FINANCIAL FLOW IN E-COMMERCE
A Customer buys an item of 123 stores for Rs 100 in Amazon.
Amazon takes its commission of Rs 15 from 123 Stores.
123 stores is left with Rs 85 from the order.
123 stores gives Rs 50 as Cost of Goods Sold (COGS) to supplier and Rs 20 to
carrier like Bluedart.
So,
123 Stores Net Income = Rs 85- (50+20) = Rs (85-70) = Rs 15.
E-commerce financial metrics you must mindfully watch
1. Gross Merchandise Value (GMV)
Gross merchandise value (GMV) is the total value of products sold by e-
commerce businesses over a particular duration. GMV is a reliable growth
indicator that can be used to track a company's performance over time and
reveal insights into its overall health. It is particularly applicable in the
customer-to-customer market and the consignment sector.
Here is the formula to calculate the GMV:
GMV = Sales Price of Goods x Number of Goods Sold
Following are some scenarios where calculating GMV is good. You can use
GMV when your company is trying to:
- Track its sales performance over time
- Compare its sales performance against competitors
- Identify trends in sales
To calculate GMV, consider the following assumptions.
Sales Price of Goods: $100
Number of Goods Sold: 100
GMV = $100 x 100 = $10,000
In this example, the GMV is $10,000. This means that the company generated
$10,000 in revenue from the sale of 100 goods.
2. Net Revenue
Net revenue is the total revenue a company generates after deducting returns
and discounts. It is an important measure of a company's performance and is
often listed on income statements. It is a more accurate depiction of a company's
actual revenue than gross revenue.
Here is the formula to calculate the Net Revenue:
Net Revenue = Gross Revenue - Expenses
Let's say a company has a gross revenue of $100,000 and expenses of $60,000.
To calculate the net revenue, we would subtract the expenses from the gross
revenue.
Net Revenue = Gross Revenue - Expenses
Net Revenue = $100,000 - $60,000
Net Revenue = $40,000
In this example, the company has a net revenue of $40,000. This means that the
company has $40,000 in revenue after all expenses have been paid.
3. Net Revenue %
Net revenue percentage is the percentage of revenue that remains after
discounts, allowances, and refunds have been deducted. It can help identify
strong and weak earning segments and areas that can be expanded or
eliminated.
Here is the formula to calculate the Net Revenue %:
Net Revenue % = (Net Revenue/ Total Revenue)* 100
4. Revenue by traffic source
Revenue by traffic source is a breakdown of the overall revenue generated
through the various marketing channels. By analyzing this data, businesses can:
- Identify channels that are successfully boosting sales and ones that need to be
optimized
- Make the most of marketing spending and focus on traffic sources that have
the highest ROI
Here is how you can calculate the Revenue by traffic source:
Google Analytics ->"Acquisition" tab -> "Channels".
This will provide you with an overview of your traffic sources and give you in-
depth information about each source.
5. Revenue per session (RPS)
RPS, or revenues per 1000 sessions, is a metric that measures how much
revenue a website generates for every 1000 visitors or sessions. It is an
important indicator for businesses that generate revenue through website visits.
Also, note that If RPS is increasing over time, it suggests that the company is
successfully drawing higher-quality visitors to its website or that the user
experience on its website is improving. If RPS is decreasing, businesses may
need to modify their marketing strategies or improve the user experience of
their website.
Here is the formula to calculate RPS:
RPS = (Revenues / sessions) * 1000
6. Number of Orders
The number of orders is a crucial performance indicator that gives businesses
insight into the total amount of transactions occurring on their platform. It helps
businesses streamline their e-commerce strategy and track the success of
marketing campaigns.
Here are some examples of how businesses can use the number of orders to
improve their e-commerce strategy:
- Identify popular products and increase their inventory
- Offer discounts and promotions during slow seasons
- Target marketing campaigns to customers who have made multiple purchases
7. Average Order Value (AOV)
Average order value (AOV) is an e-commerce metric that measures the average
total of all orders placed during a certain period. It is a key indicator to analyze
important business decisions such as advertising spend, product pricing, and
customer behavior.
Businesses can increase their AOV through upselling, cross-selling, offering
discounts, and free shipping along with a good return policy.
Here is the formula to calculate AOV:
AOV = Revenue / Total no. of orders
Consider the following assumptions.
Revenue = $10,000
Total number of orders = 1,000
AOV = $10,000 / 1,000 = $10
In this example, the average order value is $10. This means that, on average,
each customer spends $10 per order.
8. Cost of Goods Sold (COGS)
COGS, or Cost of Goods Sold, is the direct cost of selling products for e-
commerce businesses. It includes labor, manufacturing, shipping, and other
costs to make the product market-ready. COGS is a key metric for pricing,
marketing, and growth.
By understanding COGS, businesses can set profitable prices, create effective
marketing campaigns, and scale their operations.
Here is the formula to calculate COGS:
COGS = Beginning Inventory + Purchases – Closing Inventory
Consider the following assumptions.
Beginning inventory = $10,000
Purchases = $20,000
Closing inventory = $5,000
COGS = $10,000 + $20,000 - $5,000 = $15,000
In this example, the company had $10,000 worth of inventory at the beginning
of the period, purchased $20,000 worth of inventory during the period, and had
$5,000 worth of inventory at the end of the period. The COGS for the period is
calculated by adding the beginning inventory and purchases, and then
subtracting the closing inventory. In this case, the COGS is $15,000.
9. Gross Margin (GM)
Gross margin is a key business metric that measures how much money a
company makes from each sale after deducting the cost of goods sold. A high
gross margin indicates that a company is profitable, while a low gross margin
suggests that the company may be facing challenges.
The average gross profit margin in e-commerce is 41.54%.
Here is the formula to calculate Gross Margin:
Gross Margin = Revenue − COGS
Consider the following assumptions.
Revenue = $100,000
COGS = $50,000
Gross Margin = $100,000 - $50,000 = $50,000
In this example, the company generated $100,000 in revenue and had $50,000
in COGS. The gross margin is calculated by subtracting the COGS from the
revenue. In this case, the gross margin is $50,000.
10. Gross Margin Rate (GMR)
Gross margin rate (GMR) is a percentage of revenue remaining after deducting
COGS. A higher GMR indicates a more profitable business, while a lower
GMR suggests production or pricing issues. Businesses can use GMR to make
informed pricing, manufacturing, and growth decisions.
Here is the formula to calculate Gross Margin Rate:
Gross Margin Rate = (Revenue − COGS) / Revenue
Consider the following assumptions.
Revenue = $100,000
COGS = $50,000
Gross Margin Rate = (100,000 - 50,000) / 100,000 = 50%
In this example, the company generated $100,000 in revenue and had $50,000
in COGS. The gross margin rate is calculated by dividing the gross margin by
the revenue. In this case, the gross margin rate is 50%.
11. Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the total revenue a customer is expected to
generate for a business throughout their relationship with the business. CLV can
be used to make decisions about pricing, sales, promotion, and customer
retention.
Here is the formula to calculate CLV:
Customer Lifetime Value = (Customer Value* x Average Customer Lifespan)
*Customer Value = (Average Purchase Value x Average Number of Purchases)
12. LTV/CAC
LTV: CAC is the ratio of a company's Customer Lifetime Value to Customer
Acquisition Cost. It is a key metric for measuring the success of a company's
marketing and sales efforts.
A 3:1 ratio is a common benchmark for a "good" LTV: CAC ratio. However,
the ideal ratio will vary depending on the industry and the company's specific
goals.
Here is the formula to calculate LTV/CAC ratio:
LTV/CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost
[Example 1]
Lifetime Value (LTV): $1,000
Customer Acquisition Cost (CAC): $250
LTV/CAC Ratio = $1,000 ÷ $250 = 4
In this example, the company is acquiring customers at a cost that is less than
the value those customers will generate over their lifetime. This is a good sign
for the company's long-term profitability.
[Example 2]
Lifetime Value (LTV): $500
Customer Acquisition Cost (CAC): $500
LTV/CAC Ratio = $500 ÷ $500 = 1
In this example, the company is acquiring customers at a cost that is equal to the
value those customers will generate over their lifetime. This is a break-even
point for the company.
13. Average revenue per session (ARPS)
The average revenue per session (ARPS) is the amount of money generated by
each unique visitor to a company's website. Businesses can use ARPS to track
the health and effectiveness of their brand. A rising ARPS indicates that the
website is converting more visitors into customers. Similarly, a falling ARPS
indicates that the website is converting fewer visitors into customers.
This E-commerce metric also gives information on client lifetime value, major
traffic sources, and shopper drop-off. Because ARPS logs each session, it can
provide data regarding the performance of every end-to-end customer
experience.
Here is the formula to calculate ARPS:
ARPS = Total revenue / No. of sessions
14. Return/Refund rate
Return and refund rates are essential metrics for e-commerce businesses
because they can significantly affect revenue.
High return and refund rates can be a sign of poor product quality, inaccurate
product descriptions, or a negative customer experience. This can lead to lower
customer satisfaction, loyalty, and revenue.
Businesses can reduce their return and refund rates by providing accurate
product descriptions, high-quality products, and excellent customer support.
The average e-commerce return rate is 30%.
The formula for return and refund rates:
Return Rate = (Number of returns / Number of orders) x 100
Refund Rate = (Number of refunds / Number of orders) x 100
[Example 1]
Return rate: If a company receives 100 orders and 20 of those orders are
returned, the return rate would be 20%.
Return Rate = (20 / 100) x 100 = 20%
[Example 2]
Refund rate: If a company receives 100 orders and 15 of those orders are
refunded, the refund rate would be 15%.
Refund Rate = (15 / 100) x 100 = 15%
15. Card chargebacks
A chargeback is when a customer disputes a charge on their credit card. This
can happen for a variety of reasons, such as unauthorized use, fraud, or a
product that was not received or not as described.
When a chargeback is filed, the merchant is charged a fee. Chargebacks can be
costly for businesses, so it is important to take steps to prevent them.
Here’s how you can prevent them:
- Provide accurate product descriptions
- Deliver products on time
- Respond promptly to customer complaints and disputes
- Implement fraud detection and prevention tools
- Use secure payment gateways
- Establish clear return and refund policies
16. Processing fee
Payment processing fees are costs that businesses pay to process payments from
customers. They can vary depending on the type of payment, the merchant, and
the payment processor. Companies should be aware of these costs to manage
their cash flow effectively. These costs are often 2-3% of the transaction but can
vary depending on the business.
17. Shopping Cart Abandonment Rate (CAR)
Shopping cart abandonment is when a customer adds items to their cart but
doesn't complete the purchase. It's a major problem for e-commerce businesses,
as it can lead to lost sales and revenue. There are many reasons why customers
abandon their carts, including
- High shipping costs
- Complicated checkout process
- Lack of trust on the website
- Unexpected extra fees
- Unclear or confusing pricing
- Lack of a sense of urgency
- Customer dissatisfaction with the product or service
E-commerce businesses can reduce cart abandonment by offering free shipping,
simplifying the checkout process, and building trust with their customers.
Here is the formula to calculate CAR:
Cart Abandonment Rate = (1 - (Number of Completed Transactions / Number
of Shopping Carts Created)) x 100
Consider the following assumptions.
Number of completed transactions: 100
Number of shopping carts created: 500
Cart abandonment rate = (1 - (100 / 500)) x 100 = 80%
In this example, the cart abandonment rate is 80%, which means that 80% of
shopping carts created were abandoned before the customer completed the
purchase. This is a high cart abandonment rate, and the business should take
steps to reduce it.
18. Earnings before interest and taxes (EBIT)
EBIT, or earnings before interest and taxes, is a measure of a company's
profitability from its core operations. It is calculated by taking a company's net
revenue and subtracting its operating expenses.
It is a useful metric for investors because it gives them an idea of how well a
company is performing without the impact of financing costs or taxes. A high
EBIT indicates that a company is generating a lot of profit from its core
operations, which can be a sign of a healthy business.
EBIT = Revenue − COGS − Operating Expenses
Or
EBIT = Net Income + Interest + Taxes
EBIT % = (EBIT / Revenue) x 100
19. Net profit margin
The net profit margin is the most accurate indicator of a company's profitability.
It is calculated by dividing net profit by total revenue. A high net profit margin
indicates that a company is making a lot of money from each dollar of sales.
This is a good sign for investors and stakeholders, as it shows that the company
is financially healthy and has the potential to grow in the future.
Here is the formula to calculate Net Profit Margin:
Net Profit Margin = ( ( Revenue - COGS - Operating expenses - Taxes -
Interest ) / Revenue ) * 100
5% is a low-profit margin
10% is a healthy one
20% is an excellent profit margin
