The Algebra of eCommerce - MGR Blog

I know, the title may sound intimidating, especially if you hated math class at school, but I will make it very simple.  When it comes to eCommerce, the most important formula that you need to keep in mind is the following:

Visitors X Conversion Rate X Customer Lifetime Revenue = Total Revenue

Plain and simple.  If you can increase any of the three above factors (multipliers) your revenues will increase too.

Now, let’s take a quick look at how the above formula would apply to a sample email marketing campaign and how that translates into a potential Return On Investment (ROI)

For this example, I will consider a fictitious client that decides to create a monthly eNewsletter and start a new Email Marketing campaign for her company.  The following numbers are just average numbers, but you can simply plug in your own numbers to calculate the ROI in your particular case.

Let’s assume that each eNewsletter requires an average of 8 hours of work from initial concept to completion.  This includes the combined time for the writers/researchers to come up with the articles, the designers, the programmers, and the project manager that oversees the project.  To keep the numbers simple, let’s assume that they hire a marketing agency to produce the newsletter and the average hourly rate of everyone working on the newsletter at the marketing agency is $125/hr.

eNewsletter Monthly Investment

  • eNewsletter Production (Labor Costs): 8 hrs X $125 = $1,000
  • Email Marketing System Fees: $75/month

Total Monthly Cost (per eNewsletter): $1,075

So far, the above costs represent the “Investment” or the “I” in ROI.  Let’s now take a look at the “Return” side or in basic terms, the revenues that you can expect to generate from the eNewsletter.

Let’s assume that you send the eNewsletter to 5,000 leads in your customer database.  From those 5,000 people, your “Open Rate” (that is people who actually open their email and see your eNewsletter) is 20%.  That’s an achievable rate if your database is from ‘true fans’ or customers that have subscribed to receive information from you.

So you have now 1,000 people that actually see your eNewsletter.  But you haven’t made any money yet.  Now we will estimate that from the 1,000 that read your eNewsletter, only 1% become customers.  This is a very low number, but let’s just consider a worst-case scenario to see how we end up.  So 1% of 1,000 is 10.  I told you this math would be simple!  You now have 10 customers that are contacting you so you can do some work for them!

But remember, our main goal is still to calculate our ROI, so somehow, we need to put a dollar figure to each customer.  Let’s again assume that each new customer will spend around $1,000 over the course of the year buying your products or services.  That would be your gross revenue from each customer.  But we don’t care about gross revenues either.  We DO care about PROFITS!  At this point, you plug in your average profit margin.  If you run an efficient company, you may enjoy at least a 25% profit margin.  That is, for every $1,000 of revenue, your profit will be $250 on average.  So back to the previous figure, from each new customer spending $1,000, you will net (or profit) around $250.

Now we have a lot of new numbers on the table so let’s get back to our drawing board:

  • eNewsletter Total Database: 5,000
  • eNewsletter Open Rate (20%): 1,000
  • eNewsletter Conversion Rate (1%): 10
  • Average Revenue per Customer: $1,000
  • Total Gross Revenue for eNewsletter: $10,000
  • Profit Margin: 25%
  • Average Profit per Customer: $250

Total Net Profit from Newsletter: $250 X 10 = $2,500

With all of the above figures, now we’re ready to calculate our ROI.  The formula to calculate ROI is always the same no matter which project you want to calculate it for.  Basically, ROI is your total Return divided by your Investment, sometimes expressed as a percentage or as a ratio.

So in this case, your NET ROI would be:   $2,500/ $1,075 = 232% or a 2.32:1 ROI

It is important to point out that the above calculated ROI is the “NET” ROI, or the ROI after expenses.  Your Gross ROI would be close to 10:1 as you divide your gross revenue ($10,000) by your eNewsletter cost ($1,075).  Most agencies, mostly because they are not familiar with your profit margins, will show you campaign results based on “Gross ROI” and leave it up to you to estimate your actual NET ROI.

Either way, as you can see, in this particular case, it makes perfect sense for you to add a monthly eNewsletter to your overall Marketing Plan.

So, let’s go back now to our original formula at the top of this article.

Visitors X Conversion Rate X Customer Lifetime Revenue = Total Revenue

Remember, an increase in each of the above factors will automatically increase our revenues.

We can increase visitors by growing our email database on a regular basis via several types of promotions for new subscribers, in addition to the growing customer database.

We can increase conversion rates a number of ways and many of them may not require additional costs.  For example, reducing cart abandonment rates, retargeting, simplifying checkout, one-click-purchase, offering multiple payment methods, just to name a few.

Customer Lifetime Revenue is directly related to the quality of your products and services.  Keep your customers happy and they will continue to buy from you.

If you can increase two or all three factors simultaneously by just a bit, you will see your revenues spike exponentially. But it doesn’t need to end there.  You can apply the same formula to just about all of your marketing efforts.

If you follow our “Multichannel Marketing” approach, you can calculate approximate ROI numbers for each of your marketing channels.  This will not just let you see and keep track of which channels perform better for your company, but also calculate the Average ROI of all of your channels.

Here’s a hypothetical example showing you a calculation of an average ROI for all marketing channels:

Hypothetical Gross ROI Per Channel

  • Email Marketing: 8:1
  • Video Marketing: 4:1
  • Company Website: 5:1
  • Organic SEO: 8:1
  • PPC Campaigns: 7:1
  • Print Ads: 2:1
  • Direct Mail: 2:1
  • Social Media: 5:1
  • Content Marketing: 4:1

Average ROI = Total ROI (45:1) / 9 Marketing Channels = 5:1 ROI

Keep in mind again that the above are just fictitious figures but you can easily calculate yours by plugging in your own numbers.  Depending on your industry, you may target a higher or lower ROI.

At MGR Consulting Group, we constantly work on marketing campaigns for a variety of clients.  Some clients target a higher ROI than others.  For example, one client may target a 10:1 ROI, meaning for every $1 invested, they expect to get $10 in return.

In a more specific example, a high-end resort in a popular travel destination may invest $50,000 in a certain promotional campaign, expecting to get around $500,000 in gross revenues from such campaign.  By the same token, other companies are just as happy creating branding campaigns with very low short-term ROI expectations.

A small retailer may just spend $2,000 in a branding campaign that results in an equal $2,000 return or ‘break-even’ short-term’ ROI.  However, even it that case, the campaign would be beneficial if it has provided additional branding and awareness among potential consumers who may –if not immediately- in the long-term become new consumers of your product (read: Customer Lifetime Value)

You will also notice that, as you start tracking and analyzing your ROI for your different campaigns over a period of time, the actual ROI figure may also grow each time.  Your first marketing campaign may break even; subsequent campaigns may bring you a 5%-10% ROI.  As your branding increases and your potential customers start warming up to your company and your products/services, your ROI will also increase accordingly.  Planning and consistency is the key.  You can’t expect to send a single eNewsletter one month and get outstanding results.  But if you stick to your long term plan and make adjustments along the way, your efforts will surely pay off.

Remember, this is the simplest and most relevant formula for your success:

Visitors X Conversion Rate X Customer Lifetime Revenue = Total Revenue

As always, if you need any assistance with your eCommerce marketing, our MGR Team will be happy to chat with you one-on-one.  Use this link to contact us and set up your free consultation.

Thank you for reading.  Until next time, this is Manuel Gil del Real (MGR).  Happy Marketing!