I have studied hundreds of the best eCommerce businesses.
Worked with dozens that generate millions in revenue every year.
And this is the formula I found to scale them, fast and profitably.
GROWTH = (TRAFFIC * CONVERSION RATE * AOV * 60-DAY LTV MULTIPLIER) - VARIABLE COSTS - FIXED COSTS
As growth specialists, founders, and CEOs, we can improve each of these variables.
Not just by brute force - like increasing traffic by doubling spend on Facebook.
But also by experimenting our way to success.
Because, after running hundreds of experiments, I've realized no strategy fits all.
What increases AOV in one eCommerce, can decrease it in another.
And a tactic that improves conversion rate in one, can destroy it in another.
That's why experimentation is key.
So we can be certain the changes we implement have a positive impact.
Let's explore the levers we can move through experimentation in each component.
Part of the success of any eCommerce depends on the number of visitors it receives.
Some say traffic is a vanity metric.
In some way, I agree.
But I also believe that, without traffic, your business is dead.
So why not keep an eye on it without letting this metric guide your strategy?
Apart from that, you are paying for half of it, so it's something you should consider.
There are three factors to take into account:
The biggest lever in traffic is your creative. An outstanding video, image, or ad copy can reduce CPMs and increase CTRs, resulting in lower CPC.
Key questions to consider:
These are all questions you should consider, dig into your data, and experiment around.
Huge amounts of traffic are of no use if they don't end up buying.
That's why conversion rate is a crucial metric in our eCommerce Growth Formula.
Calculating it is easy: divide Total Buyers by Total Users.
But be careful, don't make the mistake of comparing yours with benchmarks you see on the web.
Each industry and business is different, and conversion rates vary a lot between them.
Improving this metric can be a complex process with dozens of research methods.
If you need help with it, I can give you a hand.
Nevertheless, here are some key factors I detected if you want to work on your conversion rate:
Start tracking the performance of the funnel's steps, from Session Started to Purchase.
You need to identify at which stages most users drop off and identify why it's happening.
There might be issues in checkout, or lack of motivation on the product page.
Inconsistencies between the ad and the landing page kill your conversion rate.
Make sure that whatever a person sees in the ad - words, images, colors, angles - are replicated on the landing page.
In this way, the person is assured they are in the right place and can continue their journey to purchase.
Run reports to detect which segments are converting poorly compared to other segments. Perhaps mobile is doing worse than desktop, so there's an opportunity to improve.
Or maybe your Canada customers have a worse conversion rate than the US ones.
Your job is to identify which are underperforming, detect why, and work to improve it.
AOV - Average Order Value - indicates how much, on average, a customer spends each time they place an order in your store.
Even though most Conversion Rate Optimizers ignore this metric, it's extremely important.
All things being equal, a 10% increase in AOV has the same effect as the same increase in Conversion Rate.
And sometimes, it's way easier to improve the former with an upsell & cross-sell strategy.
Improving AOV enables you to bid more for your customers and increase your ad spend.
At the end of the day, the business who can pay more for the customer wins.
These are some of the strategies you can experiment around:
In SaaS, aiming for a 3:1 LTV to CAC ratio is common practice, but this same concept would bankrupt lots of eCommerce businesses.
But forgetting about LTV altogether is also a mistake.
We can unlock huge growth by taking this factor into our strategy.
That's why 60-Day LTV is the sweet spot between both views.
This metric reflects how much, on average, a customer spends in the first 60 days post-purchase.
For example:
Depending on your business, you might also want to track 90-Day, 120-Day, 1-Year, and 2-Year LTV, but 60-Day is a good start.
It's also the easiest to measure and improve since users are more receptive to changes. Here are some elements you can play with:
Some businesses will have a naturally higher LTV Multiplier than others.
Think brands selling coffee vs jewelry.
But that doesn't mean we shouldn't put the effort to improve it.
I've seen huge uplifts in different industries, so let's get the experiments rolling.
This component includes every cost that increases proportionally to your sales:
As Growth and Experimentation specialists, we tend to think about how we can increase our revenue.
But we are forgetting the other side of the equation - reducing costs.
A 2% decrease in variable costs has the same effect as a 2% increase in ARPU.
And even though it seems there's no room for experimentation, it is a huge and often overlooked lever.
Hexclad tested reducing the number of cookware sold in their bundle, from 13 to 12 without changing its price.
ARPU didn't drop but the gross margin increased due to a decreased COGS.
If you detect that returns are a big cost in your P&L, an improved sizing guide could decrease it.
Or if you see that Afterpay is eating a percentage of your profits, you could try removing it and check if ARPU decreases.
Don't sleep on variable costs - there's a huge opportunity here.
These are all the costs that don't increase as your sales increase - at least proportionally.
For example:
One of the ways to reduce the percentage that these costs represent in your P&L is to increase revenue.
But often, this is a hard thing to do.
Another option is to think outside the box and build experiments that aim to reduce them:
There are dozens more ways to experiment around fixed costs.
Check your brand's P&L and craft tests that aim to reduce them.
This formula is a starting point and doesn't consider variables like inventory or cash flow.
But it's a great way to challenge our understanding of eCommerce experimentation and expand its scope.
Because this is not just about changing button colors and improving conversion rates.
It is a way of thinking through problems and applying the scientific method to validate solutions.
And if you learn to think and act like a scientist, you will be closer to unlocking your business's true potential.
