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The Language of Dropshipping: Key Terms and Metrics Explained

Update on: 23/09/2024

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Are you planning to start a dropshipping business? Understanding key terms and metrics is essential for success in the eCommerce landscape. These insights will guide you on where to focus your efforts as you grow your business.

Let’s explore the key terms and metrics every dropshipper should know!

Stage of Building an Online Store

1. Cost of Goods Sold (COGS)

COGS refers to the total cost incurred to purchase products from suppliers that you sell to customers. The lower your COGS, the higher your potential profit. For example, if you buy a product for $20 and sell it for $50, your COGS is $20, and your gross profit is $30.

2. Total Cost

Total cost is the total amount spent to achieve your current revenue. Calculate your total costs monthly by adding your fixed costs (like payroll) to your variable costs (like shipping fees). Comparing these numbers helps identify areas to cut costs and boost profits.

3. Profit Margin

Profit margin is the percentage of revenue remaining after costs are deducted. For instance, if you sell a t-shirt for $20 and it costs you $10, your profit margin is 50%. To improve profit margins, track your sales, production, and inventory data, and develop strategies to enhance your business management.

Stage of Testing Products

4. Average Order Value (AOV)

AOV is the average amount spent by a customer per order. Calculate it by dividing total revenue by the number of orders. For example, if your store made $1,000 from 20 orders, your AOV is $50. To improve AOV, consider upselling, cross-selling, and implementing loyalty programs.

5. Revenue

Revenue is the total money your store makes from sales. If you sold $5,000 worth of products this month, your revenue is $5,000. Tracking your revenue helps you decide on measures to improve it, such as raising prices or enhancing marketing efforts.

6. Cost Per Purchase (CPP)

CPP measures how much you spend on advertising to acquire one customer. Calculate it by dividing total advertising costs by the number of purchases. For example, if you spend $500 on ads and generate 100 purchases, your CPP is $5.

7. Add To Cart (ATC) Rate

ATC rate shows the percentage of visitors who add products to their cart. If your website gets 10,000 unique visitors and 2,000 items are added to carts, your ATC rate is 20%. Factors affecting ATC include product images, descriptions, and site design.

TIP: If ATC equals one-third of CPP, consider running further tests.

Stage of Running Ads Campaigns

8. Website Traffic

Website traffic is the number of daily visitors to your site and their sources, such as search engines, social media, and email campaigns. Understanding traffic sources helps gauge which marketing channels are effective.

9. Page Load Time

Page load time is how long it takes for your website to load. Faster load times improve user experience and can boost sales. Learn how to optimize website speed here.

10. Bounce Rate

Bounce rate is the percentage of visitors who leave your site without taking action. If 100 people visit and 40 leave immediately, your bounce rate is 40%. A lower bounce rate indicates visitors are engaged.

11. Advertising Spend

Advertising spend is the total amount spent on ads to promote your store. Tracking this helps manage your budget and measure campaign effectiveness.

12. Customer Acquisition Cost (CAC)

CAC is the average amount spent to acquire a new customer, including ads and promotions. If you spend $100 on ads and gain 10 new customers, your CAC is $10. Reducing CAC can be achieved through referral programs and targeted marketing strategies.

13. Click-Through Rate (CTR)

CTR measures how many people click on your ads compared to how many see them. If 1,000 people see your ad and 50 click, your CTR is 5%. A higher CTR indicates effective ads.

14. Return on Ad Spend (ROAS)

ROAS indicates how much revenue you earn for every dollar spent on ads. If you spend $100 on ads and generate $400 in sales, your ROAS is 4:1.

15. Return on Investment (ROI)

ROI evaluates the efficiency of an investment. It is calculated by dividing net profit by total investment, expressed as a percentage. For example, if your store has a net profit of $100,000 and total investment of $500,000, your ROI is 20%. A positive ROI is desirable, with many dropshippers aiming for 15% to 30%.

16. Conversion Rate (CR)

CR is the percentage of visitors who make a purchase. If 100 people visit your site and 5 make a purchase, your conversion rate is 5%. Average ecommerce conversion rates are around 2.5-3%, with well-optimized stores achieving 3.5% to 4%.

Stage of Optimizing the Online Store

17. Customer Lifetime Value (CLV)

CLV is the total amount a customer is expected to spend over their lifetime. If a customer spends $50 monthly for a year, their CLV is $600. To increase CLV, focus on building long-term relationships and offering loyalty incentives.

TIP: Balancing CAC with CLV is crucial. If it costs more to acquire a customer than they’re worth, adjust your strategy.

18. Customer Retention Rate

Customer retention rate shows how many customers return for additional purchases. If 50 out of 100 customers return, your retention rate is 50%. A high retention rate indicates customer satisfaction and loyalty.

19. Cart Abandonment Rate

Cart abandonment rate shows how many customers add items to their cart but leave without completing the purchase. If 50 people add items and 10 don’t finish, your rate is 20%. Reducing this rate leads to more sales.

20. Refund and Return Rate

Refund and return rate is the percentage of orders that are returned or refunded. If you had 100 sales and 5 were refunded, your rate is 5%. A lower refund rate indicates happier customers.

In conclusion, whether you’re just starting or looking to elevate your store, monitoring these key terms and metrics will help you make informed decisions and grow your business. By staying on top of these insights, you’re setting yourself up for success.

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Related articles

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If you’ve ever considered starting your own online business, you may have encountered the term “dropshipping.” But what does it really mean? This article will provide you with essential insights to help you determine if this business model is the right fit for you. What is dropshipping? Dropshipping is a business model where online sellers,…

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