Your brand is growing fast.
You've put together your dream team.
Your products are flying off the e-shelves.
But to seriously scale your eCommerce business, you may need some outside investment to offset some of the large scale initiatives, resources, and infrastructure necessary to reach the next stage of evolution.
Unfortunately, having great products and an experienced team is rarely enough to convince investors to take a chance on your eCommerce brand. You'll also need to provide them with insights into your business model, growth strategy, and existing performance–that means showing them your data.
If you're planning to raise some capital, here are some of the most important eCommerce metrics that D2C investors care about.
Sales are straightforward to track and understand. They're simply transactions that take place between consumers and your business, for your product or service.
Why investors care about Sales
Showing investors that your sales are increasing MoM and (most importantly) YoY is a great way to get them excited about investing in your brand. Sales mean revenue and (hopefully) profit, which is crucial to keep your business going.
High sales provide you with opportunities to remarket to existing customers, increase brand awareness through word of mouth and loyalty programs, and secure the necessary social proof to instill trust in your brand.
An important note about how inventors think about eCommerce sales is that sales are generally broken down into two metrics: MRR (Monthly Recurring Revenue) and GMV (Gross Merchandise Value).
- Subscription sales are classified as MRR
- Transactional sales are classified as GMV
MRR typically has higher valuation multiples (based on revenue or EBITDA).
Cost of goods sold (COGS)
Cost of goods sold (COGS) is the sum of direct costs involved in creating the products you sell. It includes the costs of labor and raw materials but excludes indirect costs such as distribution expenses.
To calculate COGS, subtract costs of goods purchased from your initial inventory value (over a time period), which will leave you with your cost of goods available. Then, subtract your end inventory value (over the same time period) from your cost of goods available, and that will leave you with your COGS.
Why investors care about COGS
COGS is used to calculate gross profit, by subtracting it from revenue. This means COGS helps indicate not only your profitability but also the efficiency of your production and manufacturing processes.
When you're pitching to investors or looking to secure venture capital, it's fundamental to provide insights into your brand's profitability: COGS plays a vital role in this effort.
Contribution Margin and Gross Margin
Contribution margin is usually used to calculate and track profitability on a unit basis. It is your top-line sales minus discounts, refunds, returns, cost of goods sold, and marketing costs. In short, it is your sales revenue (or gross profit margin) minus variable costs.
Your CM is a great number that reflects your company's health and is the main component in calculating your Break-Even Point (BEP).
Why investors care about contribution margin and gross margin
Tracking your contribution margin gives you a deeper understanding of your unit economics..
- e.g., How much does it cost to market and sell your product? If you want to be more profitable, where on the Marketing, Manufacturing, and Fulfillment side can you increase margins?
You can dive deeper into your analysis by looking at your contribution margin with respect to specific SKUs and channels.
For example, if you have a product that sells well, tracking the contribution margin by sales and marketing channel is important to make sure you're in the green. If, say, shoppers are buying it in bulk (and hence driving your shipping costs up), you might actually fall into the loss zone.
In this scenario, tracking your contribution margin by SKU will alert you to the need to introduce a shipping fee on the SKU.
Your gross margin gives a good idea of your brand's product profitability and get a good understanding of how much profits can be reinvested into growing the business (i.e., marketing, opex). Because gross margin excludes operational expenses like administrative and distribution costs, you can identify shortcomings in your direct costs, such as production.
- e.g., Are you spending too much on certain raw materials? Could switching suppliers help you become more profitable?
Customer lifetime value
Customer lifetime value (CLV) is a profitability metric calculated by dividing your gross margin per customer over their lifetime with your brand.
The metric is invaluable because it helps you streamline your growth efforts to get the best return.
Why investors care about customer lifetime value
Customer lifetime value is crucial because it represents the future potential profits from acquiring new customers today. If you are raising a round on the assumption that your company will continue to grow, investors want to know the potential for the company to be profitable in the future.
Customer lifetime value goes beyond sales and looks at a customer's estimated value to your business, throughout the whole lifecycle of their dealings with your brand.
It's important to know your CLV because it dramatically impacts your marketing efforts. For example, if your CLV is, say, $1,200, then you might be comfortable spending $300 to acquire a new customer.
Investors like this metric because it shows them that your brand is able to keep the momentum going when a customer makes a purchase from you. Investors don’t want to invest in “one-and-done” brands that spend hundreds of dollars to acquire each customer but don’t manage to generate repeat purchases.
Customer acquisition cost (CAC)
Customer acquisition cost (CAC) is the marketing budget you spend to acquire a new customer.
Why investors care about customer acquisition cost
Investors want to know how much you’re spending to acquire new customers. With ads platforms trying to take credit for every purchase, it’s hard to know the truth of where your growth is coming from if you’re relying on only their data.
- Your marketing platforms don’t have accurate CAC data. For example, Google defines CAC as cost per action (which is actually CPO), in order to get around the fact that they're not able to ID the difference between a new customer (i.e., CAC) and any customer (either new or returning).
- Facebook has the same problem, as advertising costs are defined as CPO (which is not helpful from a CAC perspective).
To complicate it further, everyone calculates CAC differently, on the brand side and on the investor side.
On the brand side, it’s most important to pick one CAC-ulation and stick with it: we recommend using a blended CAC and including the following:
- variable marketing cost (the money spent on a particular ad platform)
- recurring costs of marketing/eCommerce tools used
- ad vendor cost
- costs to create ad creatives
- team salary
- agency costs (if applicable)
- team salary
LTV/CAC is the ratio of your customer lifetime value to customer acquisition costs. The metric helps eCommerce brands determine how much to spend on acquisitions (and if they're spending enough on them).
Why investors care about LTV/CAC
While LTV and CAC are important metrics independently, taking their ratio provides deeper insights and helps optimize your marketing efforts. It's important for your LTV to be greater than your CAC…but not too much. If your LTV is way higher than your CAC, it could mean you're not spending enough to acquire customers (and could therefore be missing out on growing your brand more).
For example, if your LTV/CAC ratio is 4:1, it's a good indicator that your marketing efforts are profitable and in a good place. But if the ratio is, say, 6:1 or 7:1, it might mean you’re leaving growth on the table.
You should show investors your LTV/CAC ratio to give them confidence in your marketing efforts and growth opportunities. A healthy ratio confirms profitability and shows investors that your strategy is well-aligned.
LTV/CAC by channel
Understanding your LTV/CAC by channel shows understand the efficacy of your marketing efforts on a channel basis in comparison to the LTV you recoup from those channels.
Why investors care about this metric
Investors care about LTV/CAC by channel because it helps them understand which of your channels are most profitable.
For example, Facebook might bring in more customers but with a lower LTV/CAC. Conversely, Google might bring in fewer customers but at a healthier LTV/CAC ratio.
Understanding which channels are most profitable is key to streamlining investments and scaling up marketing budgets.
Repurchase rate (and customer retention)
Repurchase rate measures how many customers return to buy from your store again. It's usually calculated as a percentage of the entire purchaser base.
Why investors care about repurchase rate
A high repurchase rate indicates successful post-purchase retention campaigns, great product quality, and strong customer loyalty. Brands with a strong repeat purchase rate are the brands investors want to invest in.
Your brand's repurchase rate is essential for investors because it gives them insights into how customers interact with your business. Are they happy enough to return for more? Are they likely to remain loyal?
On customer retention
A great way to visualize the greater context of customer retention is with Daasity’s “Layer Cake” graph, which displays sales by quarter of acquisition cohort:
This graph places a customer into a cohort according to the quarter in which they made their first purchase, and then stacks those cohorts on top of each other using an area graph.
Each cohort creates a “layer” of LTV.
Burn rate shows how quickly your brand spends its cash. You can calculate your gross burn rate by dividing available cash by the sum of your operational expenses:
Why investors care about this metric
Startups and fast-growing companies usually aren't profitable (i.e., they don't have a net positive income) in their early stages. This is because they're more focused on growing their customer base and developing their product, which requires burning money. If you are profitable, you wouldn’t have a burn rate, because the profits you make every month are greater than your total expenses.
If your burn rate is high, it means your cash pool is depleting quickly. Depending on how well your startup is growing, investors may either inject more investment to help you grow further, or shy away from investing out of fear of financial distress.
So, it's important to balance your burn rate and reduce it if necessary. While there is no exact number that your burn rate should be, always monitor it and set proper expectations with your investors. If you raised money on the basis that it was going to last you 18 months, your burn rate shouldn’t be so high that you’ll be out of cash in 8.
How Daasity can help your brand get funding
Daasity is an eCommerce data and analytics platform that helps you centralize your data and track vital metrics from one platform. Thanks to Daasity's single, unified view, you can show investors KPI dashboards and accurate data to help them understand your brand's growth and potential.