The ULTIMATE ecommerce business in 2024 

by Tom Bruce

I’m a former CFO, I worked for an ecommerce software startup, and then spent the last 13 years building an ecommerce marketing agency.  I’ve worked with the small and the large and everything in between.

 

 

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Contribution margin per transaction

The most important thing in ecommerce is what you get from a customer.  Why?  Because the more you get from a customer, the more you can afford to pay to get more customers.  That’s a competitive advantage.  Contribution margin is the dollars you make per order after covering your variable costs to fulfill the order like inventory, shipping and credit card fees.

If your contribution margin per order is $18, you will have a difficult time paying to drive quality traffic to your site to scale your business.

Why?  Because the cost to get a customer is cost per click divided by conversion rate.

If quality traffic costs $.50 and a typical conversion rate is 2%, then you’re looking at a $25 CPA.  You just lost money.  To make money, you probably can only pay $.20 per click, that’s not going to get you any scale, and you’ll struggle to make many ad types and platforms even work.

Let’s say your contribution margin is $200.  You can pay $3 per click and still make money!  $3/2% = $150 CPA.  Profit per transaction of $50.  If you can pay that much per click, then my friend you can likely afford to run search ads, shopping ads, retargeting ads, video and static ads across Google, YouTube, Meta, CTV and everywhere else.  You can scale!

 

 

Multiple Purchases Per Customer

The top table, in the chart below, shows how profitable a single customer is at different levels of contribution margin assuming a CPA of $40.  The bottom table shows what it looks like if each customer makes 3 purchases.  The difference is staggering.  If contribution margin is $175, but each customer buys 3 times, that increases the contribution margin of a customer to $525.  At this level, there are very few ad channels that aren’t available for you to scale into.  You can build a very profitable and significant ecommerce business with one hand tied behind your back.

How can a brand drive multiple purchases?

• Sell replenishable products and motivate customers to reorder via reminders, subscriptions, discount offers
• Offer reward programs for members to encourage purchase loyalty
• Sell B2B products with a good assortment so a target market buys repeatedly (say a restaurant equipment provider)
• Provide outstanding service so people love the brand and choose to repurchase via loyalty
• Reengage customers strategically and respectfully to increase brand loyalty and demand

 

A business that works using audience-targeted ads.  💵 💵 💵

Every sustainable ecommerce business should be able to drive sales in search and shopping ads.  You’re serving relevant ads to people who are actively in-market to buy what you sell.  These ads are served in response to a search but they have limited scale and are vulnerable to disruption by competitors, especially the big ones like Amazon and Temu.  They can cut your opportunity in half in a day, I’ve seen it happen numerous times.

Audience-based ads are any ads served to an audience, often a targeted audience. These audiences don’t always have the same degree of readiness to buy, as someone actively searching for a product and thus will at times convert at a lower direct rate. But these auctions are NOT a zero-sum game like search auctions. Why does that matter? Because when you want to scale your business, audiences unlock linear incremental traffic that costs grow exponentially on in search. 📈

Why should a brand care about audience-based ads?

• Huge scalable market with numerous platforms available
• Far less vulnerable to disruption from big competitors
• Ability to serve custom creatives to build a brand story and connection that offers long-term benefits
• Ability to capture customers not already in market (searching)

Sounds great, right?

There are challenges:  Unless you have a massive contribution margin per customer, you need more advanced skills to succeed:

• The measurement of these ads is terrible, you can’t trust the ad platform or a third-party click-based system – you have to do better or these ads won’t work (more on this later)
• Creative – can’t suck, can’t be the same all the time, aim for positive engagement and brand impression, but you can add a direct response call to action as well
• Depending upon your target market, you may need more advanced audience targeting than what’s available in the platforms natively
• CPA’s are often 20-50% higher than what you might find in search and shopping ads because you’re advertising largely to people not presently in market. Hence the need to have high contribution margin per order, or per customer.

The best ecommerce business finds success in audience targeted ads as well as search ads because that protects them from vulnerabilities in search only.  Customized creatives also build brand recognition, a long-term asset.

 

 

What’s more powerful than building a brand that’s memorable?

Very few things – building a strong brand results in more demand for your products, higher conversion rates due to brand trust, and lower price sensitivity – dropping dollars straight to the bottom line. If you don’t have brand affinity, then when you turn off your marketing channels, sales tank quickly. If you have brand affinity, they have staying power.

Thoughtful creative strategies without an incessant focus on short-term ROAS is important for building brand affinity. This is valuable because customers are less price sensitive and they start their search for your brand rather than starting with a search for a product – cutting out the likelihood that customer finds a competitor instead.

How do you know if it’s working?

You won’t if you try to use click-based measurement. The click path is almost always broken, and many people see the ads and form an impression without even clicking, and many will click multiple times. But none of that data is available to you in GA.  It’s completely broken. But here’s a quick way:

Measure the 4 ways people navigate to your site:

• Direct – type in your url
• Search – they then click on your organic listing
• Search – they then click on a brand shopping ad
• Search – they then click on a brand text ad

These are navigational clicks – they didn’t cause sales, they are people trying to get on your site.  Measure the volume of people who take these actions each quarter.  If brand affinity is increasing, these numbers will reflect it.  Don’t make the mistake of including non-brand organic searches.  This measurement is a capability we are building into our Scaling Path channel measurement software right now.

But realize that brand affinity takes a long time to create.  Many ecommerce brands struggle to invest in this.  One hack is to build creatives that are focused on creating brand affinity but also have a direct response call to action.  This can boost some shorter-term success metrics as well as achieve the longer-term goals.

These are navigational clicks – they didn’t cause sales; they are people trying to get on your site. Measure the volume of people who take these actions each quarter. If brand affinity is increasing, these numbers will reflect it. Don’t make the mistake of including non-brand organic searches. This measurement is a capability we are building into our Scaling Path channel measurement software right now.

But realize that brand affinity takes a long time to create. Many ecommerce brands struggle to invest in this. One hack is to build creatives that are focused on creating brand affinity but also have a direct response call to action. This can boost some shorter-term success metrics as well as achieve the longer-term goals.

 

 

Improved channel measurement

You will never scale a business if you believe the measurements coming from Google Analytics, and if you believe the measurements coming from ad platforms, you will overspend and drive yourself right out of business.

You need improved channel measurement and incrementality protections. Attribution software systems claim to improve channel measurement, but rarely will show you the logic for how they do so. We built Scaling Path to improve channel measurement accuracy in an understandable fashion, and we also provide incrementality protection. And we provide services to make it all very easy for our clients to manage and benefit from. These are things you need in order to grow profitably.

The table above compares ad platform measurements against GA4 and our own systems calculations. The ad platforms are grossly overvaluing the revenue attributable to paid channels, making it look highly profitable and encouraging much higher spend. GA4 tells the opposite story with very little sales credit to paid channels. This is vastly understated largely because the paid channels aren’t the last interaction in the path to purchase. Our system (SP Attr) shows paid channels are profitable, but not so profitable as to be a massive opportunity for growth in this case.

Many ecommerce brands follow ad platform or GA4 as their guiding light. Or, they make adjustments to goals to try to drive more upper funnel even though it is poorly measured. Ultimately there is a great deal of guesswork in this equation. A more logical approach drives brands further. Additionally, it is not a good practice to report on channels with very low ROAS and spend a lot on them. If you believe the channels are doing more, then the measurement should be adjusted to reflect that. Otherwise, guesswork continues along with a great deal of organizational confusion and inefficiency when trying to discuss why things are the way they are.

We recently helped a brand increase profit 27% by giving them the confidence to increase spend in key channels that were strong drivers of new visitors and sales, but had been devalued by their click-based measurement system.

 

Multiple channels

Physical distribution enables consumers to see and touch the products. This can create a lot of demand for your products that may convert online. Online advertising can drive consumers to buy online or in store locations, often increasing overall conversion rates. A rising tide lifts all boats.

Online marketplaces can create a similar network effect to lift the business overall, however, rules and constraints can make this less of a no-brainer. For example, if a brand sends any product to sell through Amazon, Amazon then acquires the right to bid on that sellers brand name in Google ads per Amazons terms and conditions. This can be disadvantageous, so online marketplace selling needs to be assessed carefully.

If I owned a brand that had extensive physical distribution, then I would invest a great deal into creating brand and product affinity, knowing that it would increase demand, awareness, and conversion rate both in stores and online on my own website as well as other retailers’ sites. It is much more difficult to measure omni-channel impact than it is to measure the direct sales on your own site, but the advantage of being able to convert a sale with more options of convenience for the customer is huge.

 

 

Building the Ultimate ecommerce Business from Scratch

Firstly, pick a target market where the amount of money I can make per order and customer is substantial so that I can afford advertising to scale up my customer acquisition and revenue. I’m going to pick car mods. People often spend $600-$5k on car parts, so at a 35% contribution margin we can make $200-$1.5k/order. These customers typically have recurring needs and if they know and trust us, they’ll likely come back for more. Potential for a higher customer value, ~$500-$5k of contribution margin per customer.

Now I’m going to launch search & shopping ads to scale, knowing I can pay $150 or more per customer. Since CPC/CR = CPA. If I convert 1.5% of clicks to a customer, then I can pay $2 per click as follows $2/1.5% = $166 cost per customer acquired. Getting the volume to get this off the ground.

I don’t want to be vulnerable to search & shopping, knowing competitors could cause CPC to increase, something I have no control over. Testing into audience-based ads will diversify my customer acquisition strategy. Meta is a great place to start, generating a set of creatives that tell our story and run the ads. I know the measurement is broken so I will implement lift tests to see if we can generate sales lift in certain geographies prior to scaling. Since I can sustain a CPA of $150+, I should be able to find success. Once successful in Meta, YouTube & connected TV are next.

Things are rocking and hitting some scale! Now to grow margins & build brand affinity for a lasting business.

 

Strategy:

• Posting on auto modification forums – sharing expertise and support to build loyalty & demand with our target market.
• Posting blogs with beautiful pictures & project cars just like our target market.
• Investing in intentional creatives to improve efficacy on social media channels including brand and continued direct response campaigns.
• Setup a measurement of demand that is coming to the site through the 4 navigational pathways proving demand is increasing.
• Build a customer support team who talk to customers about their projects building further loyalty.

Traffic and sales are coming from all over now! But are we spending the right amount or allocating it correctly? Are we wasting ad budget? We’re never going to figure this out using GA4/ad platform measurements. Time to build a custom model that is accountable to the P&L. It memorializes what we know different channels contribute so we make good decisions and effectively communicate across the organization.

Lastly, for world dominance, expanding beyond D2C; online marketplaces & physical stores. Test putting a limited product assortment in automotive appearance centers around the country, along with our full catalog to showcase to their customers.

 

Now it’s time to sell for $100M and take a well-deserved break

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