My e-commerce clients typically ask me “How can you increase my e-commerce revenues?” My answer usually references what I have dubbed The E-Commerce Equation. In this equation R= revenues, V = site visitors, L/V = ratio of leads per visitor, C/L = ratio of customers per lead, AOS = average order size, F = frequency of purchase and LTV= lifetime customer value.
With these abbreviations in mind, the following formula determines a site’s e-commerce revenues:
R= V x (L/V) x (C/L) x AOS x F x LTV
By definition, there are thus 6 ways to increase e-commerce revenues. You need to increase: 1) the amount of traffic coming to your site, 2) the percentage of visitors that convert to leads, 3) the percentage of leads that convert to customers, 4) the average order size per purchase, 5) the frequency of purchases made by your average customer and 6) the lifetime value of purchases made by your average customer.
Whenever you increase the values of any of these variables, you will succeed in increasing your overall e-commerce revenues. Therefore you will need to increase as many of the variables in the e-commerce equation as possible in order to maximize your revenues. It’s important to state, however, that revenues only represent the top-line of your income statement. To improve your bottom-line profits you will need to leverage the most cost-efficient ways to increase each these variables. For instance, you not only need to increase your customer acquisition rates, but reduce your costs-per-acquisition to improve the profitability of your e-commerce site. To ensure profitability, you will need to have the metrics, knowledge and discipline required to test different tactics to increase the value of each variable so that you leverage those that optimize your ROI, or return on investments, for each dollar spent.
How to increase the revenues and profitability of each variable in the e-commerce equation is worthy of its own blog post. In the next post, we will examine the most powerful and cost-effective ways you increase the first variable, increasing the amount of traffic that comes to your site.
Meanwhile, what other variables do you think impact the revenues of e-commerce sites?