You made a million dollars in Sales! Congratulations! But let me guess, you’re still losing money somehow?? One of the greatest tragedies today is thinking that Gross Sales means you’re making money and that is simply not the case at all!
Your E-Commerce financial strategies must take into account the key E-Commerce metrics that need to be put into place to make sure that at the end of the day you’re making money instead of losing it. You don’t want to overspend on attaining new customers without knowing if it’s worth spending which will almost certainly lead to debt build up, creating a financial disaster.
Hence today’s article in which we discuss some of the critical key metrics you need for your E-Commerce business:
1. Customer Acquisition Cost (CAC)
Your CAC measures the cost involved when trying to attain a potential customer. Measuring this is considering the total overall cost to acquire new customers. This key metric involves your marketing and sales effort. Bottom line if your CAC is under 1.0 then stop right now! You need to be making money on each customer acquired. Otherwise, your Gross Sales will look fantastic, but you’ll be sleeping on the couch and still eating Ramen.
Customer Acquisition Cost (CAC) = Total Marketing and Sales Expenses / Number of Customers Acquired
It questions whether you’re earning more revenue on your business or are you spending more on attaining new customers? The consequence of neglecting this is overspending on marketing campaigns if your return on income is lower than previous months. Again, spending money to make money doesn’t mean you need to be broke in the process.
2. Customer Lifetime Value (CLV)
This metric measures your customer’s relationship and revenue over an X amount of time. It is the total revenue received from the customer over the time of your business relationship with your customer. I honestly am not the biggest fan of this metric when it comes to e-comm businesses as repeat customers are typically hit or miss, but it is still important, nonetheless.
Customer Lifetime Value (CLV) = Average Order Value Period X Purchase Frequency per period for average customer X Number of period average customers is retained. The CLV determines if it’s wise to increase your marketing budgets to acquire new customers. Keep track of this number weekly, otherwise, your cash flow will shrink overnight and you’ll be borrowing more money than you can count.
3. Gross Margins
This is fundamentally the most important formula to keep track of.
The gross margins measure your profitability of the products after deducting the costs of goods sold.
Gross Margins (%) = Company’s Revenue-Cost of Goods Sold (COGS) which is the figure known as the Company’s Gross profit / The Total Revenue X 100
The question to always keep in mind is if you are achieving a high sales volume to compensate for low margins, are you going to strain your business’s finances? The answer is obviously YES!
Two important things to keep in mind here:
1. Most companies do a fantastic job tracking Gross Sales. They know their figures inside and out.
2. Most companies do a horrible job tracking COGS. This includes inventory tracking, pricing, lost goods, merchant fees, storage costs and packaging. That being said, if you don’t track your COGS properly, your Gross Margins will inherently be off and you will always be pondering why you keep losing money at the end of each month.
4. Inventory Turnover Rate
Your inventory turnover rate is a measure that shows the business on how much inventory or stock is sold and replenished. It is important to know this vital piece of information as you don’t want to purchase unnecessary stock. These metrics work hand in hand. The consequences of not monitoring your inventory turnover rate are potentially overstocking products where this could result in unsold stock or in the case of understocking inventory which could lead to missing out on potential sales. To properly know your inventory turnover rate, the best thing to do is to either purchase an inventory tracking tool or use a simple spreadsheet and take daily stock takes. This includes Amazon FBA and local inventory counts.
It’s also very important to note that inventory is the number one place where employees can steal and take advantage. So it is crucial to keep a tight lid on inventory, track every Purchase Order and know your stock values.
Additionally, you should know which inventory is super active and hot so you can have enough time to order stock without having Out Of Stock issues and you should know which inventory just sits on the shelf to avoid paying extra fees to your fulfillment center for stale inventory.
5. Debt to Equity Ratio
The Debt-to-Equity ratio is basically the measure of how much total debt an E-Commerce business has in divided by their total shareholder’s equity.
Debt to Equity Ratio (D/E)= Debt of an E-Commerce : Total Shareholder’s Equity
This metric can be applicable to the various types of debt (short- and long-term liabilities) for your E-Commerce business but the basic principle is to find out whether your debt is exceeding at a quicker rate in comparison to the equity that you can generate from your E-Commerce business. Personally, I don’t see this as a major issue for most e-commerce brands as they’re typically self-funded, so debt is mainly credit card debt and supplier debt. This can get out of hand quickly when focusing on marketing spend and over development of products you simply cannot sell just yet.
6. Sales Growth Rate
This metric keeps track of the rate in which your sales increase over a specific number of months. Quickbooks does a great job at reporting this figure. The most critical part of knowing your sales growth isn’t the rate, but rather the seasonality of your revenue, which in-turn means how much cash you will have on hand to pay off marketing spend and inventory replenishment.
7. Net Profit Margin
This metric is the most important metric for your family and personal life’s sake. Without it, you’re simply wasting your time and energy.
The formula is quite simple, it’s what % of your Net Profits look like compared to your Gross Sales (aka: Total Revenue). If this number is negative, then you might as well stop everything you’re doing because you just keep digging a bigger hole in the ground.
Here is the formula:
Net Profit Margin = Net Profit ⁄ Total Revenue x 100
To get to your Net Profit, you must deduct all expenses. The result of the profit margin calculation is a percentage – for example, a 10% profit margin means for each $1 of revenue the company earns $0.10 in net profit.
10% profit margin is considered very healthy for a company (believe it or not).
The bottom line of all this blog post is to make informed decisions. Running with a blindfold never helped anyone. You need to be aware of how your E-Commerce business runs. That is why to truly thrive in this competitive E-Commerce space, you need to embrace the fact that when reality hits, it’ll hit hard. Don’t be ignorant! Read about the market trends, consumer behavior and technological advancements.
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