When it comes to the eCommerce business world, everyone knows that profitable growth is the ultimate goal. So whether you’re a small business just beginning to build your online presence or a medium-sized operation looking to scale into the next stage of your business, having the right growth strategies in your toolkit is crucial to long-term success.
So, what happens when the strategies that helped launch your eCommerce store suddenly fail to yield the results you need to win?
Imagine…
You’re an eCommerce business owner who hit the 5 million revenue mark. You’ve been pushing your marketing campaigns on all the right social media platforms, nailed down your target audience, and grown your customer base to hit all your ROAS targets. Everything has gone perfectly according to plan!
But suddenly, you realize that your growth goals have expanded now the target is 50M/yr rev, but the eCommerce marketing strategies you’ve been using up until this point simply aren’t enough to propel your business into the next level of revenue.
And to make matters worse, this lack of momentum towards your new ROAS targets has made your current Cost Per Customer Acquisition (CPA) and cost to acquire customers (CAC) numbers no longer affordable for your budget, which leads to a complete plateau in eCommerce growth and an overall detrimental impact on your operation’s financial well-being.
Based on your annual forecast, you know that something just isn’t working, yet you don’t know how to move your business forward and have tried every possible hack and tactic on your ad platforms.
Sound familiar? You’re not alone. In fact, pushing past this dreaded plateau is one of the biggest factors that separates long-term eCommerce brands from those who fall off the map after only a few good years.
That’s the bad news.
The good news is that you can absolutely continue scaling your eCommerce business and reaching those next levels of success as long as you have the right growth strategies at your disposal. And no, we’re not talking about cheap marketing hacks that only yield a temporary result.
Let’s start with a theory which Taylor Holiday, a good friend of mine talks about – the Law of Mom Pyrrho:
You can think of your CAC as a curve, with the beginning point being the cost to acquire a purchase from your Mom. For most of us, you’d never have to spend a single penny to make your Mom support your eCommerce website. In this example, Mom represents the lowest possible CAC on our curve Because she loves you and she will buy whatever you have.
But to reach the next level of success, your growth strategies must be strong enough to acquire a purchase from Pyrrho. Pyrrho, also known as the Greek God of skepticism, will NOT be easily encouraged to buy any new products from your eCommerce site. In fact, it would be nearly impossible to convince him to spend any money at all. That’s why he represents the other extreme on our curve.
So for every business there is a volume number connected to every CAC number on the curve. If right now you can spend $15 to acquire a customer you will get say 500 customers for that CAC on the curve and your business makes 50k rev/month, now you wanna scale and make 100k/month and according to the hypothetical curve for your business to get 1,000 customers your CAC will be $25. Now your job is to be able to scale to the levels you want you need to come up with growth strategies that can help you afford the Higher CAC at those scale levels.
So, how can you find that sweet spot in your marketing strategy that allows you to scale your eCommerce business, even after you hit a plateau? It all starts with creating a roadmap of success using our PNL approach. So that you can find where opportunity exist and fix them to lower the overall blended CAC for your business, ultimately you can afford/offset the high paid CAC that happens at the Scale levels you desire sustainable and achieve your goals, which you can revisit any time your brand is ready to leap into the next chapter of success.
Here’s what you’ll find in today’s blog:
Part 1: Understanding Your Goal
- Why use a PNL approach for your growth strategies
- The 7 levers of a PNL strategy include:
- Gross Sales: What it means and how to calculate it
- Order Revenue Vs. Total Sales: How to minimize returns and boost profits
- Net Sales: How to navigate taxes and shipping profits
- Variable Costs: Using COGs, forward shipping, merchant fees, and fulfillment to your advantage
- Gross Profits: How to determine a healthy profit margin for your business
- Fixed Costs: Using OPEX, agency fees, and other costs to enhance your growth
- Profits: Why you need to think “big” to win
Part 2: How To Adjust Core Levers For Success
- Which levers should you adjust and why
- New Customer Revenue, how to increase revenue for Paid Customers and Organic customers who are new to your business
- Returning Customer Revenue, how to improve customer retention and build loyalty among existing customers
Part 1: Understanding Your Goal
As we’ve said, the only way to achieve new growth in your eCommerce business is to be able to afford the higher end of the CAC curve, bringing in a better ROAS might not be something that is readily available – this is where your eCommerce growth strategy comes in.
That’s why the goal is never to hack the pricing of the CPM since these strategies don’t hold up in the long term but rather to improve your ability to acquire new customers at a more expensive rate.
To do this, we’ll need to create a roadmap of your business using your profit and loss (PNL) report as the guide. We will talk about how us as marketers can use the PNL to mine opportunities for a business and then come up with tactics for your growth strategy so we can make the PNL look the way we want to for your business . Most importantly, it allows you to see a correlation between which expenses influence certain profit outcomes.
Here’s what you’ll be looking at in your PNL report:
1. Gross Sales
The first lever in your PNL report features your total gross sales, including any discounts you offer your customers.
For most online retailers, discounts are a great way to entice new customers to try your products or encourage existing customers to return to your eCommerce platform for repeat purchases. But with that being said, these discount codes can often lead to a detrimental impact on your PNL when not used strategically.
So, let’s say you’re a shoe retailer that often offers a 30% discount for potential customers on their entire order. A better way to improve your profit margins would be to offer a “buy one, get one 50%” discount instead. Not only does this option allow you to retain more of the profit for each sale, but it also can be perceived as a better deal to your customers since 50% off is more attention-grabbing than 30%.
Another option in this scenario would be to cross-sell your excess inventory (in some offer or as a free gift) to clear out space in your store and increase your cashflow. For example, you could create pop-up product recommendations for discounted shoes or accessories upon checkout, encouraging your customers to put more items in their cart.
Either way, examining your PNL report is a key strategy for using customer discount offers to your advantage.
2. Order Revenue Vs. Total Sales
Next, you’ll need to look at your order revenue in contrast to your total sales. By comparing these two numbers, you’ll see how high the return or refund rate is for your products, which can help you recalibrate your growth strategies.
Now, regardless of what kind of products you’re selling, customer returns are pretty much unavoidable in some capacity. But that doesn’t mean you can’t minimize the impact of these returns on your profits!
Before you make any decisions about your marketing strategies, take some time to research the average product return rate for your industry. If your rate is below average, you may not need to make many adjustments. However, if you have a higher-than-average return rate, it’s time to break down your merchandising sheet to see why some of these products aren’t working for you.
An easy way to achieve this is by looking at your merchandising sheet and determine if you’ve been promoting the wrong products to your target audience. Then, you can reduce the number of returns you receive from online sales by shifting your focus away from these items and emphasizing products with better ROAS, gross sales, low returns and higher LTVs.
You can also get insight directly from your audience by using customer satisfaction surveys and other engagement tools, which can help you zero in on the factors that are causing your customers to return their purchases and allow you to address their pain points in the future better.
3. Net Sales
Taxes
Obviously, taxes are an essential expense to factor in when you’re looking at your numbers. But did you know there are some easy ways to lessen the blow of these taxes on your profits? First, are you charging this to the customer or are taking the blow ? Can you split test this ?
VAT, or value-added tax, is a broad tax added to the consumption of all goods and services. However, the amount of VAT for your order value will vary greatly depending on the location. So, taking the time to research these options for your international expansion is a great way to reduce net total taxes in your PNL.
You can also look into the tax code and see if you are eligible for exemption, One of our client, is exempted from VAT because they qualify under the medical supplement clause which is actually very helpful when it comes to scaling.
Shipping Revenue
It’s no secret that customers love free shipping. But if you’re not leveraging this offer to your benefit, you could lose a significant portion of potential shipping revenue on every single order from your online store. That’s why we always advise against giving free shipping to all of your customers and instead focusing on creating shipping tiers that meet the needs of you and your consumers.
By this, we mean looking at your AOV (average order value) histogram and examining these metrics’ mean, median, and mode. So, for instance, if you offer free shipping on orders above $35, but this doesn’t mean your AOV criteria, you’re actually costing yourself potential revenue with this offer.
This doesn’t mean you can’t offer free shipping for certain order volumes. However, covering shipping costs for orders over $50 is a safe bet in most cases. That way, you’ll still create customer loyalty among frequent shoppers, while new customers who only want to try a few small products are often more willing to pay a small shipping fee. And ultimately even be able to move the people who are looking for a deal up an AOV bucket which is end of the day beneficial to the business.
4. Variable Costs
Variable costs, as the name suggests, are expenses that may fluctuate depending on a variety of factors. So, you can start by asking yourself these simple questions that can drastically reduce these costs for your business.
“Can I reduce the cost of goods for my products?”
No matter what types of goods you’re selling, you’re most likely purchasing materials from a supply company. So, investigating the possibilities of a more affordable supplier or switching to cost-effective materials is one way to drive the costs of your goods (COGs) down.
Another way to achieve this is to shorten your cash conversion cycle (CCC). The CCC refers to the amount of time it takes you to convert money spent on COGs into returned cash for your business. Suppose you find that your CCC has fallen below the average for your industry. In that case, you may want to evaluate any optimization options to help you streamline your operations and generate more cash faster.
“Can I utilize forward shipping?”
Shipping products directly to your customers can be an expensive process, especially for a medium or small business. Instead, you can potentially store products in your own warehouse facility and ship them from there. While this may seem like an additional expense at first, the reality is that these practices will reduce your variable costs in the long run.
But again this depends on your supply chain, and there is no one size fits all. Still its your responsibility to negotiate the best possible outcome and process for your business.
“Are my merchant fees too high?”
Payment processing platforms like Stripe and PayPal have made it fast and easy to collect cash from your customers. But in many cases, online retailers are stuck with hefty merchant fees, making it difficult to yield the desired results.
If you’re working with a representative for one of these platforms, we highly suggest negotiating your merchant fees down to a lower rate. You may be shocked to learn that many eCommerce businesses have successfully negotiated hundreds of thousands of dollars in fees down to mere pennies with these strategies.
“Am I getting the best fulfillment agreement?”
Since the pandemic, online sales have sky-rocketed for leading eCommerce platforms like Shopify and Amazon. So, how can you know you’re getting the best value for your fulfillment agreement?
By using a BATNA, or the best alternative to negotiated agreement comparison, you can get a side-by-side view of your current fulfillment agreement next to other leading options in the industry. This can help you determine if you should stay on your current platform or explore other options that may increase your profits.
5. Gross Profit
It’s a good idea to research the average gross profit for your niche industry, but in most cases, having more than 35% is a good rule of thumb.
This is also a good time to look at your ad spend and determine if you’ve been appropriately allocating your advertising across appropriate channels like Facebook ads, Google ads and even among the campaigns inside the platforms. You can take a deep dive into that here: Merchandising sheet
If you are below the Industry average for profit, then would recommend looking where you are over in your PNL – Ad spend or CODs and then re-visit on the tactics on how to fix them.
6. Fixed Costs
Next, you can evaluate your fixed costs. Unlike variable costs, these are the expenses that stay consistent across your eCommerce business. The most common fixed costs are:
Payroll
Opex, or operating expenses, are among the first things deducted from your PNL report. That’s because these costs include the daily operations of your business, like employee wages, rent for facilities, and other utility costs.
For Payroll as % of rev, you should always strive to keep them under 10%. If you are over that then you’re probably overpaying couple of executives significantly, diminish your profit margins and create a system that isn’t built for growth.
Agency Fees
Of course, there are some aspects of your business that you may need to outsource to other agencies. Working with a digital marketing agencies, for example – can help you build new customer acquisition funnels, improve customer retention, and utilize modern marketing tools like Facebook Ads or influencer marketing. Typically, these fees range between 4 – 7 %, depending on the scope of their work.
Other Costs
Now, it’s normal for fixed costs to vary between different industries. But regardless of what your other costs may look like, the total of these expenses should never rise above 20% of your rev.
On the other hand, spending less than 9% on fixed costs is a good sign that you’re underinvesting in your brand. So, the goal is to find that sweet spot somewhere in the middle that aligns with your unique growth goals.
7. Profit
Finally, you can start to set a target for your profit goals. Unlike other aspects of this process, there is NO set number in mind when it comes to profits but usually brands are looking for Profitable growth. This number is measured against your expectation of this KPI, if you are a Revenue focused ecommerce business then this might be very small, if you are a bootstrapped eCommerce business then you would want this number to be as big as possible. As this number is unique to every business we come up with ecommerce growth strategies that are in line with the unique profit goal you have
Ultimately, profit comes down to 3 key factors:
Revenue
By now, you probably understand how revenue plays into this equation. Using the metrics we’ve mentioned above, you should be able to quickly determine the revenue of your business using our spreadsheet.
Ad Spend
The second factor is the money you invest into digital marketing platforms. With ad spend, the goal is to spend the max amount you can spend while hitting your highest ROAS targets
MER
MER, or marketing efficiency ratio, includes the total sales of your products divided by the total marketing spend. This is sometimes referred to as a blended ROAS and can be used to assess the functionality of your current tactics so that you can develop new growth strategies as needed.
Part 2: How To Adjust The Core Levers For Success
So, now that you’ve used a PNL approach to map out the profits and costs of your business and evaluated the areas that can be improved, how can you make the necessary adjustments to fuel your growth strategies forward?
Essentially, you’ll need to utilize the two core levers for success, which can help you readjust your targets and reach more valuable CAC levels.
Lever 1: New Customer Revenue & Its Efficiency
This portion of your revenue can be broken down into two distinctly different categories that yield unique results for your business:
Paid New Customers
These customers arrive at your product pages because of paid marketing efforts. To make adjustments to this category, using:
- First purchase AOV, which will tell you how much new customers are spending the first time they shop with you. To increase this number, try creating additional offers that encourage them to spend more at checkout, like product recommendations, discounts, or shipping offers. Utilizing an AOV histogram to assess areas with untapped potential and devising tailored offers to address those issues can be an immensely valuable approach in this context.
- Ad spend allocation or the process of moving ad dollars away from less effective marketing campaigns and into better ones. You can learn more about how to do this here: LINK
- Paid CAC, which indicates customer acquisition costs for every piece of paid advertising.
Organic New Customers
Organic customers, or customers who reach your eCommerce business without paid marketing efforts, may not be as common, but they can still make a huge impact on your revenue. You can make adjustments to this category through the following:
- Pop-ups, This is the most underrated tactic to actually improve your Organic New customer acquisition, Split testing your Pop-ups Ruthlessly to try to improve email capture on site will actually help improve results of your organic efforts and even the “organic % of Rev” column. Naturally people you get from organic efforts like PR campaigns, giveaways,etc are not gonna be of the same quality as your Paid traffic and these customers will take more nurturing and longer purchase time windows and being able to capture more emails will end of day make you a better ROI on those efforts.
- Seasonal trends refer to the times of the year when sales naturally increase, such as holidays, so it’s a good idea to increase your marketing strategy during this time period, especially with product descriptions that match the seasonal moment.
- Brand building, or brand awareness, happens when you grow your Brand presence enough to reach potential customers without paid mediums. This can be done through social media, referral programs, SEO (Search Engine Optimization), events, PR and other branding tactics.
- Affiliates, which often fall under the umbrella of content marketing or influencer marketing. By leveraging the impact of popular online figures, you can build customer relationships just by placing your products in the hands of trustworthy people with an online following.
Lever 2: Returning Customer Revenue & Its Volume
When you have consumers making repeat purchases, creating a customer experience that builds customer loyalty and generates consistent results for your business is crucial. To do this, you can leverage tools like:
Returning AOV
Just like with new customers, there are methods you can use to increase the amount that returning customers are spending at checkout. One example would be to offer a loyalty program, which entices them with rewards for their spending and creates a more enjoyable user experience each time they shop .
Also depending on the price increases/ changes in the products you are pushing in post purchases on your email & SMS marketing programs can effect this AOV number greatly to.
So if you wanna try to increase your returning AOV, I would look at which products we are pushing on emails and see what other higher priced products can we cross-sell into that still is congruent to the customer journey ?
Retention Change over Baseline.
Customer retention is a huge part of your returning customer revenue. But unlike other approaches, we focus on calculating this by measuring LTV by email marketing rather than revenue alone. That includes things like cart abandonment emails and other email automation features and seeing how much 60-Day LTV we actually increased.
LTV
LTV, or lifetime value, is an estimation that predicts how much someone will spend during their entire customer journey with your business, beginning from the first time they purchase until the last. That’s why it’s important to carefully monitor the needs of your target audience, allowing you to keep them engaged with your brand over the long term.
Ready To Put These Growth Strategies To The Test?
Of course, these are just a few of the growth strategies we’ve used to catapult our clients into a higher level of CAC, fueling their growth for the next stage of their eCommerce business. If you’re ready to put these tools to the test for your own brand, connect with our team to schedule a free consultation today.
