Another Monday morning. Get out of bed, go to the office, check your Google Analytics to see if your campaigns has generated any revenue and to find out if there is a positive ROI on your campaigns overall.
Let’s say you’ve spent 30.000 EUR on AdWords advertising. The result is 30.000 sessions generating 600 transactions with a total value of 60.000 EUR. This is a 2% conversion rate and an average basket size of 100 EUR. Not bad at all.
You spent 30.000 EUR and generated 60.000 EUR. In Google Analytics you can look into your AdWords performance under your traffic sources and see that you have a positive ROI of 200%. 60.000 EUR in revenue divided with 30.000 EUR invested in AdWords. Things are looking great!
Or are they?
In e-commerce nothing is for certain. Further investigation will show you that Google itself explain that ROI is related to your net profit defined as Revenue – Cost of goods sold (COGS). According to the article the ROI metric you see in Google Analytics leaves out the money you spent on producing your product. The ROI metrics should look like this:
Instead of just: (Revenue / Advertising).
Let’s say you’re a brand manufacturer of fashion clothes for men with a margin of 70% on your retail sales price. This gives you a COGS on:
0.3*60.000= 18.000 EUR
Your ROI is then: 60.000-(18.000+30.000)/18.000+30.000= 25%.
This is quite alright. Still looking at a positive ROI, right?
Not necessarily. When dealing with a physical product within e-commerce you also have to be extremely focused on return rates which in some categories can be above 50%. You also have to think about the cost of handling the order as well as costs for payment and shipping.
In that regard common profit eaters are Free shipping and Free Return. If you offer your customers to pay by invoice or by Paypal, you need to be aware that these payment methods are significantly more expensive than a normal credit card. Bottom line is that all these initiatives might be necessary in order for you to be relevant as a shop but be aware that they take a big bite out of your profit.
When doing cross-boarder e-commerce you will also realize that the behaviour is very different from country to country. Cost of traffic, conversion rates, return rates, shipping and payment costs differs from place to place which makes it crucial to develop a solid P/L model of the total operation showing you whether you are on track in each country or not. You will realize that a positive ROI of 200-1000% is not the case. At the most you will have a double digit ROI – if you’re lucky! There is not much margin left when you have paid everything so you need to be rather precise in your daily business across countries.
A sophisticated operations model will also take into account that you might lose money on the first sale, but if you are able to build an effective retention program and make more sales to the same customer, you might be able to build a truly great business.