EVERY ECOMMERCE OWNER SHOULD KNOW THESE FORMULAS

E-Commerce is one of those industry fields where data analysis is a constant concern. The right data allows you to measure success and compare different campaigns across marketing, sales, operations and logistics operations.

To have a grip on quantitative business analysis, every shop owner should be familiar with the most common industry formulas and be able to apply them in real-life business situations. In this article we explore some of the most important formulas related to (online) retail activities that can help you in your daily operations.

General Retail Formulas

1. Break Even Analysis

Break Even (€) = Fixed Costs ÷ Gross Margin Percentage

The break even is the most popular ratio to understand the minimum amount of sales, or revenues, you will need to attain to cover for your expenses (fixed costs).

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2. Contribution Margin

Contribution Margin = Total Sales — Total Variable Costs

To complement for the break even analysis it’s also important to take a look at the contribution margin, which sets the the amount of value not consumed by variable costs and which can be used to cover fixed costs.

3. Cost of Goods Sold

COGS = Beginning Inventory + Purchases — Ending Inventory

This equation gives us the value of all the costs inherent to the purchase and production of goods used in the product sold.

4. Retail Price

Retail Price = COGS + Markup

The Retail Price is the name given to the price you charge to your customer. It is composed by your COGS and a Markup applied which can range depending on your industry, product or business.

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5. Margin

Gross Margin (%) = (Retail Price — COGS) ÷ Retail Price

Margin, whether as gross margin or percentage margin is a value which tells manager the percentage of total sales revenues that the company is able to retain after deducting the direct cost of COGS.

6. Net Sales

Net Sales = Gross Sales — Returns and Allowances

The Net Sales correspond to the real value of Sales realized by a company after deducting all the values that correspond to allowances for damaged goods, non-resalable returns and other discounted allowances.

7. Quick Ratio

Quick Ratio = Current Assets — Inventory ÷ Current Liabilities

The Quick Ratio is an useful indicator of a company’s short-term liquidity capabilities. This means that it measures, from your current assets and inventory how you would be able to cover current liabilities.

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8. Sales Turnover Ratio

Sales Turnover = Net Sales ÷ Retail Stock

This formula helps you determine the company’s capability to generate sales from current assets or stock. The higher the number, the more efficient is the company in making money from existing stock, while a low number suggests that assets could be more efficiently managed to generate sales.

9. Customer Lifetime Value

CLV = Margin (€) × Retention (%) ÷ (1 + Discount Rate (%) — Retention (%) )

CLV is useful to determine the present value of the future cash flows related to a certain customer during its entire future relationship with your company. To do so, we use the average margin, the Customer Retention Rate (which will be explored later) and a certain discount rate (usually somewhere around 10%).

eCommerce Formulas

10. Conversion Rate

Conversion (%) = Number of Sales ÷ Number of Visitors × 100

The Conversion Rate is the most discussed eCommerce metric. Bottom line, the conversion rate is the percentage of people from the pool of website visitors who actually buy something from you or engage in another meaningful action (e.g. registering on your site).

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11. Lead Generation Rate

Lead Generation (%) = Number of Leads Collected ÷ Total Traffic to the Website × 100

Similar to Conversion Rate, the Lead Generation helps you discover the success of your lead collection strategy.

12. Customer Retention Rate

CRR (%) = ((Number of Customers at the end of a Period — Number of Customers Acquired during the Period) ÷ Number of Customers at the Beginning of the Period) × 100

Customer Retention Rate is the percentage of customers who you were successfully able to retain from last period to the current one. This is one of the metrics that can be used to assess customer loyalty.

13. Churn Rate

Churn Rate (%) = Number of Customers Lost during Last Period ÷ Number of Customers existing in the beginning of Last Period × 100

With Churn Rate you can assess a percentage of customers who stopped using your product within the last period, which could be the last year, quarter or month.

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14. Average Order Value

AOV = Customers Total Order Value ÷ Customer’s Total Number of Order

The Average Order Value is the value corresponding to the average customer purchase. This value helps you to have an idea of the average value of your sales.

15. Store Coach eCommerce Profit

Profit = Number of Visitors × Conversion Rate × Average Profit per Order

The eCommerce formula includes the three most relevant values from online shopping. By increasing any of those you are able to directly influence your eCommerce profit.

16. Return on Investment

ROI (%) = (Investment Gain — Investment Cost) ÷ Investment Cost × 100

ROI is basically the return delivered to the investor or eCommerce owner, after deducting all related costs. ROI is usually requested and used by investors to determine the attractiveness of your business.

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Service Formulas

17. Customer Satisfaction

Satisfaction = Experience — Expectation

This service formula tells us that satisfaction can be measured by controlling the experience assessment level from your customers and deducting their initial expectations. The importance of this formula for eCommerce goes without saying. As we have previously explored, the co-relation of customer satisfaction with revenues, customer loyalty sales and sustainable growth is very high.

Even though we cannot totally control your customers’ expectations (before they buy from you) you can always improve your customers experience.