How to improve unit economics of an internet business?
In this skilleton, we've explored essential revenue, cost & margin metrics for understanding and analyzing order-level economics in an internet business.
Each metric illuminates different facets of the business and plays a critical role in financial planning, performance evaluation, and strategic decision-making.
Here’s a recap of each metric with remedial measures for improvement if observed to be declining:
Gross Revenue:
Significance: Reflects the total sales revenue before deductions like returns and discounts.
Remedial Measures: Increase website traffic, enhance user experience to improve conversion rates, or revisit pricing strategies.
Net Revenue:
Significance: Represents the actual revenue earned after accounting for returns and discounts.
Remedial Measures: Improve product quality to reduce returns, optimize discount strategies, and streamline order processing.
Gross Margin:
Significance: Measures the percentage of Net Revenue remaining after Cost of Goods Sold (COGS) is deducted.
Remedial Measures: Seek cost-effective suppliers, enhance production efficiency, or adjust product pricing.
Contribution Margin 1 (CM1):
Significance: Indicates profitability after variable costs such as logistics and payment gateway charges.
Remedial Measures: Streamline logistics for cost efficiency, negotiate better rates for payment processing, or optimize product pricing.
Contribution Margin 2 (CM2):
Significance: Deducts variable marketing and sales costs from CM1.
Remedial Measures: Refine marketing strategies to enhance ROI, improve sales processes, and analyze marketing cost-effectiveness.
Contribution Margin 3 (CM3):
Significance: Accounts for additional variable costs such as technology and content creation from CM2.
Remedial Measures: Optimize cloud hosting and technology infrastructure costs, streamline content development and deployment processes.
Operating Margin:
Significance: Reflects the profitability after deducting all operating expenses, including fixed costs, from Net Revenue.
Remedial Measures: Tighten control over fixed expenses, improve overall operational efficiencies, and explore new, profitable revenue channels.
Identifying and addressing a decline in any of these metrics requires a targeted approach.
Continuous monitoring, understanding their interplay, and adapting strategies accordingly are crucial for maintaining sustainable growth and profitability in an internet business.