Financial Modeling
Live Analytics
Revenue sources

Creating a Financial Model for an E-Commerce

Sturppy allows you to create the financial model for any business that sells goods online.

Creating a financial model for an E-Commerce business is very easy with Sturppy. The steps that we will follow are: defining customer acquisition, settings how many customers will stick to your store, configuring your revenue and finally listing the expenses, here the e-commerce model is slightly different than the others so we will pay special attention to this part.

Step 1: Defining Customer Acquisition

To create a customers acquisition projection navigate to /Users/Acquisition, here we will define how we are going to get new customers.
Here we can add different traffic sources that will bring in traffic and, in turn, customers.

When adding a new traffic source you can define:

  • Name: this is the name that you assing to this traffic source, we suggest you use the marketing channel where you are going to advertise on, like Facebook Ads, Google Ads or SEO.
  • Payed or Free: this is the type of the traffic source, either payed or free. A payed traffic source is any source that requires a direct investment of money.

Then, based on the type of the traffic source you decided, you have to enter:

Payed

If you want to add a payed traffic source, then you have to define:

  • Monthly Budget: how much you are going to spend each month on this traffic source.
  • CPL (Cost per Lead): how much each lead from this traffic source will cost you.

It is possible that you already have a traffic source called Marketing. This is completely fine. This source was created when you followed the steps in the onboarding to create your first financial model. You can keep it, edit it or remove it and add a new one.

Free

To add a free traffic source, you need to define:

  • Organic Monthly Traffic: this is how much traffic you are generating every month. Depending on your source, this could come from your social media presence, SEO, content, word of mouth or others.
  • Conversion Rate: the percent of free traffic that becomes a lead. Since this is free and not very targeted traffic, conversion rates are usually low.

At the end we will calculate the number of leads that you are going to receive.

Payed Leads = monthly budget / CPL
Free Leads = monthly traffic * conversion rate

You can add as many different traffic sources as you want.

Free traffic

Be carefull when adding free traffic sources. You can easily be over-optimistic and tilt your projections.

Free traffic can come from an existing social media presence, PR, SEO (this requires time) and other sources.

Step 2: Customer Retention

To set your customer retention navigate to /Users/Retention, here we will define how your new customers convert to recurring customers.

This is important to get right, because not all of your new customers, will keep coming back to your business and make new purchases, but some will. This behaviour is configured with the retention rate.

So, for example, if you have 10,000 new customers in month one and a retention rate of 40%, then, on month two 10,000 * 40% = 4,000 customers of the previoius month (month one) will make a new purchase in this month (plus all the new customers that you are going to acquire in this month).

Step 3: Configuring the Revenue

To configure the revenue for your e-commerce business go to /Revenues/E-Commerce, you will find here all of the inputs that you need to project your revenue.

  • Average order amount

    The average cart size of the buyer. This is the average price that the buyers will pay to the sellers.

  • Conversion rate

    This is the percentage of traffic that become paying customers. You can learn more here.

  • Refunds

    This is the percentage of orders that get refunded. It is usually around 10-20%.

Average order amount

To come up with this value just make a weighted average of all the products that you are going to sell.

The average should be weighted: this means that the products that sell more have a bigger impact on the average.

Step 4: Listing your Expenses

For the final part we will add the expenses to the financial model. Adding expenses is very important and should be done with great attention to avoid missing key expenses that could turn the startup upside down.

The expenses for an E-Commerce business are mainly COGS, so the costs of sourcing the products that you will be selling, but personnel cost should not be ignored either.

COGS: Cost of Goods Sold

For an E-Commerce these are the main epense on your income statement. The main inputs that you have to enter are:

  • Average order product cost

    This is the cost of producing or buying your product. It can either be a fixed amount or a percentage of Average order amount.

  • Packaging cost

    This is the cost of the packaging that you are adding to your products. It can either be a fixed amount or a percentage of Average order amount.

  • Fulfilment cost

    This is the cost of fulfilling your orders, it contains the costs of handling the product from receiving to distribution, usually picking, packing and shipping. It can either be a fixed amount or a percentage of Average order amount.

  • Fees

    These are any costs associated to processing the payment that you receive or that you need to pay to a third party. It can either be a fixed amount or a percentage of Average order amount.

You can also add any fixed cost that you need to face monthly, directly linked to your product. For instance if you are using an external piece of software integrated in your product you will need to add it's monthly cost here (think about all the APIs that you will use, like programmatic emails, etc.).

If you want to learn more about COGS, read here.

SG&A: Selling, General & Administrative

This will be your main cost when running a Marketplace company. The team behind your product will make your startup go big or go home and so it is of rightfully the biggest cost you have to face.

Be sure to list all of your current employees and those that you will hire in the future, plus, set up rules to hire them automatically as more customers come in.

We have a complete section dedicated to the hiring plan.

Founders Salary

Don't make the mistake of not adding the salary of the founders to your SG&A.
The financial model has to be complete and is needed to forecast your startup not to show the spirit of sacrifice of the founders.

CAPEX: Capital Expenditure

If you need to invest any significant amount of money in buying equipment for your startup, you have to add it here. For instance, all the technical equipment, like computers, monitors and office forniture should be added here.
Also, if you need to buy any software, or have an external agency build it for you, you have to add the cost here.

If you want to learn more about CAPEX, read here.

Next

You should now have a solid financial model, but you can always go back in and add more details and tweak the assumptions. You now have access to all the financial statements, metrics and scenario planning.

Don't forget that you can also add other monetization modes, such as: sales and transactions and you can also add your various operating activities.

Go Live

Don't forget that you can now go live and connect your forecast to your actual live data!

Learn more

Questions? Contact us at info@sturppy.com

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