The Fundamental Equation for Ecommerce Revenue

In many ways the basics of generating ecommerce revenue in the online channel do not differ greatly from the well-honed models that the real-world offline channels have developed over a prolonged period.

Revenue is the end result of a customer journey that starts with website visits, or footfall in the offline retail store. Irrespective of the volume of visitors or footfall only a percentage will actually make a purchase.  Of those that make a purchase, some will spend more than others. The combination of these three factors will ultimately define the revenue generated.

In short:

$$Ecommerce Revenue = Total site Visitors by Customer Conversion Rate by Average Order Value.

So if we have 1,000 visitors, with 7% making a purchase and their average order value is $50 this will result in revenue of $3,500, i.e. 70 customers will on average spend $50.

We can deploy a whole range of strategies or tactics to increase the total revenue. 

Prior to deploying strategies to address one or more of the components that contribute to the ultimate sales revenue, it is important to formulate the overall marketing strategy and set appropriate ecommerce revenue performance targets and metrics.  Are you planning to focus on significantly increasing the customer conversion rate and, if so, what impact will it have on total revenue generated?  What are the other alternative strategies and opportunities to generate the same total revenue?

Clearly a doubling of, say, the number of visitors without any change in the other variables would double the revenue.  For many ecommerce sites such an increase over a reasonable timeframe may be challenging and unlikely.

The first step in identifying where the opportunities lie to increase ecommerce revenue, and particularly the low-hanging fruit, is to carry out an audit of the website activity and identifying where the customer journey drop off occurs.  How do website visitor numbers compare to industry averages?  What are the main traffic sources currently? Are there ready-made opportunities to increase the number of website visitors, such as starting a blog, or a more active social media presence?  Once visitors enter the site is the bounce rate particularly high?  Is this across the site or is it particular landing pages or from particular sources e.g. social media?  Are there obvious ways the landing pages could be clarified or improved to entice more visitors to explore the site more fully?  Are the Calls to Action (CTAs) clear and relevant?

For visitors who get to the product pages is there a high level of placing items in the shopping cart but not completing the purchase?  Are there any obvious reasons why this might be the case? For those who abandon at check-out are there potential reasons such as limited payment options? No guest check-out option? Surprising high shipping or tax charges? Security concerns? Requirement to fill out a whole range of data fields that don’t seem relevant or raise privacy concerns?  For those who make a purchase are they just purchasing a single item?  Are there attractive options for them to buy complementary accessories or to make volume purchases?

Google Analytics and in particular Google Console (previously known as Google Webmaster), Bing Webmaster are among the many analysis and reporting tools that can provide much of this information to complete the audit and develop some revenue growth strategies.

In many cases the low hanging fruit may be identifying opportunities to have some increase in all three key components, i.e. website visitors, conversion rates and average order value rather that a major work program on, say, just getting significantly more traffic to the site, which may be challenging.

By way of example, if the current position is that the site has 1,000 visitors per month, a conversation rate of 5% and an average order value of $50 the monthly revenue will be $2,500.  An increase of just 10% in each of the three components would result in revenue of $3,327.50 an increase of 33%.

The Business Tools Store has a simple calculator which allows you to check the revenue impact over four periods, e.g. quarters or years, of changes in the three key variables site Visitors, Customer Conversion Rates and Average Order Value.

It allows you to check out any number of “what-if” scenarios for total revenue impact prior to finalising your revenue growth strategy and implementation plan.


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The Fundamental Equation for Ecommerce Revenue
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