Ecommerce Revenue Equation [The Ultimate Guide]
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This guide (affectionately named “The Ultimate Guide to the Ecommerce Revenue Equation”) will teach you a foundational strategic framework for growing your ecom business – one of a few strategic frameworks that every ecommerce business owner AND employee should know.
In other words, we are going to give you a formula (a perspective really) – one way to look at your ecommerce business and easily break it down into manageable building blocks.
Once understood, these building blocks can help you focus and align your efforts so you can more easily grow your business.
We’ve condensed years of learning into this guide in an effort to help you.
To give you: 1) A fresh perspective, 2) A tool to grow your business, 3) And a few things you can do TODAY to focus your efforts.
The Revenue Equation
So, what is the Revenue Equation? It is revenue = traffic x conversion x aov.
Let me explain.
If you had 10,000 people visit your website last week (traffic) and 3% of those people purchased something (Conversion) and their average order value or basket size was $100 (AOV or Average Order Value), then you would have made 10,000 x 3% x $100 = $30,000.
This formula gives you a structured way to think about your business. If you improve any of the three variables (traffic, conversion rate, or AOV) you can make more money!
Now, the million dollar question… how do you change those three variables?
Breaking Down The Building Blocks – Conversion
What levers can you pull to increase conversion?
Let’s do a quick recap on the conversion rate formula.
Conversion Rate = Orders (or desired event) / Traffic.
In other words, if 5 people purchased (or took some desired action – like signed up for email) and you had 100 people come to your website/landing page, then your conversion rate would be 5% ( 5 (orders)/100 (sessions/visits/traffic) =5%).
So, how do we get more conversions or more people to convert or purchase?
You can take one of three approaches.
- Increase the quality of your traffic
- Increase the number of orders coming from your current traffic
- Increase the total traffic and keep conversion rate the same.
In other words…
- To improve quality of traffic you can optimize your current marketing efforts. You can look at the way you are setting expectations with your advertising. You can be more relevant as you communicate with current customers via behavioral marketing. And you can focus on those ready to purchase (further down the funnel) first. There are many other ways you can improve the quality of your traffic. Feel free to schedule a brainstorming session if you want some additional help.
- To improve the number of orders from your current traffic, you focus on making your website better – improving the website experience/funnel. You could make checkout a more friendly experience. Or you could improve your product page (reviews, product copy, images).
- Finally, to increase the amount of traffic you either optimize a current marketing channel or add an additional marketing channel (the digital channels are: Email, Paid Search, SEO, Affiliates, Display Advertising, Social Media).
Let’s dive into #2–improving orders from your current traffic and explore some things you could do to improve your website today.
A client (who we will call Shasta), sold beautiful, hand crafted or hand block-printed table linens (tablecloths, cloth napkins, etc). Shasta’s products were often priced double the going rate for similar products on the market. Prints were custom designed inhouse and product was limited-run, meaning only a few products were produced and sold per given print. You could only purchase their product on their website. Sounds like a really cool company – a company with a ton of potential, right? It was.
Shasta only had one image of their product on their product pages. Some products had maybe one or two half-hearted sentences describing the product and there were no reviews (social proof) backing-up what current customers already understood – that the product truly was high quality and worth the price.
When potential customers found Shasta’s product (via a Google Product Ad) and noticed the price was double the other products they were seeing, the potential customer would immediately form a question in their mind…
“Why is this product more expensive than the other (similar) products I am seeing?”
When the potential customer clicked through, because there was little to no copy educating the potential customer on why Shasta’s product was so amazing, no reviews from past customers detailing the product’s incredible quality and only one poorly shot image to set expectations about what the customer would receive, the number of potential customers that purchased was less than one third of one percent of all the traffic that came to the website. Ouch.
What principles can we take away from this story?
RECAP: your funnel. A typical website funnel for ecommerce might include:
- an individual coming to your website,
- the individual clicking into a category/subcategory/product grid page,
- the individual finding a product they want to take a closer look at,
- the individual clicking the product to view the product details page,
- the individual adding that product to the shopping cart
- and finally, the individual purchasing/checking out – if all is well.
Looking at step 5 in our funnel outline above, please notice it is the step immediately preceding the customer purchasing. In order to purchase a product, the potential customer must add the product to the shopping cart.
If you can increase the number of people adding products to the shopping cart, you will potentially improve the number of orders you receive… right?
So, improve your product page today and get more people to add product to their shopping cart.
How can we get more people to add products to the shopping cart?
Going back to our story, a potential customer typically needs to see three things on a product page to feel comfortable enough to purchase your product.
1) Product Images and/or Video. Potential customers want to see what the product looks like. The front. The back. The top. The bottom. The side. Inside. Ultimately, product images enable potential customers to visualize what they’ll get when they purchase. Adding additional images showcasing the product in context (lifestyle photography or video) increases the probability of purchase because you make the customer feel more comfortable with what they will receive if they purchase and help them visualize using the product themselves. You may even inspire them to want to live the lifestyle.
Caution – Not all images are created equal.
Depending on your vertical, better quality (professionally shot images) can make a substantial increase in the trust consumers feel about the product. Conversely, some verticals (like womens clothing) can often include “real” women (not models) wearing the clothes with less quality images (along with the professional ones) which for one client almost improved conversion by over 40%.
Ultimately, the question you need to ask is how to best set expectations about the look, feel, and trustworthiness of your product.
We recently reshot and relabeled (repackaged) a client’s beauty products and saw their average order value literally double just with the photography and product update change. The hypothesis: the new photography increased the products trustworthiness.
2) Product Description. Product descriptions are not just fluff. This is your one shot, your one opportunity to educate customers on value proposition and help them feel something. In other words, we must answer the question: “if I am your ideal customer, why should I purchase this product from you vs one of your competitors?” (Thank you Flint McGlaughlin of Meclabs for the value prop definition).
If your product is unique, you might answer: why should I pay more for your product than for a similar product that costs less? What is so special about this product AND why should I buy it now?
Including this information with an urgency and scarcity component is critical to improving conversion.
3) Social Proof. Finally, and I hate to break this to you, potential customers don’t trust what you tell them about your own product. You’re biased. You need others (who’ve purchased the product) to share their opinion and back-up your claims.
Angie Schuttomier has a great framework that helps think through social proof. https://www.youtube.com/watch?v=PpBsL2euql0
Studies show that 9/10 customers read reviews before purchasing a product.
Invest in reviews and other social proof. They’re CRITICAL.
Breaking Down The Building Blocks – Traffic
That leads us to traffic.
Again, we have two options here:
- Increase traffic
- Keep the same amount of traffic and improve traffic quality.
Let’s start with increasing traffic.
There are many marketing channels or methods you can use to get traffic to your website. Some of which are highlighted below.
- Email (Marketing/Transactional/Behavioral)
- Paid Search (including Google Shopping/Product Listing Ads)
- SEO/Local SEO
- Social Media
- Display Advertising
- Direct Mail/Catalogs
- Word of Mouth/Referrals
- Public Relations
- Influencer Marketing
- Content Marketing
- TV Ads
Ultimately, understanding your customer is critical here. Questions you might ask to improve traffic quantity and quality could be:
- What does my “best” customer look like? What is the best customer profile? Can I take that profile and find others like them across the internet?
- What is my customer’s pain-point? What problems does the product solve for them? Have I asked the customer directly and then used their language to message back to them how our product solves that pain-point?
Each channel works both dependently AND independently of each other. In other words, you run each channel by itself. And each channel takes a specific skill set and knowledge to run. BUT taken as a whole, the more channels you turn on, the more touch points you have to engage customers at critical junctures of the customer journey and improve the chances of potential customers learning about and exploring your brand.
Breaking Down The Building Blocks – Average Order Value
Average order value is the average value of your orders for a given period of time. So for the year 2017, if you had 100 orders and you made $50,000, then your average order value (AOV) would be $50,000/100 = $500.
5 Ways to Increase Average Order Value
There are a number of ways to increase AOV. We’ve found five are used regularly and with great success.
- Cross Sells
- Offering a discount at a threshold
- Offering Free Shipping at a threshold
- Product Bundling
Upsells are when you take a product and get someone to purchase a higher priced product instead. So, if you had a 120z container of organic body wash and when someone adds that 12oz body wash to the cart you pop-up a message that says something like: “Our 120z body wash lasts approximately 15 days or for 15 showers. Buy the 24oz body wash for a month’s supply,” this is an upsell.
If you test your messaging, you can often get repeat purchasers to choose the higher priced product.
If you have a shopify website, you can use the Bold Cross Sell App to Upsell, Cross sell, and one time offer customers.
Cross Sells are when you get customers to buy a complimentary product. If someone purchases a little black dress, get them to buy the handbag, the necklace, and the pumps to complete the outfit.
At Overstock.com, we used threshold discounts all the time. Threshold discounts like $15 off $100 or $25 off $200 seem to resonate well. Use these threshold offers with your affiliate partners or on your coupon pages. For any offers, make sure there is an expiration date to protect you legally AND to drive urgency.
Free shipping is a strong motivator for customers. Surprisingly, at Overstock.com, we found that free shipping often motivated customers to purchase more than a 10% off or threshold offer. In fact, one of the top reasons for shopping cart abandonment is lack of free shipping.
We suggest taking your current average order value and testing percentage increases as a Free Shipping Threshold. For example, if your AOV is $50, then test a 20%, 30%, and 40% lift (so increasing your free shipping threshold to orders of $60+, $65+, $70+) and see what happens with your AOV and conversion rates. Remember, we are after a total increase of revenue, not just an AOV increase. So be mindful of the total impact.
Finally, if you can create bundles of product (for example: the complete outfit with a one click add to cart), you’ll find AOV’s increasing.
Now, to sum up.
The revenue equation is made up of three variables… Traffic, Average Order Value, and Conversion. By looking at your business through this equation, you can see areas to study, implement, and focus on that can help drive sales and make you more money.
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