A Profitable Ecommerce Business

Sales is about people, sure, but managing a profitable ecommerce business is about the numbers. Overseeing money coming in versus money going out is no easy feat, and often involves getting neck-deep into sales data and operating costs.

If you’re trying to stay afloat or maybe just want to make your online sales more efficient, some business figures are more helpful than others. It seems creating a profitable business involves a lot more than just profits.

Below, we explain the 3 most important figures in ecommerce success for business strategy and management. For each, we explain what it is, how to calculate it, and tips for improving it to build your successful ecommerce business..

 

1. Cost of Acquiring Customers (CAC)

What is the cost of acquiring customers?

Your business’s cost of acquiring customers is the average amount you spend per each new customer, mostly from your marketing budget. It summarizes all of your outreach expenses, including advertising, referral programs, promotional discounts, and even email software.

CAC is a perfect figure for profitable ecommerce companies because it helps optimize the highly-targeted ad campaigns common in digital marketing.

 

How do you calculate the cost of acquiring customers?

Cost of Acquiring Customers = Total Marketing Expenses / Number of New Customers Acquired

Although you can calculate the CAC using any time period, we recommend month-by-month so you can alter your marketing campaigns in a timely manner. In that case, you’d take your total monthly marketing expenses and divide by how many new customers you received that month.

 

Tips for improving your cost of acquiring customers

  • Because digital marketing is directly tied to which methods you use, calculate an individual CAC for each marketing initiative. For example, compare the CACs for Facebook Ads vs Google Ads to see where your marketing budget should go. If you see that Google Ads bring in more shoppers who are actually buying products than Facebook Ads, it’s worth it to push more funds towards Google Ads.
  • You can lower your CAC by spending your marketing budget more effectively. In addition to prioritizing the right channels as mentioned above, you can also tailor your content to encourage customer acquisitions. One of the best ways to achieve this is by creating content for each stage of the sales funnel.
  • If you’re a multichannel seller, analyze your sales data to see which marketplace or webstore is seeing a lower CAC. Lower your marketing costs for the lower-performing channels and move those funds over to your better-performing channels. Don’t stop there though, troubleshoot those channels with higher CAC and see how you can improve the conversion on those sites.
  • Get more granular with your analysis and see which products are converting at a higher rate. Focusing your marketing dollars on those products will continue to lower the cost of acquiring new customers.
  • CAC is also relevant to your retention marketing, and can help inform how much you spend on loyalty programs and keeping existing customers coming back.

 

2. Free Cash Flow

What is free cash flow?

Free cash flow is the amount of money a business has available after paying operating and overhead costs. Similar to net profits, your free cash flow shows how much money your company generates after accounting for expenses.

However, cash flow is often reinvested in a company to keep it afloat or expand, so a business can be profitable while simultaneously having a negative cash flow. For retailers online and off, cash flow is vital for restocking inventory, marketing, and introducing new products.

 

How do you calculate free cash flow?

Free Cash Flow = Total Revenue – Operating Expenses – Capital Expenses

Again, we recommend calculating your cash flow month-by-month to make sure you always have enough to pay expenses.

 

Tips for improving free cash flow

  • Timing is vital for cash flow. You could triple your profits for the month, but it won’t matter if you don’t have cash in hand when it’s time to pay the electric bills. Always consider payment and expense intervals when budgeting your cash flow.
  • One of the biggest threats to cash flow is overspending or overextending. Just because you had a good month doesn’t mean you have to spend everything all at once. Spend money like the tortoise, not the hare.
  • Storage fees for unsold inventory is notorious for clogging up cash flow. Tracking how much you’re paying to store each item will help you determine if you need to liquidate any stale inventory.
  • It’s helpful to create a cash flow forecast to anticipate future needs. This is especially useful in ecommerce for budgeting seasonal trends. For example, you’ll need more cash on hand in the autumn months to prepare for the holiday sales rush.

 

3. Gross Profit Margin

What is a gross profit margin?

Sometimes abbreviated to just “gross margin,” your gross profit margin is the percentage of money you make from sales after deducting costs. It’s your “take home” money after accounting for things like acquisition and delivery.

 

How do you calculate gross profit margin?

Gross Profit Margin = (Net Sales – Cost of Goods Sold (COGS)) / Net Sales

Cost of goods sold is the sum total of all the costs that go into selling a product: sourcing, raw materials, packaging, storage, etc. Read our complete guide to calculating COGS here.

To calculate the gross profit margin of an individual product, the formula is simply:

Gross Profit Margin = Selling Price – COGS for that productSelling Price

 

Tips for improving your gross profit margin

  • Be sure to track the gross profit margin, not just the gross profit. Gross profit margin is an ideal metric to measure an online retailer’s success because it provides context, unlike the gross profit, which only shows the total income without factoring in costs.
  • You can improve your gross profit margin in one of two ways: increase your prices or reduce your COGS. Pricing can be improved using some expert pricing strategies, whereas COGS can be reduced through streamlining your behind-the-scenes operations, such as renegotiating with suppliers, buying in bulk, or using inventory management software.
  • Calculating the gross profit margin of individual products can help you prioritize the most profitable ones for features and promotions.
  • Gross profit margin does not account for employee salaries, property costs, utilities, or market spend, so don’t forget to consider those when making big decisions.

 

Tight Ships are Profitable

The reason these three figures in particular are so useful is because they correspond to how efficient and effective an online retailer’s business model is. Companies that mismanage resources, buy stock haphazardly, or don’t monitor sales figures invariably have high CAC, low cash flow, and unsustainable gross profit margins.

To truly improve your profits, you need to streamline and organize operations. A lot of that depends on your business model, but when it comes to inventory management, ecomdash can help. Our software not only consolidates all sales channels and storage facilities into one platform, it also presents the most important figures and sales analytics for convenience and quick reference.

See for yourself — sign up for your 15-day free trial now!

 

Related

FREE GUIDE:
The Ultimate Guide To Inventory Management for Multichannel Retailers
FREE GUIDE:
The Ultimate Guide To Inventory Management for Multichannel Retailers

The ins and outs of managing inventory are overwhelming. That’s why we’ve put together the only guide that covers inventory management basics, accounting methods, pricing strategies, multichannel marketing strategies, and more.

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