Measuring your return on investment is really important for you to better know your e-commerce sales performance and marketing impact across the different strategies you put in place. This can be as simple as understanding the impact of a new UX implementation or as complex as measuring the return of an entire new PPC campaign. The point is: is it worth the time or money that you invest into it?
Of course e-commerce ROI calculation depends on what you want to learn about the state of your online store. There are several essential formulas for you to remember to better analyze your e-commerce state. While this can be tricky, it’s worth it to know if your campaigns or changes are doing good things for your sales. Let’s have a look.
Monetary ROI, the Basic
The basic monetary ROI is the easiest and also the most used measurement as it is simple and intuitive. You only need to divide the money generated by the amount of expense you had to spend to make the sales happen: ROI = (money earned – money spent) / money spent.
So you take the simple amount that you have earned from any given action (UX change, social or digital campaign, etc), and you subtract the amount that you’ve spent on that change. You then divide this product by the amount of money that you’ve spent.
Even though it can still give you an idea of how your business is going, when it comes to measuring your e-commerce ROI, the simplest way is not always the most accurate. By using this simple method you are not able to identify the channels or the campaigns that brought your customers to your store.
This lack of information is critical when you run an online store, since there are big differences between your customers. If you take into account that your very best customers (which usually represent no more than 1%) tend to spend 30 times more than your average customer, you definitely want to identify them and analyze their shopping habits. By doing so, you will be able to tailor your acquisition strategy depending on their expectations. But you cannot achieve this by using the simple monetary ROI measurement above.
It’s also important to consider time as a monetary value as well. Even if you manage to do your campaigns for free (and it’s definitely possible to do so), if you spend quite a bit of time on it, it may not have a great ROI. The easiest way to calculate your time is to ask yourself what you would be doing with your time if you weren’t working on the action you’re measuring.
Then, decide how much you would make doing that. How much is it by hour? By day? Is that time worth it for the return that you’re getting for your campaign? Then follow the formula above.
The Customer Lifetime Value ingredient
If you were to have only one ROI to include in your e-commerce marketing strategy measurement it should be the “Customer Lifetime Value” assessment. The name of this metric can be a little bit scary but it’s actually really simple as it measures the profit your business makes from any given customer.
First of all, what you need to do is analyse your database and find the channels that brought your customers to your online store. Then you include the corresponding expense to the formula. The calculation now looks like that: ROI=(Customer Lifetime Value/Communication channel expenses)/Communication channel expenses
So the return on investment is the customer lifetime value, or the amount you earn per paying customer, divided by the expense of the communication channel that they use to come to your store. You then divide that sum by the expense of the communication channel again for your e-commerce ROI.
Customer acquisition strategy is essential to any business of course, but getting actual customers to repeat purchases is actually even more rewarding in the long run. In general, online stores get a little bit more than 40% of their profit from their loyal customers, but some of them actually managed to get as much as 75% of their profits thanks to those repeat buyers.
Maybe it is time for you to consider modifying your strategy if not done yet. Using Customer Lifetime Cycle ROI is actually a good way to identify the 1% of those super customers that you want to please the most and figuring out how to keep them coming back.
How to use Customer Lifetime Value?
CLV is very useful to measure e-commerce ROI and help you in your business decision making process. For example you can assess how much to spend on your next acquisition marketing campaign, how to customize your products to fit your customer’s’ expectations, determine the number of e-mails to send to what customer segment and when, in order to bring them back, and etc.
Use Marketing ROI to Refine your Strategy
If you want to improve your marketing strategy, you will need to determine your acquisition cost, so that you can compared it to your customer lifetime value result and adjust. The formula is this one: Acquisition cost = Acquisition expense / Number of new customers acquired
In this case, you would take the total amount that you’ve spent on acquisition (campaigns, etc) and then divide it by the number of new customers acquired. This will tell you the overall cost per new customer for your campaign and give you a clear indication as to how well it’s working.
Why is acquisition cost a great e-commerce ROI to measure then? New e-commerce businesses open everyday and everything is to be built from scratch. The customers and the search engines are discovering your site, and it will take (a lot of) time, before you see a significant monetary ROI result.
This is the reason why it is important to focus on other measurements like marketing ROI, and to understand that if you manage to at least recover your expenses on marketing at the beginning of your activity, you actually did a good job.
If you want to know more about your investment to increase your visibility, then you can also measure ROI based on paid search, but keep in mind that ROI on organic search will be much more interesting knowing that organic visibility is the one that costs less in the long run.
Whether it is about money investment, customer life cycle, or marketing efficiency, measuring the right e-commerce ROI is crucial to know the state of your e-commerce and plays an important part in your business decision making process.