eCommerce Financial Model & Valuation

Key terms of eCommerce valuation:

 Site traffic: the number of visitors to a site

 Conversion rate: the number of customer who place an order relative to site traffic
 Bounce rate: the number of visitors who enter the site and then leave “bounce” rather than
continuing on to view other pages
 Order: A single checkout which may consist of multiple items
 Churn rate: annual percentage of customers who stop shopping the site
 Organic search: traffic from search engines that is not paid for
 Paid search: trafic from search engine that is paid for
Channel to acquire new customers
 Affiliates: paid traffic from another site

Key valuation Metrics:

Customer metrics

 Customer Acquisition Cost (CAC)

Marketing spend
New customer orders

 Contribution Margin per Order : This ratio provides a clear picture of how much we are
getting by adding one incremental order to our business

Revenue−Variable Costs
Number of
Conribution ordersper Order
Margin
Churn Rate
 Lifetime Value (LTV)
 LTV/CAC Ratio : to see if there is an economic value added to the business by paying to
acquire new customers

Contribution per customer× Avg. customer life

Customer AcquisitionCost
 Payback (years) : calculate the number of years or number of orders that it takes to recover
the initial investment in acquiring that customer

CAC
CM per Order
 Other metrics:

 Active customers: number of customers who ordered in last 12 months

 Churn rate: percentage of customer who are no longer active at the end of 12 months
 Average order value: average checkout values; number of items per order x price per item
 Total addressable market: Annual value of all goods/services in market
 Average revenue per user: total revenue divided by number of users
 Net promoter score: Survey of how likely customer are to refer someone

Financial metrics

 Gross Merchandise Value : the value of all goods sold on a site

 Gross profit or gross margin : Shipping or fulfilment can be above or below GP
 Sell through rate : percentage of inventory sold over period of time
 EV / Active Customer : a very crude matric and not a great indication of economic value, but
used in pre revenue business or a business before profitability
 EV / Revenue
 EV / Gross Profit
 EV / EBITDA

LTV / CAC = Lifetime Value / Customer Acquisition Cost

Contribution per customer × Avg. customer life

Customer AcquisitionCost