The Formula for Profitable E-Commerce Growth

Drive visitors, convert them as often as possible, increase their value over time, focus on reducing variable costs, and your e-commerce store will grow profitably.

Here’s a basic formula to breakdown the growth of an e-commerce store:

(Visitors x Conversion Rate x Lifetime Value) – Variable Costs = Profit

Here’s an overview of how to treat each of these variables.

Visitors

There are two basic ways to generate visitors: paid and organic.

Paid is advertising (e.g., Facebook, Google, native ads, sponsorships). Organic refers to sources like SEO, natural referral, and word of mouth.

In the early stage, brands rely heavily on paid traffic and lightly on organic. It helps them get the visitors, leads, and buyers right away. But it can also be expensive.

As companies grow, they should invert this.

For paid traffic, here are a few suggestions:

  • Facebook/Instagram and Google are the best for most e-commerce channels, with Snapchat, Pinterest, and TikTok secondary.
  • Breaking down your Facebook ad account by profitable angles and products will improve your revenue.
  • Creative strategy is a must. You must have a system for understanding why creatives work. And you must also work to replicate the success.
  • Facebook and Instagram help generate the demand. Google captures it. The goal on Google is to own as much real estate as you can. Bid on your brand keywords, competitors’ brand keywords, as well as other relevant ones. Invest in Google Shopping.
  • SEO: Paid advertising can generate quick and fast returns. Content marketing, on the other hand, has a compounding value that accumulates in the long term.

Conversion rate optimization

There are plenty of routes to take. But some principles are:

  • Focus on paid advertising funnels because it’s easier and quicker to test different variables.
  • Ensure that the customer journey is consistent from the ad to the purchase.
  • Your offer (product, price, and positioning) has the biggest influence on the conversion rate. Other things like the font and color of the CTA are less important. Fine-tune and test as you go starting from the big stuff down to the smallest details to maximize optimization.

Lifetime value (LTV)

No other strategy can outperform a well-executed text/SMS and email strategy. They’re the highest ROI channels. If you fail here, you’re wasting your efforts in acquiring customers.

Variable costs

These are made of:

  • Cost of goods sold (COGS)
  • Customer acquisition costs (CAC)
  • Operating expenses (opex)

Ideally, each one of these elements shouldn’t be above 25% of your revenue, but it also depends on what you’re selling. Selling services (low to no COGS) is different from selling machinery (high COGS).

Always look for ways to prudently cut costs to improve the efficiency of your business.

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