Not knowing the revenue range of a company you’re selling to can be a major handicap for any salesperson. With so many private e-commerce companies cropping up, the revenue numbers have been guarded almost as religiously as Coca Cola’s recipe. Finding out the exact e-commerce revenue without any inside sources can be a pain. Not impossible, just a pain. What you can do is use a little bit of math and a little bit of logic to land a rough margin within which the revenue falls. In simpler words, guesstimate. There’s a lot of room for error. This blog post is going to help you reduce that and land a good enough range within which an e-commerce company’s revenue falls.
First things first, here’s the math formula:
Total annual revenue = Total traffic x Conversion Rate (%) x Average basket size x Average unit value
Note: We choose annual revenue over monthly revenue because holiday months tend to have almost 2x the sales over the rest of the months. Annual revenue estimates normalize such differences.
Conversion rate (%)
The number of final transactions that happen for every 100 sessions/users you get is the conversion rate. Now, it could be session conversion rate or user conversion rate.
Sessions are visits.
Users are visitors.
If a person visits a site 4 times and purchases something the 5th time, the session conversion rate is 20% and user conversion rate is 100%.
For an outsider, It’s difficult to find out the exact conversion rate of each e-commerce firm. Thanks to companies like Monetate, you get free quarterly reports of Benchmarks and research. They evaluate big e-commerce companies and put together a report of conversion rates by each device (Smartphones, tablets, PC/Laptops) and each platform (iOS, Linux,etc.). They do that each quarter.
Use the benchmarks if you don’t know the company’s conversion rate.
Traffic is essentially the footfall (or a click) a website or an app gets on a regular basis. This could either be the number of users or sessions. This is fairly easy to find with sites like Siteworthtraffic giving you a detailed information about any website’s traffic.
Average Basket Size
Average basket size is the number of items that get sold on a single purchase.
Total units sold / Number of invoices = Average Basket Size.
This metric is more relevant to e-commerce companies like Amazon where the basket has more than 1 item than companies that sell exquisite jewelry where the basket size generally isn’t more than 1.
Average Unit Value
It is the average cost of a single item sold.
Average unit value = Total value of all products / No. of units held in the inventory
Multiplying all of the mentioned elements (Total traffic x Conversion Rate (%) x Average basket size x Average unit value) will give you a ballpark of where the revenue lies. Obviously, this needs a lot of homework and research before you get started.
Companies like PipeCandy deep crawl hundreds of thousands of e-commerce companies and automatically calculate average SKU price, estimated basket size (based on the categories sold by the e-commerce companies). With the underlying data and empirical metrics, calculating revenue range becomes easier.