As an e-commerce business owner, you know that what gets measured gets managed – data has the biggest impact when it’s used to make decisions about your brand. Different types of e-commerce brands have different priorities, and in this week’s post, we’re explaining which Key Performance Indicators (KPIs) you should be tracking.
Return on Working Capital
No matter what type of business you’ve built, the most important metric to pay attention to is your Return on Working Capital, or ROWC.
Your ROWC is your indicator of how much bang you’re getting for your buck: how much money is your money making you? You can calculate your ROWC by dividing your PAG (or Post-Advertising Gross) by your inventory investment. For example, if you buy $100,000 worth of inventory in a year, and you gross $250,000 (after accounting for your ad spend), you’ve got an ROWC of 2.5; every dollar you put into your business yields $2.50 in return.
This important data piece tells you whether you’re spending your money in the right places and whether your product is bringing as much to the table as you think it is. No matter what type of business model you’re running, every e-commerce business offers a product to a client base, so every business benefits from understanding the impact of their invested capital.
White Label Kit Arbitrage
The first type of business we’re examining is a white label arbitrage business. These brands buy a product from their manufacturer, put their brand labeling on it, and strive to be the only ones selling in their particular listing. Their growth strategy emphasizes relationships with their manufacturers, and they should strive to continuously identify new opportunities to sell within their niche.
Because of this concentrated focus on a particular sales category, we recommend tracking ROWC, then new products, and finally, PAG. New product development is particularly important to this type of seller because if you want to be the only one selling in your niche, you’d better have the best possible product customers can buy. Then you can worry about measuring your PAG and making sure you’re spending your advertising money in the right places.
Supply Chain Arbitrage
The next and most popular business model we come across at Seller Accountant is Supply Chain Arbitrage. This is a traditional data-driven sales model in which sellers source their products from a manufacturer but don’t concentrate on a single customer or product niche. These sellers take advantage of cutting out the retail middleman.
Similarly to a White Label Arbitrage business, Supply Chain Arbitrage sellers should focus on ROWC, new products, and PAG, but for different reasons. Supply Chain Arbitrage businesses concentrate on a growth strategy based on keyword density and search volume – they look to source and sell products that are popular with sellers in the moment rather than trying to drive demand themselves. These sellers are happy on Amazon and rarely expand out to international markets or become direct-to-consumer businesses. Therefore, the name of the game for them is product discovery (expanding their listings to chase consumer habits) and tracking ad spend (maximizing their margins by honing in on successful ad placement).
Heavily Branded Private Label
Private label sellers have a lot in common with White Label Arbitrage sellers, but their focus is the opposite: instead of focusing their attention on a quality product, they concentrate on building an ideal customer base and markets their products towards loyal buyers. These sellers, much like Supply Chain Arbitrage businesses, pay attention to keyword and algorithm data to gain insight on what their base might be looking to buy next, and they’re good candidates for eventually going off-Amazon and becoming D2C brands who sell mostly from their own website.
Since these brands grow primarily through expanding their product line or picking up additional sales channels and international markets, they should track their ROWC, PAG, and ways to keep the attention of their existing customer base – new products and new sales channels. For these sellers, PAG has a bigger impact than product growth, since their business strategy is most effective when they can keep their name in the forefront of buyers’ minds.
Direct to Consumer Brand
Direct to Consumer (or D2C) brands are the most customer-focused businesses of the bunch; these sellers often have a built-in fanbase from the very beginning, having grown their brand from a Kickstarter, influencer campaign, or social following. The customer loyalty for these sellers is to the products and branding itself rather than the sales channel, so they typically make most of their sales from their own site rather than a marketplace like Amazon.
These sellers will grow their brands through expanding their customer base while developing new products to meet the needs of that base. Aside from ROWC, these brands should pay careful attention to their return on ad spend (how much profit they gain per advertising dollar spent) and their lifetime value ratio (the revenue a customer is expected to bring in over the course of their relationship with the brand). These metrics focus on meeting the needs of the customer in exchange for their brand loyalty. And along those same lines, these brands should also invest in testing and targeting new marketing channels to expand their brand recognition.
When considering which pieces of data you should give your attention to, the most important question to ask yourself is “who am I as a seller?” Understanding your brand niche and growth strategy will help you hone in on the strengths of your business and take away the stress of worrying about irrelevant performance metrics.
If you’re ready to get CFO-level advising at a fraction of the in-house cost, book a free 15-minute discovery call with us today.