The importance of a marketing funnel to forecast your eCommerce business

The more things change, the more they stay the same. This old mantra can certainly be applied to consumer facing companies in 2021.

Here’s what has stayed the same: Marketing spend leads to customers which leads to revenues. Therefore, consumer businesses want to invest in the marketing channels that lead to the highest conversion and in turn highest revenues.

Traditionally customer conversion has been very difficult to track especially for companies that used to drive a majority of revenues from retailers or in store foot traffic.

However, the pandemic has accelerated digital trends, forcing brands to sell only online, and investors are paying for companies that are able to increase their direct to consumer (DTC) business, driving up equity valuations. Furthermore, a DTC is more profitable for consumer facing businesses by cutting out middlemen that typically eat into product margins.

Therefore, it is critical for eCommerce businesses to develop financial forecasts driven by the marketing channel spend.

Here’s what has changed: Facebook, Twitter, Instagram, Google, Snapchat, and other social media sites are the greatest advertising engines of all time. They can tell you exactly how consumers discover your brand, which ones convert to paying customers, and allow managers to easily compute an ROI on ad spend.

Therefore, any tool to help managers connect their advertising spend and conversion numbers to financial forecasts will give them a better pulse on their business.

Marketing funnel has entered the chat…

A marketing funnel is a tool that helps you understand the customer journey from website traffic to sale. Connecting the marketing funnel to financial results and forecasts allows managers to better plan for the future, identify strategic channels to increase spend, and control marketing costs.

The model should follow this sequence:

1. Website traffic
2. Customer conversion rates
3. Orders placed
4. Order size (details)
5. Customer balances
6. Marketing expenses (variable expenses)
7. Income statement items

For example, lets say you are trying to forecast next year’s Q1 and compare marketing performance year over year (YoY) for that same quarter, here is a high level example of how it could work (numbers are for illustration purposes):

Prior years data can be pulled from actual numbers that come from a CRM or financial data system.

In this made-up example, most customers encountered this company’s site through organic search in Q1 2020. The key takeaway is that website traffic data drives the rest of the model and ultimately the forecast.

Understanding conversion rates will allow you to forecast total orders, number of new customers acquired and ultimately allow you to calculate total revenue. Note: in this model we assume that e-mail customers are repeat or existing customers and are not included in the new customer total.

To get an average cost per click we take a weighted average of site visits vs. channel costs. This information is then useful to forecast the marketing expense — a key cost component of any eCommerce business. The key will be to drive the average costs per click down over time and as the business grows. One way to ensure this cost goes down is to generate more traffic to your site through e-mail and organic search which costs $0 for marketing expense.

Understanding where your most loyal customers discover your brand or website is critical. For example, it may be more expensive to advertise on Instagram than on Google. However, if 70% of your customers coming from Instagram sign up for e-mails vs. 15% at Google, the added expense could be justified.

Additionally, with any consumer product or retail business it’s critical to compare quarter to quarter. In most cases, fourth quarter numbers are higher due to the holiday season. Therefore, you would want to track your Q1 actuals vs. Q1 forecast and hopefully see improvements in KPIs.

To check my calculations, I provided the formulas for Q1 2021:

What story do these numbers tell?

Analyzing this example, we see that website traffic is expected to increase. This occurs despite keeping expected conversion rates by channel constant. Comparing Q1 YoY the average conversion rate goes up to 4.4% from 4.2%. This is most likely due to the increase in web traffic from organic search and e-mail marketing.

The increase in customer conversion then leads to an increase in total orders placed. Keeping the average order value constant at $100 YoY, we still see an increase in gross revenue on our income statement. Furthermore, since more customers are placing orders through $0 cost marketing channels the average cost per click goes down. Finally, despite the increase in customers, increase in site traffic, and increase in orders our marketing expense stays the same.

Overall, we see a 13% increase in profits on the income statement even though marketing expenses haven’t changed. That is a good thing.

It is critical for eCommerce companies to draw the connection between marketing and finance to run a more efficient business. Far too often managers like to turn on the faucet of the marketing department, thereby pumping more dollars into advertising in order to drive traffic to the website and increase top line revenue. Taking a strategic approach and building a robust marketing funnel can help any eCommerce business identify their best marketing channels and more accurately forecast their revenues. As time goes on, managers will be able to update their assumptions as actual values come in, diagnose any problems and quickly pivot if needed in order to hit revenue targets.

In essence a complete, well thought out marketing funnel will ultimately allow any eCommerce company to implement strategies to assure the business has a sustainable future.