ABCDEFGHIJKLMNOPQRSTUVWXYZ
1
From Idea to Exit: eCommerce Unit Economics Journey
2
3
Goal: unit economics improve over time
4
If unit economics are getting worse over time, it implies that your business will get progressively less profitable as it grows.
5
If your unit economics are deteriorating, then why would I want to own it at 10X the size?
6
The unit economics of each marginal customer should be better than the last, meaning your business will improve it's moat over time.
7
8
Unit economics definition: the revenue, costs, and profit you make on one customer over their lifetime.
9
CAC: "customer acquisition cost" the amount of marketing you spend to get 1 new customer to buy for the very first time.
10
AOV: "average order value", how much a customer spends on average
11
Contribution margin: how much profit the company makes from an average order after direct per-order costs.
12
LTV (customer lifetime value): how much contribution margin or gross profit a company makes from their relationship with one customer over their LIFETIME of orders.
13
LTV: CAC ratio: how many multiples of gross profit does a company make, compared to the marketing expenses to acquire a customer (CAC).
14
15
eCommerce Dynamics
16
Huge focus on first order => often see low lifetime order numbers (subsciption box is an antidote in some scenarios).
17
Goal of most businesses => breakeven on first order
18
Two ways to have great unit economics => either have a very high CM & low CAC on the first order, or very high lifetime orders.
19
Gross margin vs. contribution margin => quick breakdown
20
21
Gross Margin vs. Contribution Margin Walkthrough
22
23
Orders 1.0 % of Revenue
24
25
Net Revenue (AOV) $ 175
26
27
Product Cost $ 31 18%
28
Import Freight, Duties & Taxes $ 16 9%
29
Product COGS $ 47 27%
30
31
Gross Margin (eComm) $ 128 73%
32
33
Pick & Pack, Materials, 3PL Charges
 $ 11 6%
34
Shipping + Merchant Fees $ 34 19%
35
Fulfillment COGS $ 45 26%
36
37
Contribution Margin $ 83 47%
38
39
40
Case Study: Apparel BrandNotes
41
42
Consumable products => objective is repeat purchases, you may not be LTV positive on first order.
43
Products that you purchase once => objective is very high CM on every order.
44
45
46
eCommerceIdeaLaunchEarly-StageGrowthLate Stage/Exit
47
48
DescriptionProduct idea, doing first product run.Initial launch, some new customers, some that know founder.Early marketing channel fit (FB ads + organic IG).Strong channel fit, scaling aggressively.Scaling various channels, significant repeat sales.
49
Total Customers - 500 2,500 25,000 250,000
50
51
52
Optimal
53
CAC $ 65 $ 33 $ 68 $ 54 $ 48
*Blended CAC dropping as more sales come in organically.
54
AOV (Revenue) $ 165 $ 89 $ 134 $ 148 $ 162
*Driving AOV up through more product variety & bundling.
55
Contribution Margin $ 99 $ 35 $ 66 $ 75 $ 105
56
CM %60%39%49%51%65%
*Product discounts via larger product runs in addition to opening a second distribution center in "Late Stage".
57
Lifetime Orders 3.0 1.0 1.7 2.6 3.1
*Very successful email marketing performance driving repeat.
58
Customer Lifetime Value $ 297 $ 35 $ 112 $ 196 $ 326
59
60
CM: CAC 1.52 1.05 0.97 1.40 2.19
*Always breakeven or better on 1st order.
61
LTV: CAC 4.57 1.05 1.64 3.63 6.80
*Repeat purchasers driving significant revenue.
62
63
Benchmarks
64
CM: CAC Target 1.50 1.00 1.25 1.50 2.00
65
LTV: CAC Target 4.00 1.00 2.00 3.00 5.00
66
67
68
Sub-Optimal
69
CAC *(see below) $ 65 $ 33 $ 79 $ 123 $ 149
*Rising CACs & CPMs as we scale harder into paid without an organic strategy.
70
AOV (Revenue) $ 165 $ 89 $ 134 $ 148 $ 162
*Equivalent AOV increases via new product releases.
71
Contribution Margin $ 99 $ 35 $ 55 $ 71 $ 86
72
CM %60%39%41%48%53%
*No second distribution center, inefficiencies in importing product to warehouses as well.
73
Lifetime Orders 3.0 1.0 1.2 1.5 1.8
*Lower retention, issues with product quality & email marketing.
74
Customer Lifetime Value $ 297 $ 35 $ 66 $ 107 $ 150
75
76
CM: CAC 1.52 1.05 0.70 0.58 0.58
77
LTV: CAC 4.57 1.05 0.83 0.87 1.01
*An LTV: CAC of 1 on a lifetime basis won't cover your OPEX.
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100