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June 6, 2022
Adam Hoeksema
In order to create reasonable financial projections for your eCommerce startup, there are several key assumptions that can have a dramatic impact on your revenue projections. In this article I want to highlight 5 of the key assumptions that I see entrepreneurs struggle with most often. Those 5 assumptions are:
- Average Cost per Click for eCommerce
- Average Conversion Rate of Website Visitor to Customer
- Average Order $ Amount for eCommerce
- Average Monthly Spend per Customer
- Average Customer Churn for eCommerce
Having unrealistic assumptions for these 5 key areas can easily drive completely unattainable financial projections and ultimately lead an entrepreneur to make poor choices in the business. So in this article I am going to try to provide you some ranges, backed up by data, for these assumptions, and provide some real ecommerce startup revenue data that can help ground you to reality. This data will help you determine whether your ecommerce startup is within the realm of what is reasonable. I am also going to provide you with tools that you can use to do your own research on your industry, so that you can make the most informed assumptions possible.
Lastly, before we get into it, you can find 3 very easy to use eCommerce financial templates that make it easy to use the 5 assumptions outlined in this article so you can quickly develop accurate and organized financial pro formas. And if you are needing to create a business plan for your ecommerce venture, check out this free ecommerce business plan template.
- Average Cost to Acquire a Customer for eCommerce
The average cost to acquire a customer for an ecommerce startup is really based on two key assumptions:
- What is the average cost per click to drive a visitor to your ecommerce website?
- What is the average conversion rate of website visitors to paying customers in ecommerce?
To determine the average cost per click for paid ads for your specific industry I suggest using the Google Adwords Keyword Planning Tool. Set up a Google Adwords account and start to enter keywords that you would like to advertise for and Google will estimate the cost per click for each keyword. This will give you a good starting point, and this is vitally important because the cost per click between two keywords can vary dramatically. For example, “mortgage loan” has a cost per click range of $11.90 to $32.33; whereas, “mortgage rate” has a cost per click range of $1.64 to $6.24.
Cost per click for – Mortgage Loan
Cost per click for – Mortgage Rate
The reason these two similar keywords are so different is likely the intent of the search. If you search for Mortgage Loan it probably means you are looking to secure a loan, so a bank or online mortgage lender can “sell” you a mortgage loan which has a high value, but with “mortgage rate” the searcher is probably just looking to see the current rates.
If you plan to run ads on Facebook or different platforms, I would suggest following a similar process where you ought to be able to start setting up an ad account and get an idea of the cost per click based on your specific industry.
- Ecommerce Conversion Rates
Your conversion rate for your ecommerce website can vary dramatically depending on a number of factors. For example, the visitors purchase intent. In our example above, someone that comes to your website looking for “mortgage loan” is probably going to have a higher conversion rate of completing a mortgage loan application when compared to a visitor that searched for “mortgage rates.”
Even though conversion rates can vary dramatically, you can still get an idea of what a maximum conversion rate is likely to be, and make sure you keep your projected conversion rates below that level.
According to Invesp, the average ecommerce conversion rate in the United States is 2.63%.
I often see financial projections where the entrepreneur assumes conversion rates of 10%. This simply shows that you don’t understand the ecommerce business. It is incredibly unlikely that you will reach a 10% conversion rate, and it that conversion rate has a massive impact on your financial projections. A conversion rate of 10% when it should really be 2.5% means you are overstating your revenue projections by 4x.
- Average Order $ Amount for eCommerce
The next key assumption for eCommerce startups is the average order dollar amount. Now you can’t really use an average ecommerce order amount for your specific business because you really need to take into account your industry specific details and your specific product prices.
But if you are curious, Geckoboard estimates that the average value of an ecommerce order is $78.
So as you develop your projections, I would suggest that you assume an average order that is $78 or less. If you project over $78 per order, just be sure to have strong industry data to back up why that is a reasonable assumption.
- Average Monthly Spend per Customer
The other key assumption that should also inform your average order value is the average monthly spend per customer. For this data you need industry specific information. For example, if you are selling dog food online, you can expect that your average monthly spend per customer shouldn’t be much more than the average dog owner spends on food per month.
According to Statista, the average dog owner spends $442 per year on pet food or $37 per month.
Again, if you project that your average customer is going to spend $300 per month, you better have a good reason why your average monthly spend per customer is so far outside of the industry standards.
- Average Customer Churn Rate for eCommerce
Finally, our last key assumption for eCommerce startup financial projections is to project a reasonable churn rate for your customers. In other words, what percentage of your customers leave each month or year?
According to Ominconvert, the average retention rate for ecommerce brands is just 30%. In other words, 70% of your new customers will “churn” or not purchase again.
You need to assume that most of your new customers will never buy again. If your projections don’t include a reasonable church rate, your projections are likely too optimistic.
How to know whether your ecommerce startup projections are reasonable
Once you have done your research and made reasonable assumptions based on research, you can determine whether your projections align with what other ecommerce startups have experienced. We studied 234 tech startups and found actual revenue for ecommerce startups. I encourage you to see how your projections line up to what other direct to consumer / ecommerce brands experienced. You can see some of our revenue data below:
There you have it! The 5 essential financial assumptions you need to have in order to create reliable and accurate financial projections for an ecommerce business. If you'd like to use a template in order to put these assumptions to work quickly, check out our three ecommerce templates that guide you through making projections simply.
