Running an eCommerce business means knowing how to spend your money while earning it. Here is a simple explanation of eCommerce ROI calculations.
When you start your own business, one thing you need to keep in mind is that it takes money to spend money. It takes more than setting up an eCommerce website to drive sales and develop a loyal customer base. You’ll need to do some marketing and advertising to attract people to your shop and feel invested in your brand.
Simple Explanation of eCommerce ROI Calculations
With that said, it’s important that you keep track of your investments in your business. You’ll find that some types of ads and marketing channels are stronger revenue streams than others. You need to be aware of what you’re spending and what these investments are bringing you so that you can refine your ad and marketing strategy. It can take some time to identify the best, most profitable strategy. There will be some trial and error.
So, how can you strategically plan your advertising and marketing budget? By regularly calculating your ROI (return on investment).
There are two ways to calculate eCommerce ROI. The first is the most basic and commonly used formula: ROI = (Revenue/Investment)-1
Let’s say that you spent $500 on social ads over three months, which yielded $1,000 in revenue from five customers. Your ROI for social ads is 100%. You would probably be pretty pleased with this investment and want to continue your social ad spending based on these results.
However, you’re still testing the waters to pinpoint your best marketing and advertising strategy, so you also spent $4,000 on search ads during this three month period. Your search campaign brought in $3,000 in sales from fifteen customers. The ROI for your search ads is negative: -25%.
Looking at these numbers, your gut reaction might be to slash your search campaigns altogether and invest that money into your social ads budget. However, we want you to pause for a moment.
Your goal for your eCommerce site is to build a strong customer base. By strong, we don’t mean the number of customers. What you really want – and what will truly make your business profitable – is having high quality customers who buy regularly. Customer lifetime value (CLV) is a key metric for your eCommerce business strategy and development. If you’re unfamiliar with the term, CLV is a reasonable estimate as to how much money you can expect a customer to spend at your business.
This next ROI calculation factors CLV into the equation: ROI = (CLV/Investment)-1.
Let’s go back to the numbers from the example in the first equation. Your social ads yielded a positive ROI, but only came from four customers who were all one-time buyers. Your search ad, on the other hand, brought you fifteen customers who all went on to become repeat buyers. On average, they spend $200/order four times/year – which amounts to $12,000/year. Suddenly your search ad campaign doesn’t seem like a waste of money at all. In fact, their continued business shows you that your search campaign is actually the better place for you to spend your ad budget.
It’s easy to be short sighted with your eCommerce business. It’s hard to be patient for sales to come in. We all want success now. Remember, it takes time for you to attract these repeat customers who will become the foundation for your business’s success. When you calculate your ROI, we encourage you to look at both of these formulas so that you can spend your money where it will bring you the highest long-term return.
We hope this simple explanation of eCommerce ROI calculations will help you in your eCommerce business!