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The Five & Dime
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Tuesday
Oct192010

The 6 "Cs" of E-Commerce

e-Commerce is red hot with trend-setting companies like Gilt Groupe, Rent the Runway, Groupon, and others leading the way.  To be successful in e-Commerce however, you need to be maniacally focused on the metrics of your business.  Here are 6 “Cs” that provide an unparalleled window into the health of your online retail business.

Company Net Promoter Score, or NPS, is a customer loyalty metric developed by Satmetrix, Bain & Company, and Fred Reichheld. This score is determined by posing a simple question to consumers; it’s a query designed to screen for customer loyalty. Consumers are asked, “On a scale of 0 to 10, how likely is it that you would recommend our company to a friend or colleague?” Consumers offering a rating of 9 or 10 are anointed “promoters”, implying they could heavily promote the company to others. Those who give a rating of 7-8 are “passives”—maybe they might not do anything. Those at the lower end of the scale, with ratings of 0-6, are dubbed “detractors,” since they might speak ill of a company and hurt its prospects with other potential customers. 

A company calculates its overall net-promoter score by subtracting its percentage of detractors from its percentage of promoters. So, if 65% of an e-commerce firm’s customers rank as promoters, and 15% as detractors, the firm’s overall NPS would be 50.  You should ask every customer this simple NPS question after they’ve received their shipment. 

Track and monitor your NPS every month and discuss it in your management and board meetings.  Slice and dice the metric to study specific people who have interacted with your customer-service team or who processed a product return.  You’ll be surprised by the insights that will jump out. Check out netpromoter.com to compare your score against the best brands on the planet, like Amazon, Apple and Google. Tracking NPS is invaluable. 

 

Customer lifetime contribution, or CLTC.  We define CLTC as the net present value (NPV) of the profit from a customer’s purchases.  Remember to include all the sales that result from a customer’s repeat visits, less any associated costs to service the resulting orders (include variable costs like COGS, credit-card processing fees, shipping, warehouse-order processing, etc).  A profitable customer will have a CLTC in excess of its customer acquisition cost (CAC).  Treat these profitable customers well.

Once you have a good handle on this metric, you shouldn’t be afraid to spend until the marginal CAC (your CAC to acquire the next customer) approaches the CLTC of your next incremental customer, even if it costs more to acquire that new customer than you recoup on his or her first purchase.  Note: This doesn’t mean you should spend until the average CAC approaches your CLTC.  Rather, you want to spend to acquire customers until your marginal contribution (CLTC – CAC for each new customer) equals zero. Anything less is under-investing in your business.  In the beginning stages when you’re not sure what your what your customers’ repeat purchasing behavior will be, track your customers Average Order Value (AOV).  In fact, AOV is a great leading indicator for CLTC regardless of the stage of your company.

 

Customer acquisition cost (CAC).  This is quite simply your fully-loaded average cost to acquire a new customer.  You should track this over time.  However, averages can be misleading; not all customers are created equal.  You’ll always have one group of customers that come back to your site multiple times and are profitable to you. Others may come once, perhaps pick up some of your lower-margin SKUs—and never return.  Remember: Your goal is to optimize CLTC minus CAC.  This means that trying to keep your CAC down is not always your best bet: Sometimes your better customers (those that return and/or buy higher margin SKUs) are a little more expensive to acquire.  But they’re worth it.  If your current average CLTC is at least 2.5X your average CAC, and most of that comes in year one, you’ve got enormous upside potential.  

 

Conversion rate.  For most e-tailers, the relevant conversion rate is the percentage of new visitors that convert to buyers.  Here, traditional blocking-and-tackling concepts like streamlined landing pages and fast page-load times are king.  If you want to take this metric to the next level, you should think of your conversion rate as a conversion of visitors to revenue producers (not necessarily to buyers)—or, better yet, to gross profit contributors.  Essentially, what you are trying to measure is how much money you make from each visit to your website.  It’s the equivalent of the eRPM (effective revenue per thousand impressions) most Web publishers use to measure their businesses. But here, we suggest eGPV (effective gross profit per visit).  Compare the eGPV for all of your visits, and tweak the site paths that are falling below the average.  Adding additional revenue streams such as on site advertising may help to optimize this metric.

 

Churn. Yes, e-commerce businesses have churn too!  This is the percentage of visitors to your site that don’t come back to buy anything else. You should also, of course, track the number of monthly visitors who are returning customers. 

 

Cash-conversion cycle and return on capital. Only the simple-minded focus on the P&L statement. No one cares what your profits are if you don’t generate any cash flow. Online retail can be tricky because there are lots of ways to burn cash even when you’re generating income-statement profits. Inventory and warehouse equipment can consume a lot of cash, particularly during periods of high growth. The best online retailers actually boast a negative cash-conversion cycle.  In other words, they get paid by their customers before they have to pay their suppliers. Amazon and Blue Nile have negative cash-conversion cycles, so it’s perhaps not surprising that these companies have the most attractive valuation metrics in the online retail industry.

Be aware of this, and make smart tradeoffs between vendor-discounts and stretching payables whenever you can.

 

This post is an excerpt from a 10-series post on my blog, BVP's Top Ten Laws of eCommerce.

References (1)

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    The 6 "Cs" of E-Commerce - Home - EarlyStager

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