The Magical Mystery eCommerce Revenue Formula

The Magical Mystery eCommerce Revenue Formula

When we ask eCommerce merchants what they want, the answer is always “More Sales.” Duh! But saying you want “more sales” is like saying a politician wants “world peace.” It seems like a simple statement, but it’s really a dodge because it doesn't require or compel any tactical and practical action. Let me explain. 

A lot of online merchants and entrepreneurs THINK about wanting more sales and then try to figure out what to do to get it – more emails, more marketing, more product, more something else. The truth is that – even for small eCommerce shops – “More Sales” is just too big and general of a topic. The reality is that they are jumping over the most important parts.

And here’s the Golden Key … “More Sales” is not an objective at all … not really. This is the Magical Mystery of it all. Your success in acquiring “more sales” is a direct RESULT of doing other things.

You’re probably saying “Objective, Result … same thing!” Nope. Your objectives should be to accomplish other, smaller things that each yield specific RESULTS that are the real Key Performance Indicators (KPIs) of your success. The correct way to think about boosting that top-line revenue is in reverse and in these smaller, actionable chunks.

Your Total Sales – your top-line revenue – is made up of three things and ONLY three things:

  • Average dollars per sale (A$)
  • Number of customers (#C)
  • Number of individual transactions per month/customer (#M)

Magic Sales and Revenue is Shopify eCommerce Blog Post

It’s Not Magic … It’s Math

Remember that time you heard somebody say “Why did I have to learn algebra in high school, I’m never going to use it.” Maybe you said it yourself. Well, it’s time to eat those words so that your family can eat better at the dinner table. Because top-line revenue is a simple multiplier of these three variables: 

Average dollars per sale (A$) times Number of customers (#C) times Number of individual transactions per customer (#T) = Total revenue (TR)

A$ x #C x #T = TR

I used to imagine that this didn’t apply to some businesses that were seasonal or that relied on one-off sales transactions. But the more I thought about it the more I am convinced that there are no exceptions.

Both The Beauty And The Tragedy

Now before you roll your eyes and tell me that I am over-thinking it, the truth is that this is not my invention. This is what we marketing types focus on every single day because it is actually a sublime level of simplicity that brings clarity of thought and purpose.

The tragedy is that most merchants focus on only one of these variables, and it’s almost always #C – getting more customers. Don’t get me wrong, that’s important! But if all you focus on is getting more customers you end up in a never ending cycle of SEO spend and ad buying. Getting new customers is absolutely THE MOST expensive part of marketing and sales.

All the big modern companies know this to be true. That’s why when Super-Giant-Mega-Company is considering a merger or acquiring Smaller-Successful-Company, the three most important elements to determine the value of that company are:

  • How many customers do they currently have now that we can sell other stuff to?
  • Will their existing customer buy other stuff we already make?
  • What is their CAC – Customer Acquisition Cost?

Getting a customer to make that first purchase is a BIG deal. I am not necessarily suggesting that you do this, but some big companies are willing to actually lose money on the first few sales just to ensure that they get the customer into the pipeline for future revenue.

But I digress. The point is that getting a steady stream of new customers is vitally important to the health of a business. But if that’s all you focus on you are not likely to reach that higher “more sales” dream number you have in your head (and profitability will suffer badly, but that is another blog post).

And yes … if your online store is brand new, everything is about getting new customers 24/7/365 from day one. BUT … starting on day two you should be thinking about the revenue formula. And unless you have literally invented the “next big thing,” growth in customer base is a long, hard slog that – in established businesses – is measured in the low single digits. The longer and more established your business, the harder it is to do.

Understanding the complexity of customer growth and diminishing returns seems like a blog post unto itself. I just added it to the list … we’ll do one on it in the coming weeks. But for now, suffice it to say that if you can MAINTAIN a 3% growth rate in number of customers OVER THE LONG TERM you are beating the average.

When you are just starting out, getting a high percentage of customer growth is easy. Heck, when you get your second-ever customer you have doubled, right? But achieving and maintaining higher than 3% annual customer count in an established business can take HUGE marketing dollars and time … dollars and time that you might not have. 

Revenue Results Multiplied ... That's the REAL Magic.

The Beauty of It All (the REAL Magic)

The beauty is that since your mind is now liberated from “more customers – more sales” trap, you can see that simple, small changes can have a HUGE impact. This is because objectives can't be multiplied, but individual results can ... that's the REAL magic. Let’s put together a hypothetical example:

  • Average dollars per sale (A$) = $100
  • Number of customers (#C) = 1000
  • Number of individual transactions per month/customer (#M) = 1

This means that total revenue = $50,000, right?

A$ x #C x #T = TR
100 x 1000 x 1 = $100,000

If you add 3% more new customers, things just do not change that much:

A$ x #C x #T = TR
100 x 1030 x 1 = $103,000 (3% revenue growth)

In this scenario, all it takes is one marketing mistake or a new competitor in your space to trash this number because you could lose a sale or two to that competitor or the market price for your product could go down. The point it that all of your revenue growth eggs are in one flimsy basket that you don’t have a lot of control over.

Revenue and Sales Eggs in One Shopify eCommerce Basket

But what happens if get 3% growth in customers, but you also:

  • Increase the average sale by 5% by adding a few more premium-priced products, bundles, and some low-priced complimentary products into the mix.
  • Use email campaigns, social media, and retargeting ads to get just 5% of your existing customers to make a second purchase.
A$ x #C x #T = TR
105 x 1030 x 1.05 = $113.557.50 (13.5% revenue growth)

Better, right? Since each of the RESULTS is a multiplier, bumping the needle with single digit increases for each one RESULTS is a solid double-digit increase in total revenue. Even just 3% across the board will get you almost all the way to double digits.

The Real Magic of Tactics and Execution

There are very specific and time-proven tactics to achieve increased RESULTS in each of these elements.  But if you are focused on getting big double-digit sales increases you will not do the small, incremental things that any merchant CAN do, easily  little by little each month – that will RESULT in those double-digit increases.

We are going to tackle each one – outlining the clear-cut, low-hanging fruit. I'm talking about the basics that are both PROVEN and PRACTICAL that keep yielding consistent increases in each individual element. Because I KNOW that if you stop thinking about total sales and keep focusing on A$, #C, and #T the only possible result is more TR … more sales.

As we write each blog post we will cross link them here.

Thanks for reading.
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