The Language of Dropshipping: Key Terms and Metrics Explained
You’re planning on starting a dropshipping business, and you have a good idea of how many products you sell. However, if you want to succeed in the dropshipping game, you've got to keep an eye on some key terms and metrics. These terms & metrics, aligned with each stage of your business journey, will provide essential insights into where to focus next.
Let’s dive in and explore the key terms and metrics every dropshipper should know!
COGS in dropshipping refers to the total cost incurred to purchase products from suppliers that you then sell to customers. The lower your COGS, the higher your potential profit. For example, if you buy a product for $20 and sell it for $50, your COGS is $20, and your gross profit is $30.
Total cost is the total amount of money spent to achieve the current revenue. You can calculate your total costs monthly by adding your monthly fixed costs (like payroll) with your variable costs (like shipping fees). By comparing these numbers, you can see how much your costs are and where to cut corners to boost profits.
Profit margin is the percentage of revenue that remains after costs are deducted. Imagine you sell a t-shirt for $20, but it costs you $10 to buy and ship it. Your profit margin is the $10 left over, which is 50%. A higher profit margin means you’re making more money on each sale.
To boost profit margins, it’s essential to grasp their overall performance and how it impacts their current profit margin. To do this yourself, track the efficiency of your business by assessing your sales, production, and inventory data, then develop stronger sales tactics and business management strategies that collectively work to improve your profit margin.
AOV is the average amount of money spent each time by a customer in your store. It is calculated by dividing the total revenue by the number of orders in a definite period. If your store made $1,000 from 20 orders, your AOV is $50. A higher AOV means customers are buying more items or more expensive products each time they shop.
To improve AOV, try implementing tactics that attract more visitors to your ecommerce site and encourage higher spending. Upselling, cross-selling, discounts, and coupons are effective strategies to engage customers and boost the average order size. Loyalty programs can also contribute to higher AOV by rewarding repeat customers for their increased spending with your brand.
Revenue is the total money your store makes from all your sales. If you sold $5,000 worth of products this month, your revenue is $5,000. Watching your revenue grow is a great way to see how well your store is doing.
By keeping track of your monthly revenue, you can better decide what measures to take to improve it. These revenue-boosting measures can include raising product prices, improving AOV through upselling and discount offers, and even enhancing social media engagement and other marketing efforts to attract more customers and sales.
CPP is a measure of the amount of money a business spends on advertising to acquire one customer who makes a purchase. It is calculated by dividing the total advertising cost by the number of purchases made. If your store spends $500 on advertising and generates 100 purchases, the CPP would be $5. This means that the store spent an average of $5 on advertising to acquire each customer who made a purchase.
ATC rate shows you the percentage of your store’s visitors who actually added to their cart one or more of your products. Suppose your website gets 10,000 unique visitors in a month, and in the same duration, 2,000 items get added to shopping carts, your ATC rate becomes (2000/10,000)*100 = 20%.
Several factors can impact the ATC rate, including the quality of product images, descriptions, pricing, shipping/return policies, site and cart functionality, and overall site design. Consider the following factors and optimize the customer purchase journey accordingly if you are looking to boost your add-to-cart rate.
TIP: If ATC equals one-third of CPP, then consider running further tests.
Website traffic defines the number of daily visitors to your site alongside the various traffic sources they originated from. These website traffic sources include search engine searches, social media platforms, email campaigns, and direct traffic from visitors who type your website URL directly into an internet browser.
Understanding the amount of ecommerce website traffic you earn from each source allows you to better gauge which marketing channels work best for your brand and which areas could use improvement. For example, if your social media traffic is lacking, you may need to optimize and tweak any existing social campaigns to better target paying customers.
Page load time is how long it takes for your website to load. Faster load times make for happier visitors and can boost your sales. If your site takes too long to load, people might leave before they even see your products. Learn how to optimize website speed here.
Bounce rate is the percentage of visitors who leave your website without taking action. If 100 people visit your site and 40 leave right away, your bounce rate is 40%. A lower bounce rate means visitors are finding what they’re looking for and sticking around longer.
Factors contributing to a high bounce rate include an unattractive website design, website navigation issues, and a site not properly optimized for mobile use. To encourage viewers to browse your website and find what they need to make a purchase, you must present them with an attractive, easy-to-navigate design that supports accessibility across any device.
Advertising spend is the total amount of money you spend on ads to promote your store. Keeping track of this helps you manage your budget and measure the effectiveness of your advertising campaigns.
CAC is the average amount of money you spend to get a new customer. This includes everything like ads, marketing campaigns, and promotions. If you spent $100 on ads and got 10 new customers, your CAC is $10. Knowing your CAC helps you make sure you’re not spending too much to get new buyers.
To reduce your cost per acquisition, focus on efforts to attract customers at a lower price. Referral programs, which capitalize on word of mouth, are an affordable way to bring in new customers. Fully understanding your customer base is crucial for creating targeted marketing strategies that convert well.
CTR measures how many people click on your ads or links compared to how many see them. If 1,000 people see your ad and 50 click on it, your CTR is 5%. A higher CTR means your ad is catching people’s attention and getting them to take action.
Most click-through rates can be found in the reporting dashboard of your marketing platform, such as Google Analytics for Google search ads. While click-through rates are typically not all that high, a low CTR may signal that your marketing campaigns are not properly reaching your target audience. You may need to adjust your campaign settings and demographics in this case.
ROAS tells you how much revenue you make for every dollar spent on ads. If you spend $100 on ads and make $400 in sales, your ROAS is 4:1. A higher ROAS means your ads are working well and bringing in more money than you’re spending.
CR is the percentage of visitors to your online store who make a purchase. It can be calculated by dividing the number of purchases by the number of recorded website sessions in a fixed period. This total is then multiplied by 100 to receive your percentage. If 100 people visit your site and in 5 of those visits there’s an order, your conversion rate is 5%. A higher conversion rate means more of your visitors are turning into paying customers.
Average ecommerce conversion rates are around 2.5-3%. Even if you are doing everything right, a well-optimized professional store can expect a good conversion rate between 3.5% and 4%, reflecting effective sales and marketing strategies. In contrast, the new store is building its presence with a conversion rate of 1% to 2%, typical for emerging businesses as they establish brand awareness and customer trust. Meanwhile, the standard store, similar to a dropshipping model, experiences a lower conversion rate due to factors like longer shipping times and less brand trust.
CLV is the total amount of money a customer is expected to spend in your store over their lifetime. If a customer spends $50 every month and sticks around for a year, their CLV is $600. This supports more effective budgeting regarding customer acquisition spending and helps you understand the level of customer loyalty your business has earned.
To increase your CLV, prioritize building long-term customer relationships. Requesting customer feedback and adjusting your operations to fit their needs better is a great way of demonstrating customer appreciation and encouraging recurring purchases. Likewise, incentives such as customer loyalty program discounts can help retain customers long-term and boost CLV over time.
TIP: Balancing CAC with CLV is crucial. If it costs more to acquire a customer than they’re worth in their lifetime, your business strategy needs to be adjusted.
Customer retention rate shows how many customers come back to your store to buy again. If 50 out of 100 customers return for another purchase, your retention rate is 50%. Keeping this high means you’re doing a great job making customers happy and loyal.
Cart abandonment rate shows how many customers add items to their cart but leave your store without completing the purchase. If 50 people add items to their cart and 10 of them don’t finish the purchase, your cart abandonment rate is 20%. Reducing this rate means fewer lost sales and more happy customers.
Refund and return rate is the percentage of orders that get returned or refunded. If you had 100 sales and 5 were refunded, your refund rate is 5%. A lower refund rate means happier customers, which is always a good sign for your business.
Alright, dropshippers, let’s wrap this up! Whether you're just starting out or looking to take your store to the next level, keeping tabs on these key terms and metrics will help you make informed decisions and grow your business. By staying on top of these insights, you’re setting yourself up for success and growth.
What Is Dropshipping and How Does It Work?
Is Dropshipping Legal? The Real Truth On This Ecommerce Trend
The Art of Driving Low-Cost Traffic to the Shopify store
For any further concerns or problems, please do not hesitate to contact us via the Live chat window on the right screen or email us via support@zopi.io
Let’s dive in and explore the key terms and metrics every dropshipper should know!
Stage of Building an Online Store
1. Cost of Goods Sold (COGS)
COGS in dropshipping refers to the total cost incurred to purchase products from suppliers that you then sell to customers. The lower your COGS, the higher your potential profit. For example, if you buy a product for $20 and sell it for $50, your COGS is $20, and your gross profit is $30.
2. Total Cost
Total cost is the total amount of money spent to achieve the current revenue. You can calculate your total costs monthly by adding your monthly fixed costs (like payroll) with your variable costs (like shipping fees). By comparing these numbers, you can see how much your costs are and where to cut corners to boost profits.
3. Profit Margin
Profit margin is the percentage of revenue that remains after costs are deducted. Imagine you sell a t-shirt for $20, but it costs you $10 to buy and ship it. Your profit margin is the $10 left over, which is 50%. A higher profit margin means you’re making more money on each sale.
To boost profit margins, it’s essential to grasp their overall performance and how it impacts their current profit margin. To do this yourself, track the efficiency of your business by assessing your sales, production, and inventory data, then develop stronger sales tactics and business management strategies that collectively work to improve your profit margin.
Stage of Testing Products
4. Average order value (AOV)
AOV is the average amount of money spent each time by a customer in your store. It is calculated by dividing the total revenue by the number of orders in a definite period. If your store made $1,000 from 20 orders, your AOV is $50. A higher AOV means customers are buying more items or more expensive products each time they shop.
To improve AOV, try implementing tactics that attract more visitors to your ecommerce site and encourage higher spending. Upselling, cross-selling, discounts, and coupons are effective strategies to engage customers and boost the average order size. Loyalty programs can also contribute to higher AOV by rewarding repeat customers for their increased spending with your brand.
5. Revenue
Revenue is the total money your store makes from all your sales. If you sold $5,000 worth of products this month, your revenue is $5,000. Watching your revenue grow is a great way to see how well your store is doing.
By keeping track of your monthly revenue, you can better decide what measures to take to improve it. These revenue-boosting measures can include raising product prices, improving AOV through upselling and discount offers, and even enhancing social media engagement and other marketing efforts to attract more customers and sales.
6. Cost Per Purchase (CPP)
CPP is a measure of the amount of money a business spends on advertising to acquire one customer who makes a purchase. It is calculated by dividing the total advertising cost by the number of purchases made. If your store spends $500 on advertising and generates 100 purchases, the CPP would be $5. This means that the store spent an average of $5 on advertising to acquire each customer who made a purchase.
7. Add To Cart (ATC) Rate
ATC rate shows you the percentage of your store’s visitors who actually added to their cart one or more of your products. Suppose your website gets 10,000 unique visitors in a month, and in the same duration, 2,000 items get added to shopping carts, your ATC rate becomes (2000/10,000)*100 = 20%.
Several factors can impact the ATC rate, including the quality of product images, descriptions, pricing, shipping/return policies, site and cart functionality, and overall site design. Consider the following factors and optimize the customer purchase journey accordingly if you are looking to boost your add-to-cart rate.
TIP: If ATC equals one-third of CPP, then consider running further tests.
Stage of Running Ads Campaigns
8. Website Traffic
Website traffic defines the number of daily visitors to your site alongside the various traffic sources they originated from. These website traffic sources include search engine searches, social media platforms, email campaigns, and direct traffic from visitors who type your website URL directly into an internet browser.
Understanding the amount of ecommerce website traffic you earn from each source allows you to better gauge which marketing channels work best for your brand and which areas could use improvement. For example, if your social media traffic is lacking, you may need to optimize and tweak any existing social campaigns to better target paying customers.
9. Page Load Time
Page load time is how long it takes for your website to load. Faster load times make for happier visitors and can boost your sales. If your site takes too long to load, people might leave before they even see your products. Learn how to optimize website speed here.
10. Bounce Rate
Bounce rate is the percentage of visitors who leave your website without taking action. If 100 people visit your site and 40 leave right away, your bounce rate is 40%. A lower bounce rate means visitors are finding what they’re looking for and sticking around longer.
Factors contributing to a high bounce rate include an unattractive website design, website navigation issues, and a site not properly optimized for mobile use. To encourage viewers to browse your website and find what they need to make a purchase, you must present them with an attractive, easy-to-navigate design that supports accessibility across any device.
11. Advertising Spend
Advertising spend is the total amount of money you spend on ads to promote your store. Keeping track of this helps you manage your budget and measure the effectiveness of your advertising campaigns.
12. Customer Acquisition Cost (CAC)
CAC is the average amount of money you spend to get a new customer. This includes everything like ads, marketing campaigns, and promotions. If you spent $100 on ads and got 10 new customers, your CAC is $10. Knowing your CAC helps you make sure you’re not spending too much to get new buyers.
To reduce your cost per acquisition, focus on efforts to attract customers at a lower price. Referral programs, which capitalize on word of mouth, are an affordable way to bring in new customers. Fully understanding your customer base is crucial for creating targeted marketing strategies that convert well.
13. Click-Through Rate (CTR)
CTR measures how many people click on your ads or links compared to how many see them. If 1,000 people see your ad and 50 click on it, your CTR is 5%. A higher CTR means your ad is catching people’s attention and getting them to take action.
Most click-through rates can be found in the reporting dashboard of your marketing platform, such as Google Analytics for Google search ads. While click-through rates are typically not all that high, a low CTR may signal that your marketing campaigns are not properly reaching your target audience. You may need to adjust your campaign settings and demographics in this case.
14. Return on Ad Spend (ROAS)
ROAS tells you how much revenue you make for every dollar spent on ads. If you spend $100 on ads and make $400 in sales, your ROAS is 4:1. A higher ROAS means your ads are working well and bringing in more money than you’re spending.
15. Conversion Rate (CR)
CR is the percentage of visitors to your online store who make a purchase. It can be calculated by dividing the number of purchases by the number of recorded website sessions in a fixed period. This total is then multiplied by 100 to receive your percentage. If 100 people visit your site and in 5 of those visits there’s an order, your conversion rate is 5%. A higher conversion rate means more of your visitors are turning into paying customers.
Average ecommerce conversion rates are around 2.5-3%. Even if you are doing everything right, a well-optimized professional store can expect a good conversion rate between 3.5% and 4%, reflecting effective sales and marketing strategies. In contrast, the new store is building its presence with a conversion rate of 1% to 2%, typical for emerging businesses as they establish brand awareness and customer trust. Meanwhile, the standard store, similar to a dropshipping model, experiences a lower conversion rate due to factors like longer shipping times and less brand trust.
Stage of Optimizing the Online Store
16. Customer Lifetime Value (CLV)
CLV is the total amount of money a customer is expected to spend in your store over their lifetime. If a customer spends $50 every month and sticks around for a year, their CLV is $600. This supports more effective budgeting regarding customer acquisition spending and helps you understand the level of customer loyalty your business has earned.
To increase your CLV, prioritize building long-term customer relationships. Requesting customer feedback and adjusting your operations to fit their needs better is a great way of demonstrating customer appreciation and encouraging recurring purchases. Likewise, incentives such as customer loyalty program discounts can help retain customers long-term and boost CLV over time.
TIP: Balancing CAC with CLV is crucial. If it costs more to acquire a customer than they’re worth in their lifetime, your business strategy needs to be adjusted.
17. Customer Retention Rate
Customer retention rate shows how many customers come back to your store to buy again. If 50 out of 100 customers return for another purchase, your retention rate is 50%. Keeping this high means you’re doing a great job making customers happy and loyal.
18. Cart Abandonment Rate
Cart abandonment rate shows how many customers add items to their cart but leave your store without completing the purchase. If 50 people add items to their cart and 10 of them don’t finish the purchase, your cart abandonment rate is 20%. Reducing this rate means fewer lost sales and more happy customers.
19. Refund and Return Rate
Refund and return rate is the percentage of orders that get returned or refunded. If you had 100 sales and 5 were refunded, your refund rate is 5%. A lower refund rate means happier customers, which is always a good sign for your business.
Alright, dropshippers, let’s wrap this up! Whether you're just starting out or looking to take your store to the next level, keeping tabs on these key terms and metrics will help you make informed decisions and grow your business. By staying on top of these insights, you’re setting yourself up for success and growth.
Curious to read more? Check out additional articles:
What Is Dropshipping and How Does It Work?
Is Dropshipping Legal? The Real Truth On This Ecommerce Trend
The Art of Driving Low-Cost Traffic to the Shopify store
For any further concerns or problems, please do not hesitate to contact us via the Live chat window on the right screen or email us via support@zopi.io
Updated on: 04/09/2024
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