- Hey guys, Sam here from keycommerce.com.
In this video you're going to learn the easy math
behind e-commerce success.
I'm going to share with you a template that I created
that breaks down all the metrics in a buyer's journey
for your e-commerce store to show you the huge impact
that each point of the journey has
on the profitability of your store.
Let's get into it.
(upbeat music)
Okay guys, so I'm gonna leave a link
to this template down in the description below.
Go check it out at the end of the video.
Let me explain it right here right now.
Okay, the first thing you need to do is go to file
and click make a copy.
So important guys.
I've got the instructions here as well.
I get so many emails from you guys that are trying to access
any template that I create for you.
And you can't edit this one.
You need to create your own copy.
The reason is I can't let you edit this one
because this is shared by everybody, okay?
So go file, make a copy, create it for your own,
and now you can start editing all these different fields.
Okay, so let me break it down for you.
So we had this big table here and the goal here,
is to teach you guys all these different metrics
that are really important,
especially for Google ads and Google shopping,
what they mean, the abbreviation, the formula
and the explanation.
And you're going to be able to adjust each of these metrics
to see the impact on the final result.
And this is just gonna blow your mind
in terms of the effects that each metric can have
on your profitability.
And a lot of people wonder why aren't my ads profitable?
Why is this wrong?
Or why am I getting sales but I'm not making any money.
This is gonna answer so many questions.
So let me run through it right now.
So we have impressions, clicks, click through rates,
and average cost per click and cost.
These top metrics they're largely
in your Google ads account.
Okay, so impressions,
that's how many people actually viewed your ad.
The clicks that's the people that actually clicked on it.
So you might have...
That number is always gonna be bigger than the next one,
the impressions over clicks.
And so a thousand people view this ad,
a hundred people clicked.
The reason I have two columns,
is that I want to make it really easy
for you to compare changes in the metrics.
So at first we had the click through rate,
which is the percentage of people that clicked your ad
after viewing it.
So for example, let's say in the case to...
Let's say that 150 people clicked it
and the same amount of people viewed it.
That means the click through rate goes up to 15%.
And of course a higher click through rate
is gonna indicate potentially more ad relevancy.
It's also gonna indicate that you've got a higher ranking
in the ads too, because people click the top ads
more than others, but that's...
You can see how clearly
that actually changes that metric obviously.
The next one is average cost per click.
This is the average that you're paying,
basically you're bidding.
Okay, and of course, when you look at this,
this is gonna be over a period of time.
And you see here if I changed the average constable to 150,
the cost changes of course.
This is really basic stuff
we'll get into the mini stuff right now.
I've got an explanation here.
That's the actual formula, really easy, easy stuff.
The next thing, real important conversions.
This is the number of actual transactions
or orders on your site, for this actual campaign
or your ad account basically.
And it's gonna work out the conversionary.
So say if you've got three,
three divided by a hundred clicks equals 3%,
conversion rate is 3%.
That's pretty average for an e-commerce store.
It's not amazing, it's not bad, but it's just average.
And it also calculates your cost per acquisition.
If it's yellow, it means you can edit these fields.
Don't touch the other ones 'cause there are formulas, okay?
So three conversions...
3% conversion rate, and you'll see here,
look, we already have a difference
in the cost per acquisition.
Cost per acquisition is on average how much are you paying
to acquire each customer?
So just by increasing your bid to $1.50,
suddenly you're paying $17 more to acquire that customer.
And so you can see now I talk about this in all my videos,
bidding is so important.
It really has a huge impact and a lot of the time...
But the first thing I'm gonna look at in the new account
that I'm auditing or in one of my own accounts,
is the bidding, because that has the biggest impact already,
because it's right at the top, the very, very start, okay?
So you can see that it's just 50 cents increasing that,
suddenly increase the cost per acquisition by $17.
And it means that if you look down at the actual profit
after ad spend, I'm gonna get to this in a second
but we're actually losing money
compared to actually gaining money,
actually profiting versus losing.
So you can see as you go down the funnel,
it actually has a huge, huge impact.
And I want people to understand this
because people often don't even think
about the bidding at all.
It's not something they consider.
They just kind of put it in there.
And maybe because they don't understand it,
they don't understand the algorithm,
they don't understand how it works.
Well, this is what you can often do
for accounts that are just not profitable.
Just reduce the bids, reducing your bids a bit
and you go off and push that account,
that campaign into profitability is fantastic.
So the next thing we have is the average order value.
This is something you can put in yourself.
So on average, when someone goes to your site and converts
how much they spend on average,
I made it editable because I want it to fit in
with this formula.
But you can calculate that by just getting your total sales
divided by your number of conversions, really, really easy.
And that calculates total number of sales,
the return on ad spend.
So total sales, of course you understand that.
That's the total actually number of revenue, the sales,
the income that you get, not counting expenses or anything
just total sales.
The return on ad spend, that's the...
For every $1 you put into the ads,
how much do you get back in sales?
And of course, this is calculated here by total sales
divided by cost.
So you see increasing the bid, increases the cost.
You get the same amount of conversions.
So the conversion rate stays the same,
but then your return on ad spend decreases.
So you see here, this is really, really important.
You become less profitable, basically.
You can get the same amount of clicks,
and those clicks are of the same quality.
So I mean, they convert at the same rate
and they still deliver the same average order value,
you're losing , your return on ad spend,
your ROAS goes down, that's bad.
ROAS is a very important metric of a successful account.
Gives you a lot of information about the profitability
of that account.
It doesn't tell you as much about the volume of orders
'cause you also have volume of conversions
and profitability, that's conversions.
A good balance between two of those,
lead to more actual profits,
a dollar amount in your actual bank account
at the end of the month.
The next thing here, we have profit margins.
So this is something that you can put in for yourself.
I've got a big video on how to calculate this.
I provide you guys a template to how to calculate that.
That's really important 'cause pulling that in,
lets the spreadsheet calculate
your breakeven return on ad spend, okay?
So I explained the profit margin here
that's getting into the financial stuff.
It's really basic, basically your sales minus your expenses
which is like your Shopify apps,
your Shopify subscription, app subscriptions.
If you have a warehouse or any rent,
anything like that, minus your COGS.
COGS stands for cost of goods sold.
It's an accounting term that basically refers to
how much you can pay your supplier.
I won't get into that right now,
but that's pretty much all you need to know
but this calculates your breakeven row.
It's a very simple formula that I talked about
in a lot of my videos, one divided by your profit margin.
So you see for both of these,
if I increase the profit margin here to 40%,
suddenly the breakeven ROAS lowers.
So we...
Basically, what this means is that,
we need the return on ad spend to be greater than this
and it's going to be profitable.
So you see here, if I can put this back to 30%, 3.33,
is bigger than the actual return on ad spend.
So I already know, before I look at this amount,
it's gonna be a loss.
So you're losing.
And that's a really good way
to quickly look at your campaigns.
Even your products, keywords, everything, and know, okay
this is making money or not, because you have this measure
at breakeven or it's on an ad spend.
And you can see if you can get a better deal
with your supply, you can reduce your expenses
suddenly with changing your profit margin.
Say, if I increase it to 50%, boom, we're making even more
with this new profit margin, even though the bid is higher.
So even though the actual cost is higher,
we're actually making more
and I'm going to get to this right now.
Okay so explain this here.
So we've got two different rows here
that explain the profits, because you...
I put in a profit before ad spend, and this is your sales
minus expenses, minus your cost of products
with the supplier, before you take away ad spend.
And then this one here,
we just take away ad spend on top of that.
So you can see here 135.
And I actually calculate it here because I just used
the profit margin to make it really easy.
So if you can know your profit margin,
is just gonna times that by your actual total sales.
That's pretty much the same thing,
but it's just doing it in a different way.
But then we actually then take away the cost of the ads,
so ends up being $35.
And so this actually takes into account the cost of your ads
as well as the extra profit you're generating
to work out what you should have and when the day's done,
the actual profit that you'll have after paying Google,
paying the supplier, paying for all your apps
and all that sort of stuff.
That's how much you would have.
And so this, that's why I highlighted that in yellow.
You're not meant to change that,
but I highlighted that in yellow so that you can see
it's highlighted, so you can see
that's what you really, really care about.
That's really, really important there, guys.
So let me do some...
I'll do some little tests in a second,
but let me go through the rest of this.
The next thing is average profit per order.
This tells you on average each customer,
each order that comes through,
how much profit does that generate.
That's a really, really good metric.
Really, really good for you to know.
It just helps you to see like in your ad account
but also you're dealing with customers,
say like if each customer...
No it doesn't mean you treat your customers poorly,
but it means you're gonna know on a customer basis
like how much did they actually give you in your pocket
in terms of profit.
Now this last bit here is something a longterm view
that I wanted to show you guys,
which is something that very few people figure about
but it is so powerful.
And I'm gonna show you exactly why here.
So repeat customer rate, this is the percentage of customers
that come back and purchase again, okay?
So someone might come through your ads
the first time you're shopping campaigns
that convert awesome,
but then two months later,
they come back 'cause maybe you send them some emails
with Clavio, maybe they just remembered your store like
I really want to get this other product or this ad
on this accessory, they come back and purchase again.
Or then this actually calculates using that amount
the actual customer lifetime value.
This is the actual...
If someone purchases once,
like that generates you income, but they come back again,
that generates you more income,
but not all of those people are gonna come back
and buy again.
So this is like a bit of a crude way of figuring out
the customer lifetime value,
how much that person actually gives your store in revenue
over the life of that customer, basically.
So the average profit per customer that just works out
you know, using the profit margin,
how much profit overall that customer brings to you.
And so you can see here when you have
a 40% repeat customer rate, the actual profit per customer
is bigger than the average profit per order.
This is really, really interesting.
So this is something to keep in mind guys,
is that even if your ads might give you a loss at the start,
so say if I change this back to 30%, we're making a loss.
If 40% of those customers actually come back
and purchase again,
suddenly we're actually profitable again.
So each customer generates $13 in profits.
It's still not as good as it could be.
This one over here with the same return customer rate
has a $30 in average profit per customer,
but it's still better than nothing.
And so there are some stores out there
often like low ticket stores that I've worked with,
that breakeven, or even make a loss on their campaigns
because it's incredibly competitive,
but they make it all back over the next three to six months
with subscriptions out of products they sell
and really cheap remarketing, whether email marketing
or remarketing campaigns on display network,
or even RLSA campaigns, Facebook remarketing.
Campaigns that get those people back in
and because they already know your brand, they're much more
likely to repeat purchase really important.
Okay, so I've done a few different examples here
but let's do some more examples
and see how this calculator performs
and how your store's profitability changes
with a different example.
Okay, of course the first one I showed you
was the average cost per click.
So bidding has a huge impact
on the profitability of your stores.
That's really important to remember.
The next thing I wanna show you
is about the conversion rate.
Okay, so we had the same case on either side
and all I'm going to change
is the actual number of conversions.
Say, I reduce this one to one.
So our conversion rate goes down to 1%.
Look at how these changes everything.
And this is basically if your store sucks
it doesn't convert people, or if it's okay,
this is the actual difference that your store makes
in converting your customers
and how much that impacts your ads.
And it just boggles my mind guys, how much this impacts
the profitability of your campaigns.
Yes, every part of the journey has an impact
but so many people focus on the ad account
and they don't even think about their website
and improving their product pages,
improving their homepage and making sure it convert.
And a big part of this,
is really understanding your customers.
I know that I've said that so many times, but it's so true.
Even for my own store we spent a lot of time
talking to our customers.
And when we launched our campaigns,
man, they did so well, great conversion rate,
great profit per conversion because our site didn't need
to work hard to convert those people.
They saw the website and it just spoke to them.
I talk about that all the time guys, but it's so true.
And it's the night and day difference
between successful stores I see, and unsuccessful stores.
There's only so much you can do to your ad account
if your stores sucks.
Okay, so important.
So you can see here just by decreasing that,
the two less conversions in that same period reduces the 1%.
And some people have a conversion rate of 1%.
Go and check your metrics right now in the Shopify dash
or in Google analytics, check your conversion rate
and see what it is, because this has a huge impact.
If we put that up to 5%,
suddenly look at the profit, it just explodes, man.
It's crazy.
It's crazy how this changes.
So even just as a slight decrease of one less
in that same period, huge difference.
Because of course the average order value that's not...
That's a meeting ticket (indistinct).
It's hard to get the sound,
but that's pretty average depending on the products
that you're selling.
But that also relates to the actual cost, okay?
So important, but yeah, even if I change, you know,
the return on ad spend that goes down to three.
If I put that up to five, that goes up to 7.5,
way more than the breakeven ROAS.
Man, this is absolutely huge.
And you'll see everything changes.
Even the average profit per customer.
Man, it's crazy, it's absolutely insane.
So that's why I always say make sure you get your website
dialed into those customers, improve the conversion rate.
It's one of the last things people think about.
They just get it set up with some template
but really crafting it signed, it's so, so important.
Okay guys, the next thing I wanna talk about
is the average order value.
I've spoke about this,
I've got a video on how to increase the average order value.
What it is, how to calculate it.
I'll leave that in the description below,
but yet same thing, guys,
if you just met with this, it's gonna change things a lot.
Changing that down to $100, puts that down into a loss.
So if your customers come through your store
and your products are $100,
and that's what you sell and they only buy one product,
then you can see how much of an impact that's going to have
on the profitability of your campaigns.
But say that you could sell them two of that product.
Maybe you have a deal, but they spent over $150,
then they get free shipping
and that's still profitable for you.
Well, something you can see here that the profit
for this campaign goes up a lot,
but especially the average profit per customer
on the customer lifetime value goes up massively.
It's huge because that average order value affects
the repeat customers rate as well, super, super important.
Let's pull that back down to 150,
and then next I wanna look at the profit margin.
And I'm just going through this one by one
'cause it is so, so important.
Like I said before,
just changing this is gonna have a huge impact.
If you can get a better deal with your supply,
even just if you increase your pricing
and it doesn't have a detrimental effect too much
on your conversion rate, this can be a great way
to improve your ads.
So say that was 20%, suddenly the breakeven ROAS
that we need is five, which is lower than 4.5
which is what we have right now.
And boom, we're in a loss,
and we do make money for repeat customer rates.
So that is a good example of that happening,
but still if you have cashflow issues,
don't have a lot of cash to spend on your ads right now,
and you can't bank on those return customers coming back
in three to six months or whenever,
then that makes it really, really hard.
Of course, always the more profit you can have, the better.
Whoops, the more profit that you can have the better.
But if you increase the price of your product too much
then the quantity of conversions you get
are gonna decrease because people aren't gonna want to spend
that much for that product.
They're not gonna see the value.
Also if you decrease the cost,
the actual price that you've paid to your suppliers,
maybe they're going to cut corners.
Maybe you're going to get a lower quality product.
This is also going to impact the repeat customer rate
because those people aren't gonna buy again
if they see a bad quality product sent to them.
So that's also really important.
As an e-commerce store owner,
you're balancing all these different things
as you craft your store
and making these decisions for yourself.
The last thing I wanna look at you guys,
is the repeat customer rate.
And I already talked about this a little bit as well.
A lot of stores especially drop shipping stores
with terrible products,
they get no repeat customers, maybe even 1%.
So let me put in 1% here and you'll see here,
the average profit per customer decreases massively
compared to having 40%.
Now, the reason I put 40% in there
is because a lot of the brand stores that I work with
that are doing really well or even just starting
but have done really well at crafting a strong brand.
They are often at 30 to 40%, which is just insane
because if you think about it this way,
you've already spent all this money here
to acquire this customer.
But here, the added cost to get the extra sale is minimal.
It doesn't cost that much.
If you're using email marketing, your Cluvio subscription
maybe if you have a discount code as that sale maybe,
but even then, if you're just sending out emails to nurture
that customer after they've purchased,
you could win them back
and get another purchase for nothing.
You're just paying for that Cluvio subscription.
It's fantastic.
So that's why it makes it really hard
to scale up your store if no one's coming back
to purchase again.
Even at 10% which is pretty good
for an Ali Express dropshipping store.
One of those templates, those that a lot of people
are trying to get off the ground these days.
It is really, really hard to be profit
'cause at the long run, you're just not making as much.
Even if you look at here, the average profit per order,
it does, those repeat customers bring in an extra $4.
Those 10% of repeat customers do bring in an extra $4.17
in terms of the extra value per customer on top
of the actual initial order.
But overall it's nowhere near that $30,
which is more than double what that one customer generates
for your store.
It's insane guy.
So you can see here with this calculator,
only the link in the description below
you can access this for yourself,
play around with the numbers.
You'll see.
You can put in your own metrics in here too,
and see what happens.
See what happens if you just increase your conversion rate
by a little bit.
See what happens if you decrease your bids, it's all there.
You can use it for yourself.
And it's fantastic to see the impact
that these little changes make for your store
and your profitability.
And I've said this before guys,
your store lives and dies by the numbers.
If you know the metrics and you know what you can improve,
man, it's so powerful because you can focus all your energy
on say the conversion rate
or increasing the average order value.
And then you can pick up those weaknesses
and get your store scaling, growing, and profitable.
That's it for today's video guys.
I really hope that was helpful.
I spent a lot of time creating this
and I hope it was helpful for you guys out there
trying to grow your e-commerce store.
If it was, give this video a like, I appreciate that.
Totally YouTube algorithm and making good content
for you guys.
And let me know in the comments below,
let me know is it helpful?
Is it not, just let me know, I appreciate it anyway.
And if you're not subscribed,
consider subscribing follow along as I help you grow
your e-commerce store.
Thanks for watching guys.
See you in the next one, bye.
(upbeat music)