How to Calculate Online Success

If you are new to the world of e-commerce – or in fact any type of business - you may feel a bit out of your depth. This is especially true for those of us who find the entire world of business planning and management complicated and daunting. How will you know if you are making a success of your new venture? How can you avoid pitfalls if you don’t understand the basic concepts behind running a business?

It’s always worth working with an expert when you first start up a business – no matter how great your ideas and how creative you are, without a primary knowledge of business your venture may flounder - and ultimately sink.
The purpose of this article is to explain the background on achieving a successful online business.

Calculating Success

There is very little difference between calculating the success of a walk-in store and of an online business. You have to look at the three key areas:
• Profits
• Cash Flow
• Return on Investment (R.O.I)
Online, R.O.I is achieved when a company is making enough money through sales to cover both
• Initial start-up costs and
• Monthly running costs
Once this level is reached each new sale is then considered a profit.

Performance

R.O.I is key when it comes to measuring your online performance. There are 3 basic measurements used to determine how well you are performing:
• Cost per Acquisition (CPA).
• Conversion Rate
• Traffic
Greek to you? Relax and we’ll unpack them one by one. CPA is the total cost of setting up your site, divided by the number of conversions or sales you make. Imagine you buy a pair of jeans for R1000 and wear them 50 times in a year. That means you’ve paid R20 per wear. Compared to a R10 000 wedding gown, worn once – you paid the full R10 000 for that wear. Looking at e-commerce, if an online store has spent R500 000 on its website and has only generated 10 sales then the cost per acquisition is R50 000. It’s simple – the more sales you generate the lower your CPA will become and the better your R.O.I will be.

Conversion Rate

This is all about how many visitors enter your site and stick around to actually buy something. The Conversion Rate is this figure worked out in percentages. So, if you have 1000 visitors to your site everyday and make on average 10 sales each day then your conversion rate is 1%. The higher your conversion rate becomes the better your performance will be.

Traffic

If nobody finds your website, there will be no conversion to sales, and therefore your CPA will be too high for the business to sustain itself. Generating high volumes of targeted traffic to your site, at a reasonable cost, is essential towards ensuring your online success.

KISS (Keep it Simple S!@#$)

Start off small and build up – that’s the way to keep afloat in those crucial first months. It’s easy to get carried away in the excitement of launching your brilliant new online venture, spending unnecessary amounts of money in order to arrive on the scene with a bang. Experts advise that you keep your initial investment low and think long-term by building up your traffic and conversion slowly to a avoid becoming another statistic along the lines of the dot-bomb fiasco of 2000. In South Africa, we are at risk of a local dot.bomb scenario because the e-commerce service industry is still immature in nature. Basic R.O.I principles are being ignored and the e-commerce failure rates in this country are disturbingly high. By sticking to the simple R.O.I principles you can avoid a similar fate. So if it’s so easy, why use the professionals? This article’s purpose is to explain the foundation stones on building a successful online business. Just because you know the definitions of bricks, cement and roof tiles it doesn’t mean you can build a mansion.

The process of putting together all the individual pieces is a highly complex procedure that requires an experienced team of website development and online marketing personnel to be managed in a R.O.I-guided manner. It is however useful to have some understanding of the tools and methods used to achieve online success as ultimately this is your dream and knowledge is empowering.
So next time we’ll look at the implementation and operation of a successful online business.

Tom runs the ppc and seo department
at R.O.I. Media and loves writing about online business development.