6 Powerful Strategies to Improve Your E-commerce Bottom Line
While it is true that some things are immeasurable, in e-commerce most things should be measured to discover the trends and factors that affect the failure or success of a product.
In the industry, there are metrics that we call Key Performance Indicators (KPIs) that will help you measure exactly that.
Here, we recommend focusing on 6 KPIs to achieve a better bottom line.
The first place you can start looking into is your gross profit margin. This is the total sales less the cost of goods sold. This gives you an understanding of how profitable your business is.
The benchmark, you want to keep as high as possible. If your gross profit margin is too low, it means you are not making enough money out of your business.
Another way to measure this KPI is by the Net Profit. This is the total amount of money made by your business less the total amount of money spent. By adding the factor of expenses spent on operations, you will be able to understand where your business is losing money. This helps you identify your biggest expenses. Consequently, this will help you decide whether such an expense is worth it.
Revenue by Product Line
The next step to take is to determine which products to chuck and which to keep. Studies have shown that the profit made by most e-commerce businesses is concentrated in a few product lines. Determining which they are, will be key to the success of your business.
This KPI is measured by the total value of products sold in a line. It will show you what your business is known for, what is most in demand, what makes money, and what doesn’t.
Your inventory records will give you the numbers to calculate this. The results will provide you with an overview of your bestsellers and what gets left on the shelves, so to speak. This will help you decide if the product should be kept, sold at a discount, or totally dropped. Ultimately, it will also help with determining inventory turn-over. This, in turn, will help you determine which products are worth the advertising cost. Once you determine your winners, you can sleep easy knowing your marketing expenses are not being misspent.
Average Revenue per User (RPU)
This metric is determined by getting total revenue, divided by total customers. What it shows is the profitability of your business based on each customer or user. This is normally used for subscription businesses to determine the average revenue each user brings in.
The outcome will help you plan for future growth. When you know how much each client brings in, you can estimate how many more subscribers you need to hit a target profitability.
Because it is an average, when computing, you have to take note of the outliers. These are customers with unusual subscriptions that will skew the data. For example, one subscriber may be paying $10,000 per month compared to the $1,000 paid by others. These numbers will distort your figures and produce unreliable results.
Cost per Visitor
Once you determine revenue per visitor, the next move is to calculate for cost per visitor of your website. Essentially, it asks, for the advertising cost I’m spending am I getting enough clicks?
This is computed by dividing the total Marketing Cost by Total Visitors. The KPI determines whether you are over or under spending on advertising. It is a holistic approach to determine the cost of your advertising methods. Although it won’t identify the precise advertising method that will get you the best results, it gives you an idea of whether or not your marketing strategy is working, overall.
If you are a start-up, you should expect this number to be higher. It is understandable to invest more in marketing to raise brand awareness.
One thing to remember, when working out the numbers, you have to watch out for spam traffic that could render your numbers irrelevant.
Inventory Turnover Rate
Striking the right balance for your inventory will make or break a business. Too little inventory will kill your operation, too much will force you to sell at a discount. As they say, unsold inventory is sleeping cash. You want your money to work for you, not sleep.
This is computed by dividing your cost of goods sold by your average inventory amount for the period.
If you are thinking of getting your raw data directly from your e-commerce platform or your accounting software, you might end up with a data dump you can’t handle. Finding the right expert to sort, analyze and make sense of your numbers is also a factor you need to look into.
Customer Lifetime Value (CLV)
Even something immeasurable such as loyalty needs to be measured in e-commerce. The CLV is measured by adding up the total gross profit from the customer over their “lifetime” as a customer. As your business and your clientele grow, it will be harder to do this for every single customer. You can achieve the same result when you factor in average order value (AOV), average gross margin, and the average number of months the customers buy from you.
This baseline will help you determine how much the customer is bringing into your business and how much you are willing to spend to entice new ones.
The goal in every business is not always a blind drive to sell more. Sometimes, it takes consultation from your accounting system to help you realize what and how to sell your products in order to achieve maximum profitability.
The end game is to maximize profit at the least cost, so if you want those numbers to fall into place, you can work with a trusted expert to churn them out for you. Here at Mehanna Advisors, we have experienced e-commerce experts who will work with you to get the best bottom line.