Growing an ecommerce store, or any business for that matter, often involves a certain amount of trial and error. As you test out new products or marketing strategies, you get a better sense of what's paying off as well as what may not be working.
Whether you're investing time, energy, money, and most likely, all of the above into your ecommerce business, you want to see tangible results.
That's where your ROI, or return on investment, comes in. Broadly speaking, ROI is a way to measure the financial gain accrued from a specific investment, relative to its cost:
ROI = (Gains – Cost) / Cost
In simpler terms, it helps you analyze the value a growth opportunity adds to your ecommerce operation.
Calculating ROI for Your ecommerce Business in Practice
There's no one standard way to calculate or use ROI for your ecommerce store. In fact, you can calculate ROI for just about anything, as you’ll see in the following three scenarios.
Scenario #1 - Getting a small business loan
Small business loans are a way to finance everything from developing a new product line to stocking up on inventory to covering your day-to-day expenses. However, small business loans aren’t free (that would be too good to be true).
As an ecommerce entrepreneur, you have to know beforehand how much the loan is going to cost and how financing will affect your revenues, both in the short and long term.
Business is booming and you can hardly keep the (virtual) stocks shelved. “Sold Out” is becoming a common display on your ecommerce storefront, and you really need to purchase additional inventory to keep up with demand.
You crunch the numbers and determine you need $55,000 to purchase inventory and cover the cost of rent for warehouse space.
You’re offered a $55,000 term loan payable in 24 months with a fixed interest rate of 15% and an origination fee of 3%. You use an APR calculator and realize that you’re left with an APR of 18.13% (which sounds pretty high at first glance).
But, let’s take it one step further: The APR calculator shows your estimated monthly payment is $2,666.67.
However, you’ve already done the calculations and figured out that the extra inventory would increase your monthly revenue by $6,000.
Taking on the new debt, would not only cover your monthly payment but also leave you an extra $3,333.33 in revenue.
Although the effective annual percentage rate of the loan would be over 18%, the additional revenue could easily outweigh the initial cost of capital.
Scenario #2 - Improving your ecommerce website
Your website can make or break your ecommerce operation.
In fact, according to a recent Volusion article, “75% of online shoppers judge your business’s credibility by your website design alone.”
You may be thinking: Hey, my website works just fine!
And while investing money in a revamp may seem like a luxury—especially if you’re strapped for cash—it’s important to consider the possible return in conversions and revenue.
Let’s look at Boss Bearing as an example. This Volusion customer simply had their design converted to be responsive. The result?
After comparing their mobile conversions from November through December of 2015 (non-responsive design) to data from November through December of 2016 (responsive design), they experienced a 921.95% increase in conversions and a 1,039.21% increase in revenue.
By updating their site to be responsive and having a seamless user experience across all devices, Boss Bearing was able to boost conversion and revenue, especially among their mobile phone shoppers.
A relatively easy way to gauge your ROI in this situation is to compare the cost of the website upgrade or personalization solution you've opted for against gain in revenues.
For instance, let’s say you take part of your annual budget and pay $4,000 to redesign your store at the start of the new year. You’ve been bringing in roughly $6,000, and this investment results in a 294% increase in monthly revenue (as it did for Halo Headband). Your revenue in January is $11,760.
[($11,760– $4,000] / $4,000)]
That's an ROI of 194%.
And over the course of the year? Your net gain in revenue is $141,120.
[($141,120– $4,000] / $4,000)]
That's an ROI of 3428%.
Scenario #3 - Revamping your marketing plan
Marketing is a vital part of running an ecommerce business.
You have to make sure your brand is visible, you're connecting with your target audience, and that you’re making the most of your marketing money.
Calculating ROI for the various marketing tactics you're using can help you weed out the ones that may be a drain on your financial resources and your most precious commodity: time.
There are several different ways to approach ROI with regard to marketing. For instance, you could measure it in terms of how many repeat sales a particular strategy generates.
You could also look at which marketing channels are producing the highest and lowest levels of revenue.
For example, if you're spending thousands of dollars on Facebook ads each month but only 5% of your sales come from Facebook, that's a sign that you may want to dial your investment back and refocus those dollars elsewhere.
Is Calculating ROI Enough? A Quick Note on Intangible Benefits
For the most part, ROI has a financial context but it can also be used to measure certain intangible benefits an investment may produce.
Let’s take a look at each of the scenarios to illustrate this point:
• Scenario #1: If you’re constantly out of inventory, you’re not only missing out on revenue, but you’re also likely losing customers (or at the very least, suffering in the customer satisfaction department). Customers want to know that they can rely on your store, and if you’re not providing the supply, they’re going to look elsewhere.
• Scenario #2: An outdated looking site can give the impression that your site is not as safe or credible as one that is up to date. That can deter potential customers from doing business with you. In addition, ecommerce platforms like Volusion offer tools that help your site rank better in SEO, help you understand site data, and allow you to manage your social media accounts from a single dashboard. And there’s nothing more expensive than time.
• Scenario #3: Your marketing is both a first impression and also a lasting consumer association. It’s oftentimes what gets your ecommerce business remembered, and turns consumers (people who use your product once) into customers (people who come back). If you put out a killer piece of content or marketing campaign, you could benefit from social shares, and in some cases, virality that skyrockets brand awareness (and sales). There’s also something to be said about the value of investing in brand (see: Harry’s).
Thinking beyond dollars and cents is crucial: user experience, customer satisfaction, brand-building, your time and energy—all of the above and much more are at stake.
Other Metrics to Consider for Your ecommerce Business
Revenue is perhaps the easiest way to track ROI and how your business growth is progressing but there are some additional metrics you may want to account for. For instance, think about how much it costs to acquire a new customer, versus their lifetime value. Lifetime value simply means how much money they've sent with you to date.
If you have an average customer acquisition cost of $15 and each new customer results in a $5 profit, that's a 30% ROI. If you have a small subsection of customers who are creating a $15 profit, however, that's a 100% ROI for that group of buyers. Looking at how much value those customers bring to your business and how they're finding your site can help you fine-tune your marketing plan so that you're consistently attracting the best customers.
If email marketing is part of your strategy, you could also look at things like how many subscribers you have, how often they open your emails, the click rate on your email offers and how many of those clicks eventually lead to sales. While you're at it, you could review the bounce rate for your site and how long visitors are spending on each age.
Bottom line, the more metrics you're evaluating, the better you’ll be at identifying the investments that are moving the needle for your ecommerce business.
About the Author
Samantha Novick is the Social Media Manager at Bond Street, a company focused on transforming small business lending through technology, data and design. Bond Street offers term loans up to $1,000,000 with interest rates starting at 6%.