Using Data For E-commerce Growth – A Quantitative Approach
Data doesn’t sound very exciting in any field, but it turns out it may be the game-changer in ecommerce.
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Do you want to grow in a wildly competitive business? Do you want to scale to the next level and be profitable?
Then you should be looking at your business numbers for opportunities. Yes, growth opportunities lie right in your performance metrics.
Let’s say you are in the following situation:
you have maxed out all your resources and done everything you could to sell and grow.
This gives you a clear idea where you’ll get in 2 years. Using Drew Sanocki’s (Nerd Marketing) formula, you can calculate what your revenue will be in 2 years.
Revenue = AOV x Orders per customer x Number of customers
It’s a good one because it shows the impact of both retention and new customer acquisition on growth.
It’s easy to predict your organic growth at the same rate of acquiring new customers and increasing your AOV and orders per customer, without any extra resources. That’s your base.
In this situation, you should be thinking of putting more resources into your business to fuel growth.
Let’s say you decide to reinvest some of your profit and/ or extra time to work on growth. The big question is HOW EXACTLY?
Data holds the answer. A play with your KPIs will show what you can move up or down in order to get the growth in revenue you want.
The Growth Mindset
Of course, you want to grow, but going for it in the right way can make all the difference.
Set yourself realistic goals
This is hard but will save you efforts and money going after things you can’t achieve by any means.
Look at you current state – say you have 25,000 customers. Can you get to 100,000 in 2 years? Most probably not.
How long can you grow at the same rate?
Even if your growth rate now is satisfactory, for how long can you keep it? Because costs go up and ads stop working, and you’re running out of audience…What’s your market size? Is it saturated? These are eye-opening questions to ask yourself.
Focus where there’s room for growth
Maybe you can’t do much about your conversion rates or referral program, but surely there are other areas you can improve.
Many seasoned entrepreneurs will tell you that dropping what cannot be fixed and focusing on the opportunities gave them the needed boost. You can’t fix everything so put your efforts where it will move the needle.
Which leads us to…
Effective use of resources
Let’s say you have $10,000 to invest in your ecommerce business. You could do many different things with that money, but what has the greatest influence?
The key to growth is to use your resources smartly to get the most impact at the best cost.
Growth needs balancing.
Bump up the metrics with sustainable impact
To grow, as the revenue formula shows, you have to work on AOV, orders per customer and number of customers.
Is it easier to increase AOV than the number of customers? Or getting more orders per customer is the easiest? It depends on your niche and products, but still, acquisition is typically easy, but costly – you pay to play – and doesn’t guarantee anything long-term.
On the other hand, AOV and orders per customer are retention metrics and optimizing them will mean more sustainable growth over time because of their prolonged effect.
See, growth cannot happen without looking at data. Data leads the way and puts your focus on the right things.
Ok, now that we’ve laid the basics of the growth mindset, we’ll play out a few scenarios to see acquisition and retention affect revenue in the long run.
Data practically shows us the right direction.
Your target for growth
*This is a fictional example and the numbers and conclusions are not universally valid for all e-commerce businesses. The idea here is to show how data-driven decision-making process goes.
Here’s a data-driven approach to growth and how to make an informed decision.
First, download the template here on which you will be working.
Let’s say your current state is as follows:
$10,000 = $20 x 5 x 100
(You make $10,000 in revenue with $20 AOV, 5 orders per customer and 100 customers.)
And your average growth rate is 15% yearly so by the end of year 2 you expect to be at $13,225 revenue organically.
Your target revenue for 2 years from now, though, is $20,000. You see immediately it’s not possible without an additional investment.
Let’s say you have $5,000 to invest. What in?
Assume the following costs:
To increase AOV by $1 = $500
To increase orders per customer by 1 = $1,500
To acquire 1 new customer = $60
Which means for these $5,000 you can do as much as:
Now, we check if we can put all money on just one metric and reach the target with it. That’s a calculation if you can afford with that $5,000 to bump up only 1 metric to the level needed to hit the target:
The math shows that you cannot. Of course, this is a coincidence that serves the purpose of our example because it’d be too easy to just put the money on 1 metric and hit your target, but it really happens so in real life.
That’s why we’ll now try to balance out the costs and the effect of the metrics in a more efficient way. You need to start thinking how to best distribute your extra resources to impact any of these 3 metrics.
Variant 1 explores what would happen if you increase a bit AOV and invest a lot in new customer acquisition. The result is better than the projected organic growth, but far below the $20,000 target.
In Variant 2, the bet is on orders per customer, but the result is even worse.
Variant 3 distributes budget between all 3 metrics: a bit for AOV and orders per customer, and more for new customers. The result is better than the previous two, which comes to show that each metric has a positive effect on the overall goal.
Variant 4 pushes AOV and acquisition to the limits and the result is the best we can get. True, it’s under the target but very close – and $6,000 over the organic projection (and more than the invested $5,000).
You can play out the same game with your real numbers and see what it means for your business case.
It’s a matter of optimizing each metric so you can grow at a realistic rate.
You have to find what’s realistic to achieve because you have limited resources and cannot maximize all metrics.
The idea is to get you into this way of thinking where numbers and data are not your enemies, but your guiding light.
They help you run your business in a more efficient way and justify your decisions with solid facts, not gut feeling.
Hope you do this type of analysis for your business and grow to the next level!