Playing with the revenue formula—Part 1

The usefulness of the e-commerce revenue formula is that it highlights the relationship of all the variables that make up your store’s revenue.

Let’s assume that your Shopify store got 10000 visitors last month, had 1% conversion rate and your average order value for the same period was $50.

Plugging these into the formula shows the following:

10000 visitors x 1% x $50 = $5000

What do you do when you want to up your revenue by 20%?

These 20% should be introduced on the left side, meaning that any of the three variables should be increased by 20%. For example, here is how the formula looks when you:

1.Increase your traffic by 20%:

12000 visitors x 1% x $50 = $6000

In that hypothetical month you drove more traffic to your site, converting at 1% with an average order value of $50. Because more people came to your website and the conversion rate stayed the same you got more orders (with the same AOV as last month) and gained a 20% increase in revenue!

2.Improve conversion rate with 20%:

10000 visitors x 1.2% x $50 = $6000

In this hypothetical situation you got the same amount of traffic as last month, same AOV, but you’ve reduced purchase friction and now 20% more people bought from you. Revenue goes up!

3.Up your average order value by 20%:

10000 visitors x 1% x $60 = $6000

In this case the traffic amount remained the same, 1 of every 100 people bought, but you either introduced a more expensive and desirable product or managed to effectively upsell people and you gained a 20% revenue increase.

As long as you improve anywhere on the left side of the equation you’ll get an increase in the output. It is up to you to choose where to focus your attention.

Which of the three core variables do you find the easiest to positively influence?

The Revenue Equation

You may get money from your Shopify store every month in your bank account, but do you know what influences that number?

The basic formula for calculating your monthly revenue is this:

traffic x CR% x AOV = total revenue

To increase the total revenue you have to positively influence the variables on the left side of the equation.

Let’s look at what they are in more detail:

  • traffic — the traffic to your website can be measured in many ways, but in the case of the equation, this is the total number of visitors that came to your website.
  • CR% — this is the conversion rate percentage. It is calculated by dividing the number of orders received by the number of visitors for the same period of time. This gives you the rate at which your visitors turn into customers. These are the the people that landed on your site, maybe looked around, added an item to cart and completed a transaction by going through the checkout. Because of the number of requirements (add to cart, enter info during checkout, payment) the actual number of people is usually low. Industry averages here are between 2 to 4%, but from my practice I’ve seen values ranging from 0.5% to 6%.
  • AOV (average order value) — the average amount of money people paid during checkout. Calculated by dividing total revenue for a period by the number of orders for the same period.

Are these familiar to you? These are the numbers I mentioned as important in “Know Your Numbers—Part 2”. The numbers that you should always be aware of, as they measure the pulse of your Shopify store.

Next we’ll take a look at how changing these numbers influence your revenue.

Know your Numbers—Part 2

When was the last time you looked at your Shopify Analytics? Can you tell me your 30 day visitor count, conversion rate for the same period and average order value if I asked you? All that without pulling your phone or looking at the screen of your computer?

If you haven’t paid attention to these in a while you may think that your store is doing great (or not so great) without actually knowing if it is. Getting more orders for smaller items may keep you busy and feeling successful, but this won’t result in the revenue from the same amount of high-ticket purchases.

Not knowing your numbers will blind you to any problems you may have. On the other hand, it won’t let you celebrate the wins when they happen.

“What gets measured gets managed”

–Peter Drucker

Make it a habit of reviewing your stats on the same time monthly and weekly. No, don’t be glued to the stats.

Just a quick check and previous period comparison is enough so that you notice changes and trends. Just looking at the measurements will inform your decisions differently.

Checking your stats on set intervals (via Google Analytics or Shopify Analytics) will put you on the pulse of your business. You’ll know the baseline that you are starting from. This the first step towards higher conversion rates and more revenue for your store.

Know Your Numbers—Part 1

You’ve launched your store after carefully preparing your product images, descriptions and categories. You even managed to get some orders and fulfill them. Now what?

As every business owner I bet you want more. That’s what we are here for. That’s why you started your business—to serve more people, to serve them better and on your terms. Last, but not least, to earn more money.

What is “more”? How much more? How would you know if you are making more money this month than the last one? “Duh, I’ll have more money in the bank!” you say.

That’s not always true. Especially when you drive traffic via ads, which cost you money, and while you are waiting for purchase payments to clear up and be deposited into your bank account.

The main point is—to know you’ve grown you should pay attention to the stats, which thanks to the fact you are running and e-commerce business on Shopify you have an abundance of.