"Yes and so as you can see we drove a total of 30% increase in traffic since we have upped the ad spending.."

I found myself droning on and on in an analytics meeting. The room seemed largely disinterested, waiting for me to get to the point.

Normally I would jump in joy for a client that values analytics.The problem is, without context, analytics becomes data analysis for the sake of data analysis, doomed to be cherry-picked, lazily crafted narratives about "driving traffic" and an incoherent mess that do not provide insights much less drive action.

Fortunately we have since learnt from that lesson, and that is why this article was written, to help e-commerce owners:

• See how marketing decisions fit into the larger framework of building an e-commerce engine.
• Cut through the noise when looking at analytics, resulting in shorter, more impactful meetings.

The Big Picture

First we want to have a sense of the full picture, what we are working towards.

Only then will we be able to see how the small pieces fit into the puzzle, and which metrics matter.

Growth of an e-commerce store depends on three fundamentals. These are :

• Capital (How much capital you are able to invest)
• Customer Lifetime Value (How much profit you can get from a customer)
• Costs of Acquisition (How much it costs to get a new customer)

We can present them in a growth equation as follows:

Effectively the equation tells us the return we will get out of capital invested in marketing.

The goal, no matter what your business is, is to find the balance between each of the components that maximises the return for your capital.

That is where data comes in. Relevant marketing data informs us of the state of growth equation. For example, the costs of traffic driven to your store from Meta Ads, contributes in part to the Costs of Acquisition in the equation. By looking at metrics through the lens of the growth engine, you will be able to find opportunities for growth and streamline inefficiencies. Each piece of metric is a put in context of return on the marketing budget, instead of by itself or other irrelevant comparisons.

This this way, you are clear on where to allocate resources and are confident that you are progressing towards a growing store.

Now that we have a big picture, let's dive into the equation and how it brings every decision in marketing together.

Capital

To make money, you need to spend money. Getting products into the hands of customers cost money, and each dollar deployed should bring more dollars in, or you won’t be in business for long. In the case of capital, the challenge is to find out how much capital to put in that will maximise the return.

Here you want to have a keen understanding of how long it takes for you to generate a return on your marketing spend.

A simple example: It costs $100 to acquire a customer who on average buys $20 a month will take 5 months to start generating a positive return. Hence there is a limit to how many times you are able to deploy capital, as you would only have $100 in cash every 5 months once you spend it on the customer.

The goal for capital is to invest it as many times as possible, given how fast it sees a positive return. You will be able to generate that return multiple times in a year. But to do so requires you to balance costs of acquisition and the return you can get for each customer.

And again, this is why analytics matter. Understanding the relationship between lifetime value of the customer and the acquisition costs allow you make decisions on the amount of capital you can invest.

Customer Life Time Value

The value a business is able to extract from the customer throughout his lifetime. A customer doesn’t always only buy once when they know of your brand, so the actual return of a customer how much he spends over his lifetime. Typically this metric is monitored over a fixed period of time and for certain segments of customers.

An increasing customer lifetime value over time lets you know that customers are more comfortable with your brand, they are spending more / buying more frequently, this is sometimes a proxy for evaluating if long term branding efforts are paying off.

Finding audience segments where there is increasing customer lifetime value will allow you to identify your ideal customer target profile, and personalise your messaging in a way that attracts more of them.

Some other decisions that understanding customer lifetime value helps with are:

• whether or not to invest in brand awareness
• whether or not to increase average orders with upselling and bundling
• whether or not to implement loyalty programmes to keep customers coming back

Costs of Acquiring a Customer

In every advertising channel there are costs to acquire traffic. Costs varies from each advertising channel and industry, in the digital space, most ads operate in a bidding market with other advertisers.

Cost of traffic allows us to evaluate if we are advertising on the right platforms, as well as the effectiveness of our creatives, messaging and targeting strategies.

For example, a brand that has a younger audience mix may see cheaper costs of traffic in Tiktok vs Facebook, and an effective creative may have cheaper costs of traffic than others. Therefore by monitoring costs of traffic across different channels, we can begin to understand customer behaviour. This will allow us to make better decisions in allocating advertising spend.

Conversion Rate

The conversion rate is the percentage of traffic that actually becomes customers. A good conversion rate performs consistently over time and lets you know that you are able to scale your traffic, as you are confident that the traffic will convert into customers. It is one of the highest returning moves you can take as it is the closest to the purchase.

The conversion rate measures the attractiveness of your offer, the buying intent of your traffic, website speed, the design of your page from click to checkout, product/ service messaging fit.

This allows you to experiments in these areas, ensuring that your conversion rate is as high as it can possibly be.

Takeaways

Armed with the idea of the growth equation, we can put metrics into context, understand the status of the growth engine, identify opportunities for improvement and invest our marketing dollars with more confidence.

If you would like to understand how you can build a growth engine for your e-commerce store, feel free to speak with our team and we will be happy to help where we can!