What are the most important indicators when evaluating an e-commerce business model? Our CEO Raphael explains which 6 KPI's we use at R17 Ventures to assess the potential of an online shop. This also reveals optimization possibilities, on the basis of which online businesses can be strategically aligned.
1. Profitability in the top-of-funnel
Does your e-commerce company succeed in winning new customers profitably with online advertising, right from the first purchase? Paid advertising in the form of Facebook and Instagram advertising such as Google Ads is ideal for drawing the attention of new customers to your online shop and encouraging them to buy through optimized targeting.
If you look at the cost structure of a classic e-commerce company that sells physical products, you have to consider the following key cost drivers:
- supply chain
- picking & packing
- product cost
- advertising costs
The question is: Is the sum of all these costs lower than the sales generated by the first purchase of a new customer?
If this question can be answered with a resounding yes, then it is an attractive situation – for both investors and entrepreneurs. Because then the advertising strategy - and thus the advertising costs - can be geared towards growth at the end of the day.
As a result, you can scale with a clear conscience: you know that you will get the margin back with the first customer. Even if not all overheads (such as wages, rent, etc.) are covered, at least the variable costs are profitable.
If this is not fulfilled, we alternatively look at the Lifetime Value and the Customer Acquisition Cost. Ie we consider: average shopping cart of a customer x the average purchase frequency (how many times per year does this customer shop) + how many years does he stay on average?
Is your online business new and there are no past values yet? Then we expect a year. Then all advertising costs are added up and divided by the number of customers that you have generated through paid media. This is how you get the ratio of Lifetime Value vs. Customer Acquisition Costs.
This ratio must logically be positive, because what this value says is the following: Even if the customer is not yet profitable when they make their first purchase, you can at least monetize the customer over the long term.
Customer Lifetime Value
LTV is one of the most important KPIs in e-commerce, especially when it comes to increasing customer loyalty. The customer lifetime value indicates how much money someone spends on average during their time as a customer of your company. So if someone spends CHF 100 per year over five years, their CLTV is CHF 500.
E-commerce metrics like average order value (AOV), conversion rate, and customer retention are all reflected in this metric, so it provides a good insight into the overall performance of your store. The closer your CLTV is to your AOV, the lower your repeat business. In this case, it is advisable to make some changes to improve the customer experience and get customers to buy again.
Also think about building long-term relationships through targeted marketing campaigns and excellent customer service. Use upselling and cross-selling techniques and offer irresistible incentives and rewards to keep your customers coming back.
Customer Acquisition Cost (CAC)
Customer acquisition costs indicate how much you have to spend to acquire a new customer. When doing this, you should factor in your overheads as well as the marketing and sales costs associated with customer acquisition.
For example, if your CAC is $20 but your average order value is only $10, you're losing money fast. However, if your AOV is CHF 100, you are in the green. This KPI is also useful for calculating price points, making it especially important for stores selling low-margin products.
As a brand gains visibility and awareness, customer acquisition costs should decrease. However, the cost of acquiring new customers alone does not provide enough information to make decisions. Therefore, look at your CAC in relation to other metrics like your Customer Lifetime Value.
2. Entry barriers for the competition
When it comes to our e-commerce business models, we keep thinking about how to increase the entry barriers or which business models have relatively high entry barriers. This way your online business is better protected from potential competition.
Barriers to entry can arise from branding and branding, but also from the complexity of the business model itself - especially in the supply chain.
Case studies: Secondhandbags AG and Bonsia.ch
In contrast to the classic e-commerce model, the plants at Bonsai.ch have to be watered, stored in the sun and cut. That means more man power, more know-how and thus higher entry barriers. In a typical warehouse, on the other hand, there is essentially no effort involved in maintaining warehousing.
The luxury handbag supplier Secondhandbags AG also has a business model that is not easy to imitate: you have to check the quality and authenticity of the used designer handbags. You also have to be able to cope in a market with limited supply. This is about global purchasing: where are possible suppliers and where can the unique vintage bags be obtained from?
Both are very good examples of high entry barriers and thus offer protection against competition.
Watch Emanuel Müller - CEO of Secondhandbags AG - talk about the success his online store has had since partnering with R17 Ventures:
3. USP's of the business model
What is the unique selling point of your product, your shop or your business model? What specific problem are you solving or satisfying for your consumers?
A good example of a USP is when you take an existing business model - such as regular product sales - and convert it to rental or leasing of products. If you are satisfying an obvious customer need, since the purchase of the product would be too expensive and the consumer would only use it once, then you have achieved this goal. Because that way you would have a USP compared to the competitor who only offers the respective product for sale.
4. Capital Requirements: Can the cost of capital be reduced or spread?
In e-commerce, the typical case is as follows: you have your own brand and
- finances the production
- produces the product
- pre-finances the packaging
- stores the finished goods
- sells the goods.
The whole thing is similar with merchandise, but instead of in-house production, the goods are purchased. Then the product is stored and finally sold.
But are there ways to ideally offer consignment or qualitative dropshipping with an existing business model? In this case, the capital costs for the goods are only incurred when the product is actually sold.
We at R17 are considering whether such a dropshipping model can be at least partially achieved. We are particularly concerned with the factors of speed and growth. If the cost of capital is low, your company has the opportunity to try different scenarios, penetrate different markets and invest more capital in marketing without high capital risk. Especially performance marketing is advisable in this case.
5. Product Margins
Margin is one of the most important tools used to calculate profit and determine product prices. Accordingly, the margin factor is another crucial criterion that we look at when evaluating the potential of an e-commerce shop.
From our point of view, a business model with a margin factor of 2-3 makes little sense. Especially if capital costs also play a role, which - as just mentioned - can be avoided in a classic dropshipping business.
An online shop concept becomes really attractive from a margin factor of 5. And for one important reason: If you increase the volume or the ad spend in performance marketing, especially with social media ads (such as on Facebook/Instagram), then you lose often in efficiency.
As a result, volume falls, while absolute sales (and sometimes your profit) increase – but your relative profitability falls. And this is exactly where attractive margins come into play.
6. Various streams of income
Last but not least, when assessing an online shop's potential, we try to identify whether there are opportunities to build up various pillars of revenue streams in your business model, such as the monetization of
- online courses
- physical courses
Logically, companies often have huge know-how in their specific niche or in the area of the products they offer. The question arises: Can a second business model be built from this?
Another monetization option is the sale of media space or ad space on your website. Or can you use the collected data to your advantage? Maybe there are other brands that offer supplemental products that fit your business model but don't compete? Can additional business models be developed in this regard?
But the question also arises in traditional retail: Is it possible to sell ad space to brands that you already have on your platform? All of these options represent different pillars through which you can diversify your revenue potential.
CONCLUSION: If all your values for the 6 KPIs look good, nothing stands in the way of the success of your online shop
So you now have a good overview of which indicators to consider when evaluating an e-commerce business model and which screws you can turn to optimize and strategically align your business model.
Would you like to find out more? Then contact us for a free analysis of your advertising accounts and let us show you the potential of your online shop.