Every industry has its lingo. But DTC retail can often feel like its own language. So, we defined the most common ecommerce terms in everyday English.
Chances are good that you've heard most (or all) these ecommerce terms at some point or another. And if you didn't know what one meant, you likely glossed over it or used context clues to guess at what it meant.
Sure, this strategy got you through that conversation. But it won't always work.
Without a common language to communicate how your ecommerce business operates, you risk losing essential details in translation. As a result, investors might not take you seriously, customers might grow frustrated with your brand, and stakeholders might make costly mistakes.
Luckily, these pitfalls are easy to avoid when you know your industry's lingo. So, we've gathered every term and related equation you absolutely need to know, then defined them in everyday English.
Terms are organized alphabetically, so you can quickly find the one you don't yet know.
What ecommerce terms will we cover?
At-a-glance, we'll cover:
Already know all these ecommerce terms? Great! If not, let's quickly run through them.
Break-even point (BEP)
Your break-even point (BEP) is when the total revenue generated and costs are equal. In other words, it's the point where your business garners no gains or losses.
Because of this, a break-even point analysis is critical because it tells you how many sales need to happen before your ecommerce store can start making a profit. And it informs your production targets, sales targets, and sales mix.
How to calculate the break-even point:
break-even point = fixed costs / contribution margin
Customer acquisition cost (CAC)
Customer acquisition cost tells you how much you spend to acquire new customers. And it can be calculated by channel or across all channels to gauge marketing effectiveness. The lower the CAC, the more affordable it is for your online business to scale up your acquisition efforts.
Retail brands have seen growing CAC in online channels due to privacy updates and increased competition in the past few years. For reference, customer acquisition costs are up nearly 60% from five years ago in the DTC ecommerce space.
How to calculator customer acquisition cost:
customer acquisition cost = total sales and marketing spend / customers acquired
Contribution margin measures the profitability of a specific product, so you can quantify top-selling products and low-cost products. With it, you can schedule marketing promotions that lean into what's already working (to increase sales) or what's not (to get rid of potential deadstock).
How to calculate contribution margin:
contribution margin = sales revenue − cost to make products
Cost of delivery
Cost of delivery refers to how much you spend to get your products to consumers. This number includes but isn’t limited to labor, storage, manufacturing, and shipping costs.
Cost of goods sold (COGS)
Cost of goods sold refers to the direct costs (like product costs and handling) associated with producing a company’s product. However, it does not consider indirect operational costs (like warehousing or shipping).
Knowing your COGS is important because it directly affects your gross profit.
How to calculate the cost of goods sold:
Cost of goods sold = beginning inventory + purchases - ending inventory
Customer lifetime value (LTV)
Lifetime value refers to how much money a customer will spend with a company throughout their relationship. And it can be calculated per consumer to identify your best customers or per average customer to predict future profits.
By increasing your customer's LTC, you can boost margins significantly. That's because acquiring a new customer is 5-25x as expensive as retaining an existing one.
How to calculate a customer's lifetime value:
customer lifetime value = lifetime revenue - cost of acquisition
Earnings before interest, taxes, depreciation and amortization (EBITDA)
Earnings before interest, taxes, depreciation and amortization (more commonly referred to by EBITDA) measures a company's overall financial performance. And, in some cases, like mergers and acquisitions, companies will use EBITDA in place of net income to determine valuation.
Gross margin is the amount of money retained after incurring the cost of goods sold. Ideally, you want this margin to be as high as possible to prevent your brand from operating against itself.
How to calculate gross margin:
gross margin = net sales − cost of goods sold
Inventory holding cost
Inventory holding cost refers to the operational costs associated with storing and protecting unsold inventory. For example, storage costs, utilities, insurance, and so on all contribute to inventory holding costs.
Despite popular belief, inventory holding costs are not a flat rate. Generally speaking, the more inventory you have, the higher your inventory holding costs.
To estimate your inventory holding costs, multiply the value of your unsold inventory by 1.3.
Lifetime value to customer acquisition ratio (LTV:CAC)
The lifetime value to customer acquisition cost ratio measures the relationship between customer lifetime value and how much it cost to acquire that customer. And it indicates how effective your company is at getting qualified customers and, as a result, its growth potential.
Typically, you want an LTV: CAC of 3:1 or greater. This means that you acquired really qualified customers for a third or less of what they'll spend long-term with your company.
How to calculate the lifetime value to customer acquisition ratio:
Marketing efficiency ratio (MER)
Marketing efficiency ratio indicates how well your culmination marketing efforts have been to date.
Unlike return on ad spend, which provides insights on your immediate marketing efforts of a single channel or campaign, MER looks at the culmination of your marketing efforts across all channels (PPC, SEO, social media, email marketing, affiliate marketing, etc.). In other words, when you rely only on ROAS, you might miss what is important for omnichannel retail.
Because of this, the goal is to keep your marketing efficiency the same or better as you increase ad spend.
How to calculate the marketing efficiency ratio:
marketing efficiency ratio = total marketing revenue / total ad spend
Minimum order quantity (MOQ)
Minimum order quantity is the fewest number of items you can have on a purchase order when buying from your manufacturer. As such, it directly affects the capital needed to order inventory and, consequently, the cash conversion cycle.
Return on ad spend (ROAS)
Return on ad spend provides a snapshot of how well your marketing efforts perform on a specific channel or campaign.
Unlike the marketing efficiency ratio, which looks at the culmination of your marketing efforts across all channels, RAOS provides a more granular view of specific marketing efforts. In other words, when you rely only on MER, you might miss optimization opportunities.
Because of this, the goal is to keep your return on the same or better as you increase ad spend.
How to calculate return on ad spend:
return on ad spend = campaign or channel revenue / campaign or channel ad spend
Revenue per click (RPC)
Revenue per conversion quantifies how much you make on average per conversion.
And when you have several marketing campaigns running for the same product, tracking the conversion rate for each campaign is a good indicator of where revenue is actually coming from. That way, you can shut down ineffective ad campaigns and put more budget into the top-performing campaigns.
How to calculate revenue per click:
revenue per click = total revenue / total clicks
Seller’s discretionary earnings (SDE)
Seller's discretionary earnings is a recasting process that determines a business' historical cash flow.
To calculate SDE, take the company's net profits (your year-end income tax return will be the most accurate source). Then, add back expenses, including the owner's salary and benefits, non-cash expenses (like amortization), and non-recurring expenses (like litigations).
SDE gives small businesses a more accurate representation of cash flow because it removes distortions caused by the owner's spending habits.
Value to the weight ratio
The value to weight ratio metric tells you your product's monetary value per unit of weight (typically, kilograms)
And you can use this ratio to determine the cost-effectiveness of your cost of delivery.
How to calculate value to weight ratio:
value to weight ratio = monetary value / product weight
Don’t see the ecommerce term you’re looking for?
We’re constantly adding new ecommerce terms and equations to this ecommerce term glossary. So, let us know what ecommerce term you’re looking for by tweeting us @cogsyapp. We’ll get right back to you with the definition and add it to this list for others!