brush at a discount and my $40 purchase becomes $80, with the advertising costs to get the customer to the website, my net profit could potentially double to $40 now, leaving me a lot of room to bully my competitors in the marketplace as well as really push the advertising budget a lot more.
Average order value is a metric that could literally give you 20% more income overnight just by optimizing the e-commerce funnel, for example introducing upsells and post purchase upsells/downsells. Please check out our knowledge base to check out more articles on increasing your average order value.
AOV is calculated as such:
AOV = Total revenue generated/total number of orders
These are the key metrics that you should be looking at to give you a snapshot of how your business looks like. It’s good to look at your metrics to understand your unit economics, but don’t try to obsess over the metrics as you may be lost in the numbers and forget to remember that there are humans behind every business.
Go out there – and make some money!