New to the lingo? Here is an explanation of every e-commerce term you will ever need to keep up with the conversations in the business. 

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Understand the metrics, concepts and general lingo used by the top 1% within the e-commerce industry.

Ecommerce Glossary For The Next Generation

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Are you eager to know how you can get ahead of the competition and become more data-driven when it comes to running your e-commerce business more profitably?

The Contribution Margin, a crucial profitability metric, is the leftover from Gross Sales after deducting all the direct costs of fulfilling the orders. Some argue that it is the same as Net Gross Profit 3, taking marketing spending into account. In contrast, others say marketing spending should not be part of calculating the contribution margin.

Contribution Margin in e-commerce is not the same to everybody. Why is that? It might be because people focus on different things in e-commerce, and when it comes to Contribution Margin, it's very clear that this is the case. So whenever Contribution Margin is mentioned as an important part of a discussion or a potential decision, you need to make sure that you all mean the same thing.

According to some people, Contribution Margin have different layers (1, 2, 3), and to other it is absolute and always means the same.

When someone is referring to "The Contribution Margin" it most often means the remaining amount from your Gross Sales after subtracting all the costs directly associated with selling a product. It is similar to Net Gross Profit 3, as both formulas calculate the difference between Gross Sales and the expenses tied to product sales. However, while Net Gross Profit 3 also includes marketing expenses, many calculate the Contribution Margin solely considering direct product costs.

Contribution Margin is an essential metric for determining a company's profitability and evaluating the cost-effectiveness of its products.

If you want to read more about Contribution Margin, and the different layers of it; 

click here to read our blog post about Contribution Margin

Contribution Margin

A system where you reward partners (affiliates) for each visitor or customer brought about by the affiliate's marketing efforts.

Affiliate Marketing

An Attribution Model in e-commerce assigns credit for sales and conversions to different touchpoints in a customer's purchase journey, providing insights into channel effectiveness and aiding marketing optimization. E-commerce businesses need to understand the differences between attribution models, from simple ones like the Last-Click model to complex ones like the Time-Decay model or Data-Driven models, to allocate their marketing budget efficiently and increase conversion rates.

An Attribution Model in the context of e-commerce determines how credit for sales and conversions is assigned to different touchpoints in a customer's purchase journey. It offers insights into which channels (like social media, email marketing, or search engines) drive customer actions, helping businesses understand their marketing effectiveness and optimize their marketing strategies. These models can range from simple methods, like a Last-Click model that assigns all credit to the final interaction, to more complex ones, like a Time-Decay model that gives more credit to interactions closer to the conversion. Understanding the right attribution model is crucial for e-commerce businesses to allocate marketing spending efficiently and drive higher conversion rates.

An Attribution Model in e-commerce assigns credit for sales and conversions to different touchpoints in a customer's purchase journey, providing insights into channel effectiveness and aiding marketing optimization. 

Attribution Model

The average amount spent each time a customer places an order.

Average Order Value (AOV)

The Break-Even Point, is when all revenue minus all costs, yield no profit or loss. It's crucial for businesses to track as it indicates the minimum sales required to cover costs and start earning profit.

Break-Even Point

A broken size curve in e-commerce happens when one or more of a product's variant(s) is out of stock, often reducing the conversion rate.

A broken size curve occurs when a retailer or e-commerce company runs out of one of the sizes or variants of a product. Typically, the most popular size goes out of stock first, decreasing the conversion rate. Unfortunately, merchants often overlook this issue and continue marketing the product as a best-seller, even though it is no longer available in that particular variant.

Fortunately, Dema offers a seamless solution for handling broken-size curves. With Dema, you can always stay informed about which products to market, where, and when. This way, you can optimize your marketing strategies and ensure maximum efficiency.

Broken Size Curve

The percentage of online shoppers who add items to their cart but leave without completing the purchase due to a change in mind, usually because of high hidden costs like shipping fee.

Cart Abandonment Rate

The percentage of customers who stop using your online store during a certain timeframe.

Churn Rate

CTR, or Click-Through Rate, measures the proportion of users who progress from one stage to another in a process, such as from seeing an ad to clicking on it, or opening a newsletter to visiting a linked e-commerce site.

Click-through-rate (CTR)

A customer's journey through a sequence of steps designed to lead to a desired action, typically a purchase.

Conversion Funnel

The percentage of visitors who take a desired action, generally making a purchase.

Conversion Rate (CR)

The cost of goods sold signifies the total expense of purchasing the products sold, meaning the cost appears first when you sell the product.

The cost of goods sold represents the actual cost incurred when products are sold. Various methods exist to determine this cost, especially if the products were purchased at different times and prices. While the cost of goods sold typically aligns with the purchase price, it can also include additional expenses associated with product handling and transportation to your warehouse. This encompasses the overall cost of the product itself.

Cost of Goods Sold (COGS)

Customer Acquisition Cost (CAC) is one of the most critical KPIs in e-commerce. It measures the total cost of acquiring a new customer. To track your CAC, you need to know your marketing spend and the number of new customers who have placed an order. CAC is not cost per order since that includes returning customers as well. Understanding and optimizing your CAC is crucial for driving profitable growth in your e-commerce business.

Your profitability on new customers' first orders, in combination with a predicted lifetime value, will be the most important input variable in defining your maximum CAC.

All this is, of course, easy to monitor and analyze in real-time in the Dema platform.

Customer Acquisition Cost (CAC) is one of the most critical KPIs in e-commerce. It measures the total cost of acquiring a new customer. To track your CAC, you need to know your marketing spend and the number of new customers who have placed an order. CAC is not cost per order since that includes returning customers as well. Understanding and optimizing your CAC is crucial for driving profitable growth in your e-commerce business. 



Customer Acquisition Cost (CAC)

Customer Lifetime Value (CLV) usually predicts the total value an e-commerce business can expect from a single customer account. It considers the revenue generated by the customer and compares it to the expected lifespan of the customer. This calculation helps businesses identify valuable customer segments that are most beneficial to the company.

When calculating CLV in e-commerce, it is typically based on gross sales instead of profit. This is because obtaining profit metrics for these calculations is often more challenging, while gross sales are typically always available.

A common method to calculate CLV based on gross sales is to use the formula CLV = (Average Purchase Value x Purchase Frequency) x Average Customer Lifespan.

Average Purchase Value is determined by dividing the total revenue over a set period by the number of purchases made.

Purchase Frequency is calculated by dividing the number of purchases made over a set period by the number of unique customers who made purchases during that period.

Average Customer Lifespan is the average number of years a customer continues purchasing from the e-commerce business.

By employing this formula, businesses often estimate the total gross revenue a customer will generate over their lifetime. This approach provides valuable insights into the potential value of customer relationships, extending beyond individual transactions or immediate profit. However, it is important to recognize that assuming all customers are identical often is misleading. Instead, a recommended approach for estimating newly acquired customers' value is utilizing an AI prediction model. This model enhances clarity by identifying which customers are more or less likely to yield significant value or become net negative customers for the e-commerce company in the worst-case scenario.

Dema offers an LTV Prediction Model, basing the customer's future value on actual profit and not just Gross Sales. You can read more about it here.

Customer Lifetime Value (CLV) is usually a prediction of the total value an e-commerce business can expect from a single customer account.

Customer Lifetime Value (CLV, LTV or CLTV)

A Data-Driven Attribution Model uses machine learning to assess each touchpoint's role in a customer's purchase journey. This provides a comprehensive understanding of marketing effectiveness and guides intelligent optimization of marketing spend in e-commerce.

A Data-Driven Attribution Model, in the context of e-commerce, is a sophisticated approach that leverages machine learning algorithms to determine the contribution of each touchpoint in a customer's purchase journey. Unlike rule-based models such as Last-Click or Time-Decay, this model considers all available data, including direct and indirect interactions, and statistically assigns credit to each touchpoint based on its impact on conversion. This model can provide a more accurate understanding of the effectiveness of different marketing channels and strategies, enabling e-commerce businesses to optimize their marketing spend and boost conversion rates intelligently.

Data-Driven Attribution Model

A fulfillment method in which an e-commerce business doesn’t keep the products it sells in stock. Instead, the e-commerce purchases the product after the customer has purchased the item from the e-commerce. The third party that the e-commerce buys the item from also ships it directly to the customer. This allows for low overhead costs and attention to fulfillment while putting more emphasis on paid marketing.

Dropshipping

Retention rate in e-commerce measures the percentage of customers who continue to make purchases over a specific period of time. Depending on which e-commerce vertical you are in, your retention rate is more or less critical to assure sustainable and profitable growth since, typically, customer acquisition is more expensive than keeping existing customers

Retention rate in e-commerce measures the percentage of customers who continue to make purchases over a specific period of time. Depending on which e-commerce vertical you are in, your retention rate is more or less critical to assure sustainable and profitable growth since, typically, customer acquisition is more expensive than keeping existing customers. 



E-commerce Retention Rate

In the context of website analytics, an engaged session refers to a visitor's active interaction with a website for a given duration. This may include clicking on links, scrolling, or filling out forms. An engaged session usually implies that the visitor is actively interested in what your website has to offer and, therefore, exploring it.

Engaged Session

The process of receiving goods from suppliers, packaging the items, branding it, and then shipping orders to customers. Fulfillment also handles the returning part of the process from the customer back to the warehouse.

Fulfillment

Gross Profit 1 is a company's profit after deducting the Cost of Goods Sold, which represents the costs associated with purchasing its products. This figure does not include fulfillment, marketing, or overhead costs such as rent, utilities, salaries, or returned items.

Gross Profit 1

Gross Profit 2 measures profitability after accounting for the costs and fulfillment costs associated with purchasing its products. Fulfillment costs include storage, order processing, packaging, and shipping expenses. Like Gross Profit 1, this figure does not consider the impacts of marketing or overhead costs such as rent, utilities, and salaries. Returned items are also not deducted in the calculation of Gross Profit 2.

Gross Profit 2

Gross Profit 3 encompasses the profitability measure that includes the product purchasing costs, fulfillment costs, marketing costs associated with promoting the products, and general marketing expenses. It still does not consider overhead costs such as rent, utilities, and salaries. Like Gross Profit 1 and 2, returned items are not deducted in the calculation of Gross Profit

Gross Profit 3

Impression, or a view of something, is often used for ads. It answers the question, “How many times have my ad(s) been viewed?” The term used is not views but Impressions. Views are generally used when it's about video ads. An impression does not require any action by the viewer; one viewer can have many impressions of the same ad.

Impression

A marketing strategy where brands partner with individuals with strong social media following to promote their products or services. These individuals, known as influencers, typically have a niche audience that aligns with the brand's target market. This acts as a paid acquisition of warm leads and increases brand awareness among the community.

Influencer Marketing

The Last Click Attribution Model in e-commerce gives full credit for a sale to the final touchpoint before a purchase. Because of its simplicity, it undervalues earlier customer interactions that could have significantly influenced the buying decision.

In e-commerce, the Last Click Attribution Model is a straightforward approach that assigns all the credit for a sale or conversion to the last touchpoint a customer interacts with before making a purchase. This means that if a customer clicks on a paid ad, an email link, and a social media post before buying a product, the social media post will receive 100% of the credit for that sale. Although this model is simple to understand and implement, it often overlooks the value of earlier touchpoints that may have played a crucial role in influencing the customer's purchase decision.

Last Click Attribution

The Linear Attribution Model in e-commerce assigns equal credit for a sale or conversion to all customer interactions on their buying journey. While it recognizes each interaction's value, it may oversimplify as not all touchpoints equally influence the final purchase decision.

In the e-commerce landscape, the Linear Attribution Model is a technique in which equal credit for a sale or conversion is distributed evenly across all the touchpoints a customer interacts with on their purchase journey. For instance, if a customer clicked on a paid ad, opened an email link, and finally interacted with a social media post before making a purchase, each touchpoint would receive an equal share of the credit for that sale. This model recognizes the value of each interaction in the decision-making process, providing a balanced view of the effectiveness of various channels in the marketing mix. However, it may oversimplify the process, as not all touchpoints may contribute equally to the customer's final decision to purchase.

Linear Attribution Model

A Machine Learning Attribution Model, within the e-commerce context, is a powerful tool that employs machine learning algorithms to accurately assign credit to different touchpoints along a customer's purchasing journey. It surpasses traditional rule-based models, such as Last-Click or Time-Decay, by embracing all available data and statistically crediting each touchpoint based on its influence on conversion. This model is synonymous with a Data-Driven Attribution Model. Both leverage the comprehensive understanding of various marketing channels and strategies' efficacy, thereby assisting e-commerce businesses in smartly optimizing their marketing spend and improving conversion rates.

A Machine Learning Attribution Model, another name for a Data-Driven Attribution Model, within the e-commerce context, is a powerful tool that employs machine learning algorithms to accurately assign credit to different touchpoints along a customer's purchasing journey.

Machine Learning Attribution Model

Net Gross Profit 1 is an e-commerce KPI that shows the result after subtracting returns and the cost of goods sold from Gross Sales.

Net Gross Profit 1 represents a company's profit from its primary business activities after accounting for returns and the cost of goods sold (COGS). It is calculated by deducting returns and COGS from Gross Sales.

This measure provides a more accurate view of the company's operational profitability, as it factors in returns that reduce total profit. It's a critical metric for understanding a business's earnings before considering other expenses such as fulfillment, marketing costs, and overheads like rent, utilities, and salaries.

Net Gross Profit 1 is an e-commerce KPI. It is the result after subtracting returns and the cost of goods sold from Gross Sales.

Net Gross Profit 1

Net Gross Profit 2 is Gross Sales subtracted by returns, the cost of goods sold, and the fulfillment costs.

Net Gross Profit 2 represents a company's profit from its primary operations after accounting for returns, the cost of goods sold (COGS), and fulfillment costs. Essentially, it calculates profit by subtracting returns, COGS, and fulfillment costs from Gross Sales. This measure provides a detailed view of the company's operational profitability, considering not only the direct costs of the sold products but also the expenses related to order fulfillment, such as storage, packaging, and shipping. 

Understanding a company's Net Gross Profit 2 is essential to be able to better control its future. 

Net Gross Profit 2

Net Gross Profit 3 is an e-commerce company's operational profitability. It is calculated by subtracting returns, the cost of goods sold, fulfillment costs, and marketing costs from Gross Sales.

Net Gross Profit 3 calculates a company's profit from its operations after considering returns, COGS, fulfillment costs, and marketing expenses. It's determined by subtracting these costs from Gross Sales. 

This metric offers a comprehensive view of operational profitability, factoring in marketing expenditures, which is crucial for understanding an e-commerce company's health and long-term sustainability.

Net Gross Profit 3

Net Sales represent the revenue a business generates from its primary business activities after deducting returns, allowances for damaged or missing goods, and any discounts allowed. 

It is the Gross Sales minus any returns. 

This measure gives a more accurate picture of actual revenue as it accounts for factors that reduce total revenue, such as returned items. It is an essential metric for understanding the effect of return and discount on the business.

A company's Net Sales are the Gross Sales minus any returns.

Net Sales

PnL stands for Profit and loss, and the more formal word is Income Statement. The PnL shows a consolidated view of all your revenue and costs for a certain period. The accounting department generally creates the PnL, which is a report you get a couple of weeks after the end of the month, quarter, or year. Services like Dema enable you to keep up with your PnL in real-time by pulling data from your e-commerce platform, performing calculations, and then displaying it on a user-friendly dashboard.

PnL stands for Profit and loss, and the more formal word is Income Statement. 

Remarketing or retargeting is an online advertising strategy that targets users who have previously visited your website or shown interest in your products. It is done to convert a warm lead into a purchasing customer, and since it takes less convincing for an interested visitor, it is usually quite effective.

Remarketing or retargeting is an online advertising strategy that targets users who have previously visited your website or shown interest in your products.

Remarketing or Retargeting

Return on Ad Spend (ROAS) measures how much revenue you make for each dollar spent on advertising. It's calculated by dividing your ad-generated sales by the cost of those ads. It helps businesses see if their ads are working effectively.

Return on Ad Spend = Gross Sales/Marketing Spend

Return on Ad Spend (ROAS), in the context of e-commerce, is a marketing metric that measures the gross revenue generated for every dollar spent on advertising. It is calculated by dividing the revenue generated from ads by the ad spend cost. Most e-commerce businesses use this metric as it provides insights into the effectiveness of their advertising campaigns.

However, ROAS has limitations when used in isolation. For instance, it does not consider the profitability of the products sold. A high ROAS does not necessarily translate to high profits if the products sold have a low-profit margin. Moreover, ROAS does not account for other shipping costs, such as fulfillment and returns. Therefore, focusing solely on ROAS without considering net profit can overestimate the actual return from advertising spend. Businesses must balance maintaining a strong ROAS with managing their overall profitability.

To help with all this, Dema connects all your data and can offer better alternatives, such as epROAS, an accurate version of Profit ROAS.

Return on Ad Spend (ROAS) measures how much revenue you make for each dollar spent on advertising. ROAS has severe limitations when used in isolation, which can hurt a company's profitability and brand.

Return on Ad Spend (ROAS)

A unique identifier for each product variation in your store. Commonly referred to as variant. By having an organized and orderly way to track products, you will be able to track the sales of the products better and manage your inventory well.

SKU (Stock Keeping Unit)

Wasted Ad Spend refers to the marketing budget that was "wasted," i.e., which did not yield the desired result.

"Wasted Ad Spend," in the context of e-commerce, refers to the portion of an advertising budget spent on unsuccessful or non-converting campaigns. This could include spending on ads displayed to people outside the target demographic, ads not optimized for conversions, or ads placed on low-performing channels. Wasted Ad Spend drains marketing resources and reduces the overall return on advertising spend (ROAS). It's crucial for businesses to regularly review and optimize their ad campaigns, fine-tune their targeting parameters, and reallocate the budget from underperforming ads to more successful ones to minimize this waste and improve marketing efficiency.

Wasted Ad Spend

epROAS is another word for Profit ROAS, pROAS, and POAS. All describe the Profit Return on Ad Spend. The "e" stands for expected and takes the expected return rate of the products into account to tell a more accurate story about what the actual Profit Return the As Spend will yield in the end. 

epROAS is Dema's version of the widely used acronyms POAS and pROAS.

epROAS = Net Gross Profit 2 / Marketing Spend

e stands for “expected” as in the expected returns.

P stands for profit, which in this case is Gross Profit 2.

Gross Profit 2 with expected returns is Net Gross Profit 2

That means that epROAS is as true as you can Profit Return On Ad Spend in real-time.

epROAS is another word for Profit ROAS, pROAS, and POAS. All describe the Profit Return on Ad Spend. The "e" stands for expected, and it takes the expected return rate of the products into account to tell a more accurate story about the actual Profit Return the ad spend will yield in the end. 

epROAS

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