How to Reverse Engineer Your Revenue Targets: A Step-by-Step Guide for E-commerce Growth
Setting revenue targets is crucial for any business looking to scale. But how do you break down your target into a manageable, actionable plan? Unfortunately, simply hoping for a 20% increase in revenue won’t get you there! The best way to achieve your growth goal is to reverse-engineer your revenue targets using a structured, data-driven approach. By the end, you'll have a clear roadmap to achieve sustainable growth and align your entire organization towards success.
This is the approach we took at my previous DTC jewelry company and it allowed us to have a complete picture of every lever impacting revenue, so that we could make better strategic decisions about how we could reach our targets faster. It also allowed us to quickly see where there were gaps or issues that needed fixing.
Let’s walk through the entire process in detail with a simple example—using $5 million as our target—with practical examples and strategies you can use today. I'll walk through how to identify the revenue from existing customers and calculate the number of new customers needed, determine where to invest your marketing budget, and optimize various metrics to hit your goals faster.
Step 1: Define Your Revenue Target
First, let’s set a clear revenue target. In this example, I will use $5 million in annual revenue as the target.
Step 2: Break Down Your Key Metrics
To hit your revenue target, you need to understand and track several key metrics:
Average Order Value (AOV): This is the average amount a customer spends per transaction.
Customer Acquisition Cost (CAC): This is how much it costs you to acquire a new customer.
Retention Rate: This tells you the percentage of customers who return to make another purchase within the year.
Conversion Rate (CVR): This shows the percentage of people who make a purchase after interacting with your business (e.g., visiting your website or seeing an ad).
Ad Spend: This is your total budget for acquiring new customers.
Customer Lifetime Value: This is the total revenue a customer generates throughout their relationship with your business.
These KPIs will be the building blocks for reaching your $5 million target. Let’s assign some values to these metrics as an example:
AOV: $200
CAC: $50
Retention Rate: 30% (meaning 30% of your customers will make repeat purchases within the year)
Conversion Rate (CVR): 2%
Step 3: Calculate the Total Number of Orders Needed
To achieve $5 million in revenue, we first need to determine how many total orders are required:
Average Order Value (AOV): Let’s assume our AOV is $200. If we divide our revenue target by AOV, this means we need 25,000 orders in total to meet the $5 million revenue goal. These orders will come from a mix of new customers and repeat purchases.
$5M/$200 =25,000 orders
Step 4: Breakdown of New and Repeat Orders
We need to consider three sources of orders:
First purchases from new customers
Repeat purchases from new customers acquired this year
Repeat purchases from existing customers (previous years)
Let's calculate backwards:
1. Existing Customer Repeat Orders:
Existing customers: 20,000
Retention rate: 30%
Repeat orders from existing base = 20,000 × 0.3 = 6,000 orders
2. New Customer Orders Needed:
Total orders needed: 25,000
Minus existing customer repeat orders: 6,000
Remaining orders to fulfill: 19,000
3. Calculate New Customers Needed:
Let x = number of new customers needed
Initial orders from new customers (x) + Their repeat orders (0.3x) = 19,000
x + 0.3x = 19,000
1.3x = 19,000
x = 14,615 new customers needed
This gives us:
14,615 first-time orders from new customers
4,385 repeat orders from new customers (30% of 14,615)
6,000 orders from existing customers
Total: 25,000 orders
If you have the resources, and want to be even more precise, you can model your retention using a retention order rate curve. This method tracks the percentage of customers making repeat purchases at different time intervals (e.g., monthly), allowing you to forecast and optimize repeat revenue more accurately based on customer behavior patterns throughout the year. This approach is more complex, but more accurate.
Additional Assumptions:
This model assumes uniform purchase distribution throughout the year
Actual retention rates may vary between new and existing customers
Seasonal variations might affect both new and repeat purchase patterns
Consider segmenting retention rates by customer cohort for more accuracy
Step 5: Calculate the Required Website Traffic
To acquire 14,615 new customers with a 2% conversion rate (CVR):
Website Visitors Needed = New Customers / (CVR × New Customer Traffic Percentage)
14,615 / (0.02 × 0.7) ≈ 1,043,929 total visitors needed
Assuming 70% are new visitors:
New visitors needed: 730,750
Returning visitors: 313,179
Step 6: Determine the Marketing Budget
Now, the crucial part—marketing budget.
Customer Acquisition Cost (CAC): Let’s say our current CAC is $50. We need to acquire 14,615 new customers:
Total marketing spend required: 14,615×50=$730,750
If we efficiently drive the right visitors to our website at a 2% conversion, we achieve our goal. However, this $730,750 figure assumes everything goes as planned.
Note: CAC typically includes all costs associated with acquiring a customer, not just ad spend. This encompasses advertising spend, marketing team salaries, tools, creative production costs, and any other expenses directly related to customer acquisition.
Step 7: Allocate and Test Marketing Channels
To make the most out of your ad spend, you need to identify and optimize the channels where your target audience spends the most time.
Test New Channels: Dedicate 10-15% of your ad budget specifically to testing new channels, while continuing to optimize the ones that are already proven to work (Paid channels typically include: Google, Facebook, TikTok, influencer marketing, CTV, OTT, and affiliate programs). The goal is to identify which platforms yield the best performance in terms of conversions and customer acquisition costs (CAC).
Use Multi-Touch Attribution Models: For e-commerce, tools like Northbeam or TripleWhale can track user interactions across multiple touchpoints, providing insight into which channels and campaigns contribute most to conversions. This data allows you to optimize your budget allocation by focusing on the highest-performing channels.
Scale Up: Once you identify the channels that deliver the best CAC and ROI, scale your investment in those channels while continuously monitoring performance using real-time data.
Step 8: Adjust for Contingencies and Optimization Opportunities
As this is just a forecast, we always need to prepare for potential deviations:
Optimizing CAC: We should be continuously testing and optimizing our paid channels, reducing the CAC to below $50 per customer if possible. This can free up budget for other growth initiatives or contingencies.
Investing in brand awareness: Overtime, investing in your brand awareness and organic channels can help to significantly reduce acquisition costs.
Focusing on retention: Depending on your products and the nature of your business, you should be trying to retain as many customers as possible, for as long as possible, so they continue to come back and make purchases. When you increase your retention rate and customer lifetime value (CLV), you are less dependent on new customer acquisition. As you optimize your paid channels, don’t just focus on reducing CAC—ensure you’re maintaining a healthy CAC to LTV ratio (usually at least 1 to 3). When you consider long-term profitability and LTV, you might not care if a new channel has a higher CAC if it attracts high-LTV customers.
Improving Conversion Rate: If we can increase our website CVR from 2% to 3%, the traffic requirement drops drastically from 695,952 visitors instead of 1,043,929. This makes our target more achievable with less ad spend.
Step 9: Optimize Your Marketing Metrics
The final step is to monitor key metrics continuously and adjust your strategy based on performance data. By keeping an eye on metrics like CAC, AOV, and retention rates, you can make real-time decisions that optimize each aspect of your growth strategy. Let’s break down how each metric can be optimized:
Increase AOV (Average Order Value):
Bundle Offers: Create product bundles that increase the overall order size.
Upsells and Cross-sells: Suggest related or complementary products at checkout.
Limited-Time Discounts: Offer incentives for customers to spend more.
Improve Conversion Rate (CVR):
A/B Testing: Test different landing pages, headlines, and CTAs to see which variants convert better.
Optimize for Mobile: Ensure your website and ads are mobile-friendly since a significant portion of traffic comes from mobile devices.
Personalized Messaging: Use customer data to personalize ads and web experiences.
Decrease CAC:
Target Specific Audiences: Use lookalike audiences and retargeting to focus on users similar to your high-value customers.
Optimize Ad Creative: Continuously test different creatives to find which has the highest engagement.
Boost Retention Rate:
Loyalty Programs: Implement programs that reward repeat purchases.
Personalized Emails/SMS: Use email campaigns tailored to customer behavior, such as post-purchase emails or abandoned cart messages.
Customer Experience: Invest in customer service improvements and user experience enhancements to boost satisfaction and retention.
Boost LTV: Focus on increasing customer LTV through loyalty programs, subscription models, and personalized upselling strategies. Higher LTV not only enhances profitability but also gives you more room to experiment with higher CAC campaigns and new channels, knowing you’ll recoup the costs over time.
Step 10: Monitor Profitability and LTV for Sustainable Growth
While reaching revenue targets is critical, ensuring those targets are profitable is equally important.
Here's a basic formula for calculating LTV:
LTV = Average Order Value × Number of Orders per Year × Average Customer Lifespan
For a more accurate calculation you should include profit margins:
LTV = (Average Order Value × Number of Orders per Year × Average Customer Lifespan) × Profit Margin
Focus on maintaining a CAC to LTV ratio of at least 1:3 to maximize the impact of your marketing spend. By tracking LTV and profitability per channel, you can make smarter budget allocation decisions, ensuring that every dollar spent contributes positively to your bottom line.
Conclusion: The Power of a Reverse-Engineered Growth Plan
By reverse-engineering your growth goals, you create a clear roadmap that shows exactly what you need to do to achieve your revenue target. It’s not just about setting a number; it’s about knowing the steps and levers needed to get there. You gain insight into your customer base, marketing efficiency, and the areas where improvements will have the biggest impact.
The other benefit of approaching your revenue goals this way is that you create alignment across your entire organization. By breaking down the goals by team and individual team members, everyone becomes clear on their specific objectives and how their efforts contribute to the overall success. This clarity enhances coordination, boosts morale, and ultimately drives better results.
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