This article originally appeared on Outlook Start-up.
GROWTH THAT COMES at the expense of profitability can be a double-edged sword. Unprofitable growth not only hurts the value of a company but can also lead to operational challenges and financial instability.
Think about the number of brands that launched with products whose demand fizzled out quickly, and they had to either pivot or shut down the business.
Cracking the Code
In a continually evolving market, your ultimate goal should always be to achieve sustainable growth balanced with profitability that prepares you for change. And this is where the "ecommerce Growth Equation" comes in. It's expressed as:
Revenue = Traffic x Conversion Rate x Average Order Value
With the help of this equation, ecommerce businesses can strategically optimise their campaigns for short-term profitability, focusing on the major revenue drivers: traffic, conversion rate, and average order value. You can fine-tune your strategies based on your current performance.
If you want to increase your traffic, you can increase your marketing efforts, SEO, and advertising strategies. This will help you attract more potential customers to your online storefronts. And this influx of traffic will bring immediate growth in the short term.
Traffic, Conversion, Value: The Power Trio of Ecommerce Success
Similarly, a high conversion rate is gold for ecommerce businesses. The Growth Equation allows you to make data-driven changes to your store content, user experience, and sales funnel, which increases the likelihood of turning visitors into paying customers.
Another important aspect of this growth equation is increasing the average order value. Cross-selling, upselling, and bundling complementary products can all contribute to more significant transactions, directly impacting the bottom line.
Metrics that Matter
Moreover, the equation also helps in performance tracking, enabling ecommerce businesses to measure the impact of their optimization efforts.
Firstly, it allows businesses to track the performance of their marketing and advertising efforts by monitoring the traffic component.
By closely examining the traffic sources, businesses can identify which marketing channels drive the most visitors to their website. This data enables them to allocate resources efficiently, focusing on the most effective channels and optimizing their marketing strategy in real time.
Secondly, the equation helps monitor the conversion rate, which measures the efficiency of converting website visitors into customers.
Optimising Every Click
By continually tracking and analyzing this metric, you can pinpoint areas of your sales funnel that need improvement. This data-driven approach empowers you to make real-time adjustments to the user experience, product offerings, or pricing strategies, ultimately enhancing the conversion rate and driving higher revenue.
The ecommerce growth equation is also quite helpful for businesses looking to work on their long-term growth strategy, where the focus shifts from quick wins to sustained success.
For long-term growth, ecommerce companies must recognise the importance of data-driven decision-making. The growth equation comprehensively analyzes customer behaviour, market trends, and historical data. By drawing insights from these data points, businesses can make informed, strategic choices that position them for sustainable growth.
Equation in Action
With this equation, Ecommerce companies can also identify revenue growth opportunities. For instance, if a product is in high demand, companies can increase their promotional budgets to boost its visibility, increasing its demand and potential sales.
Let’s understand how this equation helps balance short-term profitability and long-term growth.
Let’s say your ecommerce business specializes in premium coffee products. Using the ecommerce Growth Equation, you can make strategic changes. You can increase average order value from, let’s say, $30 to $40 by bundling complementary products and your conversion rate from 2% to 3% with enhanced website user experience.
For long-term growth, you can expand your product line to include organic, ethically sourced coffee beans and accessories, appealing to eco-conscious customers. Additionally, you can invest in digital marketing to boost website traffic by 20%.
With this approach you might find that your monthly revenue has increased from $50,000 to $60,000. What's more, it has helped lay the foundation for sustained long-term growth as your customer base keeps expanding. This is the power of the ecommerce Growth Equation in striking the right balance.
Maximising Impact in Real Time
Another equation—the Profit Equation—helps ecommerce businesses optimize their margins from the outset to ensure profitability is the base of their operations and processes.
Profit = Revenue - Cost of Goods (CM1) - Logistics Costs (CM2) - Marketing Spends (CM3)
The Profit Equation complements the ecommerce Growth Equation, allowing companies to fine-tune their cost structure, ensuring their business remains profitable.
It enables businesses to understand the various cost components, address inefficiencies, and work towards sustainable and balanced profitability and growth.
Let’s say you want to increase the short-term revenue growth of your ecommerce business by running a promotional campaign. Using the Profit Equation, you can closely analyze the relationship between increased Marketing Spends (CM3) and the resulting boost in revenue. This data-driven approach ensures that the promotional campaign does not erode profitability.
Simultaneously, it keeps a close eye on the logistics costs (CM2) and the cost of goods (CM1), maintaining a balanced equation that safeguards long-term financial health.
With the help of the profit equation, ecommerce businesses can monitor and manage their costs while focusing on driving revenue. This approach aligns profitability with sustainable growth.
Returning to the initial question - can ecommerce companies balance short-term profitability and long-term growth using the profitability equations? Yes.
The equations we mentioned here help companies find the right balance between short and long-term goals to ensure that ecommerce businesses keep making money now and in the future.
Authored By Prem Bhatia, Co-Founder and CEO, of Graas.
21 Nov 2023