The Ecommerce Profit Playbook

In the last 2 years, funding for ecommerce decreased 95%.

Businesses need to focus on profitability more than ever to stay alive and thrive.

In this week's Thought, we'll explore how to achieve long-term profitability by tracking “Profit Per Customer” instead of “Profit Per Month”.

Survive without funding

Ecommerce funding peaked in 2021 at $5 billion.

Since then, funding declined over 95% in 2023.

And even if you look at the median of the last 5 years, it’s still down 85%.

With less funding available, ecommerce brands need to focus on profit to stay alive.

How?

Shifting from “Profit per Month” to ”Profit Per Customer”

Looking at monthly profits can be misleading.

A sales event or an email campaign to your existing customers is all it takes to inflate profit in the short-term.

In reality, however, those actions drive profits from returning customers.

The issue:

If you only focus on “Profit Per Month”, it can lead you to acquire new customers at too high costs in those periods.

Instead of $20 you suddenly spend $60 per new customer.

All under the illusion of healthy monthly profits.

Those expensively acquired customers might never return a profit, or take very long to break-even.

More profit from returning customers is not a free ticket to acquire new customers at higher costs per customer.

Why Short-Term Profitability Hurts Growth

Overspending on new customers might not seem problematic in the short term.

But it hurts growth, profitability and cashflow in the future.

Because the cost of acquiring new customers outweighs their eventual contribution (profit) to your business.

The solution?

Know how much you can spend per new customer.

Know your target CAC (customer acquisition cost).

Track it. And stick to it.

No matter how profitable you are in a certain month.

How To Calculate Your Target CAC

Let’s start with calculating your break-even CAC.

Let’s assume your AOV is $100.

Next, substract your COGS (costs of goods sold), e.g. 30% or -$30; logistic costs, e.g. -$7; and payment fees, e.g. -$3.

Your contribution margin available (before marketing) is $60.

$60 is your target CAC if you want to break-even on a customer’s first purchase.

Calculate Your Break-Even Period

In case you (have to) acquire customers at a loss, you want to calculate your break-even period.

How long does it take for a new customer to return a profit?

It’s more tricky, but I’ve made it easy for you and created a Profitability Calculator.

(Just reply to this email—or write me here—and I’ll share the Google Sheet template and instructions with you).

Takeaways

Start tracking profit per customer, in addition to profit per month to achieve sustained profitability.

Know how long it takes for a new customer to return a profit.

Specifically, if you aren’t acquiring new customers at a profit or break-even at first purchase.