The simple formula that powers profitable eCommerce growth

Introduction

Let’s be honest. Selling online isn’t rocket science. Throw a pair of knockoff AirPods on an add on Instagram, stick a bright red deal badge on it, and you’re bound to get a few buyers.

Thanks for reading eCommerce Ecosystem by Jamie Roller! Subscribe for free to receive new posts and support my work.

Yet, I’m always surprised at how often people overlook the fundamentals when it comes to growing their businesses.

I love hearing from growth hackers who talk about some leet strategy to 10x revenue, when it’s clear they don’t even know how or why their strategies work (and so have no business recommending it to others).

In this post, I’ll be sharing a simple 4-metric formula that I come back to again and again to drive growth in the online and ecommerce businesses I’ve run.

It’s simple maths and it works every time. It all comes down to traffic, conversion, and AOV.

Even for experts in this field, coming back to this fundamental equation is a fail-safe way to diagnose issues and figure out which tactics will have the biggest impact.

Then, I’ll give you a comprehensive list of ways to improve these metrics. You’re probably already doing many of these today, but there may be a few you can improve on - and a couple new tactics you can test and implement.

One important point: testing is critical. You need a before-and-after view of these metrics to understand which initiatives drive the biggest impact for your business. There’s really no point in putting any of these in place if you’re not doing some kind of controlled tracking.

But more on that later.

The formula is:

Traffic x conversion rate x Average order value = Revenue x Profit margin % = Net profit

Let's start with an example:

You are selling several online art courses on your website. You get 100 visitors per day. Every day, 1-2 of those make a purchase. Actually, you had 460 orders over the last year, or 1.26 per day. You have an entry-level course priced at $19, an intermediate course at $49, and an expert-level course priced at $199 aimed at your most dedicated students. Over the course of a year, you make $12,040, or an average order value (AOV) of $26.17. Your costs to set up, film, and host the course are $2,397 per year, so your profit margin is 72%, and your net profit is $9,643.

In the equation:

100 visitors x 365 days of the year x 1.26% people converting x $26.17 AOV = $12,040 revenue x 72% Profit margin = $9,643 net profit.

Sounds like a nice little business!

But you can do more by figuring out how to maximize each of the key metrics in the above equation.

You should be tracking these metrics on at least a monthly basis at an account level. It’s best to track weekly. Most online businesses have a weekly “cycle” of conversion and traffic, so you can compare the last 7 days to the previous 7 days, and the same 7 days last year.

You can and should also look at these metrics on a category or product level.

Let's dig in to some tactics that’ll help you push up each of these numbers.

Section 1: Traffic

Traffic can be measured by page views, the number of visitors to your page/site, or the number of unique sessions (an group of user interactions with your site or products - for example, a customer visiting multiple pages on your site over the course of a day is considered one session). Each of these numbers has their place, and I usually use sessions. Just make sure you’re always comparing the same number. To increase traffic, you can improve:

Search engine optimization (SEO): Optimize your website for search engines so that your products surface in searches and increase your organic traffic. This involves using relevant keywords, creating high-quality content, and improving your website's technical performance.
Content marketing: Publish high-quality content regularly to attract and engage your target audience. This can include blog posts, videos, podcasts, and infographics.
Organic social media: Build a strong social media presence to drive traffic to your website. This involves creating engaging social media posts.
Paid advertising: Use paid advertising platforms like Google Ads, Facebook Ads, or Instagram Ads to drive targeted traffic to your website. Bid on relevant keywords and drive ads to high-performing audiences.
Email and SMS marketing: Capture customer emails and cell numbers through a signup on your site and email and SMS them to promote new releases, deals, and reminders to purchase or take an action on your website.
Affiliate marketing: Partner with other websites or influencers to promote your website and drive traffic. This involves creating affiliate partnerships and offering commissions for referrals.
Guest posting: Write guest posts for other websites to promote your website and drive traffic.
Influencer marketing: Partner with influencers to promote your website and drive traffic.
Community building: Build an online community around your brand to drive traffic and engagement. This involves creating forums, social media groups, and other online communities where your audience can connect and engage with your brand. This doesn’t make sense for every business (and is a lot of work) so be thoughtful about whether this is right for you.
Referral marketing: Encourage your existing customers to refer their friends and family to your website. This involves creating referral programs and offering incentives for referrals.
And you can Consider international expansion: Tap into new markets and increase revenue by expanding internationally.

Section 2: Conversion Rate

Conversion rate refers to the percentage of website visitors who take a desired action, such as making a purchase or filling out a form. In this sense, we’re referring to what percentage of traffic converted to purchasing - i.e. purchases / sessions.

To increase your purchase conversion rate, you need to:

Optimize your website: Make sure your website is easy to navigate and has a clean design. Make sure your website is secure and displays trust badges to reassure visitors that their personal and financial information is safe (duh). Make sure your website is mobile-friendly and optimized for mobile devices. Make sure your website loads quickly to avoid losing visitors due to slow load times.
Improve your product pages: Use high-quality images and detailed product descriptions to help visitors make informed purchase decisions.
Offer multiple payment options: Make it easy for visitors to complete their purchase by offering multiple payment options.
Simplify the checkout process: Make sure your checkout process is simple and easy to complete.
Use social proof: Display customer reviews, ratings, and testimonials to build trust and credibility with your audience.
Offer incentives: Provide discounts or other incentives to encourage visitors to make a purchase.
Use scarcity tactics: Create a sense of urgency by using limited-time offers or low stock notifications to encourage visitors to make a purchase.
Retarget visitors: Use retargeting ads to reach visitors who have left your website without making a purchase and encourage them to return.
Use exit-intent popups: Offer visitors a discount or other incentive to encourage them to make a purchase before leaving your website.
Target customers who have abandoned their carts: Promote offers and follow up with visitors who have abandoned their carts through email marketing.
Provide customer support: Use live chat to provide customer support and answer any questions visitors may have about your products.
Personalize your website: Tailor your website and offers to each visitor's interests and preferences through personalization.
Offer satisfaction guarantee or return policy: Reassure visitors that they can shop with confidence by offering a satisfaction guarantee or return policy.
Use gamification techniques: Engage visitors and encourage them to make a purchase through gamification techniques such as quizzes or interactive elements.
Use chatbots: Provide instant customer support and answer frequently asked questions through chatbots.

Section 3: Average Order Value

Average order value (AOV) refers to the average amount of money customers spend on each order. AOV is the lifeblood of your business: The smaller the value of customer orders, the more your costs will make up as a proportion of that order. On the other hand, if every customer is placing a large order, you can more easily cover the cost of delivery or shipping, and you’re paying back any marketing expenses made to acquire that customer faster.

AOV is also a critical driver of Lifetime Value (LTV), which is probably the most important metric you can look at in your online business (I’ll write more about this in future post).

Some ways to improve AOV:

Expand your product offerings: Especially high value products. What you’re trying to do is encourage customers to buy multiple products on every visit.
Bundle products: Offer product bundles or packages to encourage customers to spend more.
Offer free shipping after a certain threshold: Set a minimum order value to qualify for free shipping to encourage customers to add more items to their cart.
Use upselling and cross-selling techniques: Encourage visitors to purchase complementary products or upgraded versions.
Create a "buy one, get one" offer: Encourage customers to buy more by offering a "buy one, get one" offer on select products.
Offer volume discounts: Encourage customers to purchase more by offering discounts for larger quantities.
Offer a free gift with purchase: Incentivize customers to spend more by offering a free gift with a minimum purchase.
Create product bundles: Bundle multiple products together at a discounted price to encourage customers to buy more.
Introduce a loyalty program: Offer rewards or discounts to customers who reach a certain spending threshold or make repeat purchases.
Offer financing options: Allow customers to finance their purchase to make larger purchases more affordable.
Create a VIP program: Offer exclusive perks or discounts to customers who spend a certain amount or make a certain number of purchases.
Offer customization options: Allow customers to customize their order with additional features or accessories for an additional cost.

Section 4: Profit %

Profit margin is the percentage of revenue that is left after deducting expenses.

Gross margin includes all costs of goods sold (COGS). Contribution margin is gross margin less all variable costs, such as refunds, returns, and shipping costs, and marketing costs. This is the money you have to go to covering all your businesses fixed expenses, like salaries. You should be looking closely at your contribution margin on a regular basis (monthly at least) and looking for ways to improve it.

To increase your contribution margin, you need to:

Reduce costs: Look for ways to reduce your costs without sacrificing quality. Negotiate pricing with your suppliers, cut unnecessary expenses, improve operational efficiency. You should be reviewing your costs on a regular basis, preferably against industry benchmarks.
Increase prices: It’s always worth testing price increases and seeing how they impact your bottom line. What you’re looking for is that even if unit sales slow, does contribution profit increase? There’s a sweet spot where you’re maximizing profits - find it.
Focus on customer retention: Offer loyalty programs, personalized experiences, and exceptional customer service to retain customers. The goal is to maximize every dollar you spent on marketing.
Implement a subscription model: Create recurring revenue from loyal customers by implementing a subscription model.
Diversify revenue streams: In addition to products, offer services, courses, or events which have better margins to improve your overall profit.

The most important thing

I said it above, and I’ll say it again. The most important thing you can do is test, and test smartly.

You should be experimenting with A/B testing - different website designs, product pages, and offers - to see what works best for your audience through A/B testing.

You need to be able to isolate any of the changes you’re making to understand the impact they have on the formula, so don’t run the same tests in parallel to the same group of visitors.

If you change prices at the same time as making merchandising changes and driving more traffic to your site, it’s going to be very hard to determine what worked. You may “10x revenue” but do you know why? Can you replicate it?

If you run your own store, you can run multiple tests at a time by funnelling only a portion of your traffic to a certain test you’re running.

For example, in simple terms:

Some visitors will see your existing merchandising and pricing (this is the control)
Others will can see your updated pricing with the old merchandising
Others will see your old pricing with the updated merchandising

Measure the changes to conversion rate, revenue and profit for each of the tests, and you’ll have an idea of how these changes impacted your equation.

So there you have it - the simple formula and 40+ ways to drive growth in your eCommerce business.

Remember, it’s important to experiment with new and creative ideas. To understand how they impact the impact your top- and bottom line (and which are the most impactful) - always be testing.