My partner (and brother) Jeffrey shared an insight last week while interviewing a prospective client. A senior vice president of marketing and sales, she is overwhelmed with all the data her staff produces. She’s also a reader of this column, so she asked me why I never explained it here. Mea culpa! I’ll share with you what Jeffrey shared with her.
Many of you know of our fondness for going back to basics, so I’ll keep this simple and organize it by objectives, strategy, and tactics.
- The objective is to make a profit.
- The strategy is to buy low and sell high.
- The tactics are how you run your business.
Getting a handle on your data and distilling lots of data into meaningful and manageable information — it’s really that simple! Promise.
Here’s the information he gave to her:
- Objective. The board and executives get the cash flow, profit and loss, and balance sheet reports.
- Strategy. Management gets the gross and net sales, cost of goods sold (CGS), sales per visitor (SPV), cost per visitor (CPV), and customer conversion rate (CCR) reports.
- Tactics. The staff gets all the raw data that feeds the management reports, built up from the overall site performance, individual promotions, fulfillment, customer service, and so on.
I’m not oversimplifying. I can hear you saying, “What about this report or that metric?” We’ll happily take the credit, but it wasn’t Future Now that developed the science of management reporting. For a management reporting system to be meaningful, everything must flow into the financial statements. If you can think of a metric that doesn’t seem to be a subset of one of these management reports, email me. Even if I can’t show you how it is a subset, I probably can show you why it’s not worth measuring.
First, let’s define the concepts from the management reports:
- Gross sales: This is your total sales at the prices you originally invoiced (you know darn well you’ll probably never see all of it).
- Net sales: Net sales equal gross sales minus discounts, returns, allowances, and any other adjustments your customers were able to squeeze out of you.
- CGS: Also called cost of sales, this is traditionally a measure of the cost of buying raw materials, if any, and producing your finished products. Included are direct costs, such as labor and overhead. You deduct your CGS from your net sales to arrive at your gross profit. If you have no employees and no overhead and your product costs nothing to create, your net sales and your gross profit are the same. Call me, I’d like to invest.
- SPV: The SPV shows the actual average dollar amount purchased per visitor (not per order). This measures both marketing efficiency and the ability of your site to close orders. You don’t need me to tell you that you want this number to be as high as possible.
- CPV: Divide all those maddening marketing expenses (or marketing expenses plus Web expenses) by the number of unique visitors.
- CCR: This is the ratio of orders to site visits, sometimes called the sales closing rate. It measures how well your site can turn a visitor into a buyer. The buck starts here.
Why are these are the key metrics you need to manage your business?
Gross and net sales and CGS. If you buy low, say $10 per unit, and sell high, say $15 per unit, $5 is the difference. Voila! Your gross profit. No gross profit, no business. I said it was simple — and it doesn’t get any simpler than that.
SPV. The idea is to increase your SPV (sell high). Factors affecting this include the quality of your traffic and merchandizing. You can improve your SPV by increasing your CCR, average order size, or both.
CPV. Lower your CPV (buy low). Factors affecting this are the effectiveness of your online presence and merchandizing. You can also improve your CPV by increasing your CCR, decreasing your marketing expenses, or both.
CCR. This is the heart of the matter. Put in place a system for increasing your CCR as an ongoing exercise. This exercise, more than anything else, will help you buy low and sell high. Nothing you can do will affect your profit and loss statement as dramatically or increase your return on investment (ROI) as much as improving your CCR.
E-commerce is a numbers game. The trick is to focus on the right numbers so that you can make accurate decisions about how to improve your site and, ultimately, your CCR. We offer a free download on our Web site: an Excel spreadsheet that instantly calculates the key metrics you need to track as you work to increase your conversion rate. My experience has been that few companies are collecting the right data or, like the executive mentioned above, are so overwhelmed with data that they don’t know what to do with it. It’s up to you: Will you drown in data that’s voluminous but useless, or will you reap the benefits of meaningful information?
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