Profitability in eCommerce store - As I understand it

[RoboNegotiator]

Fellow eCommerce experts/ Shopify store owners

I am trying to understand common problem of profitability as well as common-sense practice to balance cost vs. income so that we, store owners don't operate at loss for long term. Following are my newbie thoughts. Can you please comment or suggest better model

In my mind, If I have 500 visitors with 5% conversion rate and each conversion session results in $50 amount sale, I am expected to collect $1250 in revenue (from 25 visitors each buying $50 on average)

To breakeven, if my goods are bought at 75% of listed price, I have maximum 25% margin left for all cost (marketing, operation, sales operation, etc.). Correct? If I am spending more than 25% in other costs, I am operating at loss. 

Am I thinking correctly? What are common ways people operate their eCommerce stores?  What levers to focus on this model? # of visitors? Conversion rate? Marketing Cost?

Thanks in advance,

Dave

[Answerbase]

Hi Dave,

Well, as a general business rule....the two most important metrics is (1) how much does it cost to acquire a customer and (2) what is the lifetime value, otherwise known as LTV, of those customers.   If your LTV isn't 3x what your cost of acquisition is....you're probably out of business after awhile so track that balance like crazy and look to optimize.

At Answerbase we help with both of these with our product question and answer app as we increase conversions of customers who are on your site and then naturally growing content which brings you organic search traffic which we've seen has up to a 2x higher average LTV than other Google search traffic (we have case studies on our site).   Not sure whether you're just starting out or established, but wish you the best and hope this was helpful.

[RoboNegotiator]

Can you explain in layman's term (for a given month like I gave example)? I am black and white guy and want to see what it means to my store income / loss for month 1, 2, 3. .... May be, you are suggesting it is OK to have losses for few months as long as LTV and all make up in future.. Is it correct?

[Tony_Bui]

Hi Dave, 

Its great that you're thinking about long term profitability. Not many merchants do! If I could give a few suggestions that I use to stay profitable:

1. Test free traffic strategies. This costs time rather than hours, but creating a presence on forums and buiding an audience on social platforms has proven great for me and countless other. Depending on the product, Instagram and Pinterest are great places to provide value through media content, which can then be used to drive traffic to your store through links. I've even used Reddit, which is even more difficult but even more rewarding. Just remember to never blatantly advertise there - Redditors will sniff you out and pick you apart. Look for ways to humanize your brand and connect with the communities there. 

2. Use upsell strategies. There's a ton of apps on the Shopify app store to add upsell and cross-sell functionality to your store. You're operating with a 25% profit margin right now, but that can be double with an upsell. Look for products that complement your offer or give the option of a quantiy upsell (discount with more than one item purchase).

3. SEO. Appearing on organic search engines takes time to build, but can generate warm traffic once you know how to keep google happy. If you can provide value through blog content on your site, you'll strengthen your branding, build trust and find yourself with opportunity to subtly promote your products in the process. If you've got a knack for writing, the process is entirely free (although time consuming). 

Hope these suggestions help. It's always better to rely on a host of different traffic strategies so you're not completely dependant on paid advertising.

Good luck!