Understanding E-commerce Revenue Trends and First Order Profitability

Introduction

In this blog, we will delve into the analysis of e-commerce revenue trends, the impact of order values on profitability, and the crucial understanding of first order profitability in the e-commerce industry.

Analysis of E-commerce Revenue Graph

• The graph represents new customer revenue over time, total ad spend, and the efficiency of acquisition.

• The trend in new sales remains fairly constant, while the ad spend has a sudden decline, leading to increased efficiency.

• The problem uncovered is that new customer margin was negative, indicating net negative contribution from customer acquisition.

• The root cause seems to be the pursuit of propping up top-line revenue without clarity on first-order profitability.

Understanding Order Values and Profitability

• Average order value (AOV) can be misleading when used as the sole metric for setting efficiency targets and revenue expectations.

• AOV is a combination of purchases from existing and new customers, and it’s crucial to understand the distribution of individual orders to set accurate targets.

• New customer AOV may differ significantly from the overall AOV, and the distribution of values may be skewed, leading to potential miscalculations in setting targets for customer acquisition cost (CAC).

• Considering modal order value, which represents the most commonly occurring order for new customers, is essential in setting accurate CAC targets and revenue expectations.

• The distribution of orders from different acquisition channels should be analyzed to set specific CAC targets, ensuring profitable customer acquisition.

• Using blended averages for both order values and cost of goods can lead to inaccurate profitability assessments, as products with different margins may be treated equally in setting targets.

• To avoid misleading optimization, understanding the specificity of order values and their impact on first order profitability is crucial for businesses.

• Analyzing different product margins and varying order values is necessary to optimize advertising and ensure profitability across all product offerings.

Understanding First Order Profitability in E-commerce

• Setting up specific funnels with defined order values against specific authors with a defined margin profile and a corresponding cost of acquisition (CAC) target becomes crucial for asserting and creating first-order profitability.

• The contribution margin needs to exceed the operating expenses (Opex) in order to generate positive profit, and understanding the relationship between existing customer revenue and Opex is vital for e-commerce businesses.

• For long-term growth, running a lean Opex where existing customer contribution exceeds Opex can lead to profitability even if the first order revenue is break-even.

• Efficiency curve and the volume of revenue that can be generated in the future may not warrant sacrificing first order profitability, as indicated by spend and AMR models developed by Common Thread Collective.

• Maximizing first order contribution and lifetime profit have subtle differences, and the risk increase in the latter needs careful consideration for e-commerce businesses.

Analyzing the Impact of Customer Lifetime Value on Marketing Decisions

• When considering the increase in 60-day Customer Lifetime Value (LTV), it’s essential to model the potential impact on marketing spend.

• The analysis suggests that in order to maximize the 60-day LTV, an incremental $7,000 should be spent, resulting in an additional $100,000 in new customer revenue.

• However, it’s important to note that in the short term, the initial month may show a decrease in profit, but over the lifetime of 60 days, an incremental $112,000 can be generated.

• Despite the potential for increased long-term value, there are significant risks associated with this approach, including cohort degradation, risk adjustment, product return rates, and margin profile discrepancies.

• The lack of risk adjustment for future value poses challenges, especially when considering the potential impact on cash flow and overall business risk.

• For brands with exceptional LTV, maximizing against a 300% LTV may justify higher incremental spend, but it comes with the caveat of deteriorating cash in the short term and a focus on very long-term value capture.

• This analysis underscores the importance of considering risk-adjusted value and the financial wherewithal to support increased marketing spend for long-term value capture.

Conclusion

Understanding and optimizing e-commerce revenue trends and first order profitability is essential for sustainable business growth. Analyzing order values, customer acquisition cost, and lifetime value can lead to more effective marketing decisions and long-term profitability.

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