There is One Thing Owners Must Know in eCommerce
There are endless things you can know in eCommerce - but there is one thing Owners MUST know. They must know that eCommerce complexity converges down to a simple maths equation about PROFIT
I've watched 4 large Merchants collapse where £250,000,000 ARR evaporated. The Owners knew their market and business well - but they made one bad decision because they didn't know a basic maths equation. The decision led to uncontrolled Traffic Spend that rapidly killed their business.
What drives eCommerce is not VISIBLE - it is something that no one can control - Markets and Demand. Yet there is a simple way to SEE how eCommerce DEMAND manifests, and this VISIBILITY is based on simple maths. When you embed this maths into everything, each action gains context and a Merchant gains CONTROL.
Simple Maths Forms the Entire Foundation of eCommerce
Sessions X Conversion Rate X AOV = SALES
The eCommerce Sales equation is the only way to think clearly about any action in eCommerce. Every action we take can only change the Number of Sessions, the Conversion Rate OR the Average Order Value - positively OR negatively. That's ALL we can change.
This eCommerce Sales equation proves true now, tomorrow and while websites exist as a buying mechanism.
SALES - Cost of Goods = “GROSS PROFIT”
Of course eCommerce is not about Sales - it is about PROFITS, so we start to go further. From Sales we can easily calculate Gross Profit. Merchants will have set a Gross Margin % - we simply take off the Cost of Goods Sold (COGS) to get to “Gross profit” above.
⚠️⚠️⚠️ WARNING - THIS IS WHERE YOU LOSE CONTROL ⚠️⚠️⚠️
⚠️⚠️⚠️ GROSS PROFIT - TRAFFIC SPEND = “eGROSS PROFIT” ⚠️⚠️⚠️
Traffic Spend is a necessity in eCommerce - but it must be controlled to make Profit. To hand Traffic Spend responsibility to an Agency BEFORE understanding the maths can be fatal. The Agency has NO RISK but a Merchant has to pay Google, Facebook etc regardless of results.
This critical STEP often missed by Finance Departments is the step that trips up the industry. Traffic Spend is a dangerous variable “Cost of Revenue”. The maths above isolates this variable Cost - “eGROSS PROFIT” is the “Gross Profit AFTER Traffic Spend”.
Traffic Spend has no upper limits - it can be 5% Cost of Revenue and with one error it can be 25%. That's the loss of £200,000 Net Profit lost per £1million of sales - but even a 4% change in CPA can put a Merchant out of business.
💰 “eGROSS PROFIT” - OVERHEADS = NET PROFIT 💰
The final step is to take off the Overheads. Of course some Overheads could be classed as Cost of Sale like Shipping and Credit Card fees - but it does not make much difference - eCommerce Overheads are relatively stable around 15%. They just require vigilance. After Overhead deduction we have arrived via simple maths to the most important number of all NET PROFIT.
So What is the Thing that Owners Must Know in eCommerce?
Owners must know the maths from SALES TO NET PROFIT and know the right questions to ask of their teams. "What are my Sessions, Conversion Rate, AOV? What are my Sales? What is my Gross Margin? What is my Gross Profit? What is my Traffic Spend? What is my eGross profit? What is my CPA%? What is my NET PROFIT? "
Owners can take control of their business from this Maths and create a way to THINK and ACT in eCommerce that is logical.
IRP has spent decades building technology around the maths of profit and Traffic Spend control. We call IRP a "FOR PROFIT ECOMMERCE PLATFORM AND SERVICE MARKETPLACE".
Know the Maths - Ask the Right Questions
