How to Build a Rock-Solid Ecommerce Financial Model

In the startup world, SaaS is king (and you know this - it’s discussed everywhere, constantly). SaaS financial models are straightforward: they show recurring revenue and large growth potential with just a handful of variables, which pumps investors up and is easy to manage.

Ecommerce financial models are a totally different animal with a lot more to think about, but this type of company can be just as profitable and appealing to potential investors. When done right, a solid ecommerce model can also make decision-making a no-brainer for founders.

“Ecommerce” basically just means business conducted online, whether that’s goods, services, business-to-business (B2B) sales, or business-to-consumer (B2C) sales. Essentially, any online store is an ecommerce business. While this type of model has some obvious perks - less overhead from not having a brick-and-mortar storefront, for one - there are also some challenges. Let’s dive into a few unique considerations for ecommerce financial modeling.

Table of Contents

• Costs To Consider: Think About All the “Stuff”

• Conversion Rates and CAC: Know Your Numbers

• Conclusion: Let’s Build It

Costs To Consider: Think About All the “Stuff”

Simply put, the biggest difference in building an ecommerce model compared to any other type of business is the “stuff”: buying the stuff, storing the stuff, shipping the stuff, etc.

While dropshipping and services companies don’t have this to worry about, most ecommerce businesses selling goods need to have inventory on hand, and a place to store those goods until they sell. Other questions to consider for your inventory model include: 

Wholesale costs
What are you paying your supplier per item? This is your “per-unit cost.” Does this number decrease as your business grows and you make larger orders? Or is it a flat cost with no volume discount?

Shipping to you
Does your wholesaler charge a shipping fee? Is it a per-unit cost, a flat fee per order, and is it variable based on the time of year or current demand?

Storage
Are you paying for a physical warehouse to store your products? Are there any other hidden costs to this space in addition to the rent like utilities or building maintenance fees that you should account for?

Inventory management system
Are you currently using an inventory management system or a fulfillment center? What are these expenses on a per-item or per-month basis?

Depreciation
Are you selling items that lose their value quickly or have an expiration date? What is your historical sales volume, and how long do wholesale orders take to receive? Use this data to figure out exactly how much inventory you should keep on hand. It will never be a perfect science, but you want to find the “Goldilocks” amount: not too much, not too little, but just right.

Packaging and shipping to your customers
What are the costs of packing materials and promotional materials you may want to include with each order? Where are you shipping to? Are you offering free shipping, or charging for shipping, and how does this choice affect the sales price of your items?

Exchanges and returns
Are there hidden costs associated with your exchange and refund policy? Are you paying for return shipping? Can you resell an item that has been returned if it isn’t defective?

Labor
Are you paying anyone to manage any of the previously mentioned considerations? Hiring customer service reps or virtual assistants to help with returns, or hiring warehouse employees to pack and ship orders and run the inventory management systems can increase your efficiency. Plan your hires to match demand as your business scales. Employees are typically the largest expense to a business, and taxes, benefits, and hourly rates should be carefully planned.

International expansion
If you’re planning to expand outside of your local country, there are a few unique costs to consider. Currency exchange rates and/or Value-Added Taxes (VAT, which are common outside of the US) can make your margins vary widely in different markets. Shipping also takes longer and costs more when crossing international borders. Language barriers can pose customer service challenges, and you'll also need to develop content translations for new markets that speak different languages.

Inflation
This may be the word of the year, but inevitably, things get more expensive over time. You should plan a steady increase in your costs in your financial model. Including the historical highs and lows we’ve seen in recent times, the average rate of inflation in the US over the past decade is somewhere between 2-3% annually.

Conversion Rates and CAC: Know Your Numbers

In an online sales environment, without clicks, leads, and conversions, you have no customers. No customers, no revenue, no business.

So, you're probably going to spend money on marketing. Keeping track of your marketing spend can quickly become complicated, especially if you’re using many digital marketing platforms and social media channels to connect with potential customers. This is where CAC comes into play, and it's going to be the north star in your ecommerce financial model.

Understanding your Customer Acquisition Cost (CAC) is the key to growth.

This metric sounds more complicated than it truly is. What are you spending on sales and marketing, and how many new buyers does that spend actually get you? That’s it!

CAC = Marketing + Sales Expenses / # of New Customers

If you're spending money on several different platforms, calculate your CAC for each channel. You'll quickly be able to see which channels are the most profitable and optimize your spending accordingly.

Segment Conversion by Stage

Tracking conversion rates at all stages can also give you great insight into why you’re getting sales (or losing them). Start by defining each funnel from top to bottom:

• What percentage of your visitors become subscribers?
• What percentage of subscribers become shoppers?
• What percentage of shoppers become buyers?
• What percentage of buyers become repeat buyers?

If you’re trying a lot of different marketing channels with variable costs, it’s important to track this data with as much detail as possible. Different social media platforms, for example, attract different audiences. Maybe your ads on Instagram convert at a completely different rate than those same ads on Facebook. Tracking this data will tell you what is working and what isn’t.

You also may notice small things that are impacting your sales by consistently looking at these conversion rates at every stage of the sale. One example: if you’re getting a lot of people who add an item to their cart but don’t complete a purchase, maybe there’s something wrong with your site, or maybe you need to add alternative payment methods at checkout to make it easier to complete an order.

It’s always a good idea to periodically go through the entire buying process, or “eat your own dog food” from time to time. Regularly walking through a customer’s firsthand user experience allows you to improve and evolve.

When you're tracking every stage for every channel, it's a challenge to keep that data clean and organized. This is why it's a challenge to build a good ecommerce financial model. A premium solution like Forecastr can make all the difference. But you can get there in a spreadsheet too. It's just going to require some work on your end to create a system that can pinpoint where and how you should make changes as you grow.

Be willing to experiment. After a few tests, you’ll be able to lean into the channels that bring you the most customers, while not wasting time or money on those that don’t convert. Without knowing these numbers, you’re flying blind and you'll likely burn a lot of cash by playing guessing games.

Conclusion: Let’s Build It

Building an ecommerce business is a great opportunity to bring a product you’re truly passionate about to the masses.

Modeling all of the variables shouldn’t scare you off. If you don't know where to start, download our ecommerce financial model template - there's a quick instructional video included and it's a great way to get a head start!

Knowing your numbers, analyzing them, and being willing to try new things are all catalysts for success. And if you need some help, Forecastr has your back! Schedule a call with one of our modeling specialists to see if our easy-to-use, easy-to-share software (and expert human guidance to go with it) could be the right answer for your business.