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EBITDA, TACoS, ROAS, MROI, ACoS, CTR……WTF!?!?!
Making sense of performance metrics can be challenging. But it doesn’t have to be. Here are some tips to help you track performance clearly and accurately, and unlock hidden insights in your P&L.
Ask any 6 or 7-figure seller - what’s the most important first step in running a successful 3P brand? They’ll tell you the same thing.
You need to know what you want to go out and achieve. Don’t fall into the trap of analysis paralysis, trying to wrangle countless moving pieces and data points. Take the time to set actionable objectives, and work backwards from there.
Asking yourself the right questions is the best first step to get there:
- What’s the most efficient, effective way to track my brand’s performance?
- What’s the difference between my operating metrics and financial metrics? How do they connect and tie together?
- What “outputs” matter most to me? Is it maximizing my sales? Profitability? Cash flow?
Our Bottom Line: Every 3P brand has unique objectives. But we’ve looked at hundreds of P&Ls and firmly believe that there are 4 financial metrics, 4 operational metrics, and 3 advanced business indicators that you can use to hit your goals. You don’t need everything under the sun.
Let’s take a closer look.
Follow the “Rule of 4”
If you have an infinite amount of time, there are upwards of 50 financial and operational metrics that you can test, measure, and tinker with. But your time is a precious commodity (that’s just one of the reasons why we built Brandable).
Instead, follow the “Rule of 4.” Now what does this mean exactly?
In a nutshell, deprioritize the data that you don’t need, and narrow your measurable data set.
Think of these as 4 financial and 4 operational “inputs” that help you reach the “output” that you’re solving for.
If you’re looking to maximize profitable growth at a brand level, try tracking the metrics outlined below. These can tell you where to pivot, double down, or reevaluate your strategy across sales, pricing, inventory, marketing, and more.
Financial:
- Sales Growth ($) - Absolute sales increase. An indication of momentum and untapped opportunity for your brand.
- Contribution Margin (%) - SKU-level profitability for all organic sales or the percentage of profit you keep for a sale with zero paid acquisition spend. This is a must for understanding the ROAS for paid campaigns that backs into profitability.
- EBITDA (%) - Earnings before interest, taxes, depreciation, and amortization, divided by total revenue. The overall “health” metric for brand P&L.
- Free Cash Flow ($) - Cash generation. What’s left after paying your day-to-day expenses. Critically important for a) making money and b) the long-term health of your brand.
Operational:
- Traffic (#) - All performance is ultimately downstream of the number of visitors you attract to your digital shelf. In an Amazon environment, this dynamic is constantly shifting based on algo tweaks, competitor PPC investment and a myriad of other factors. But any optimization decision starts with knowing how many people are shopping in your store.
- Market Share (%) - It is absolutely critical to understand where you stand relative to your competitor set. This is the metric to do just that, giving you the percent of total sales that your brand has relative to your competitors. It’s the best measure of competitive execution and future growth potential.
- “Trade Spend” ($) - Dollars invested in customer acquisition, including marketing and promotions.
- Availability Rate (%) - How much inventory is in stock to meet customer demand, ensuring you avoid OOS scenarios and optimize your inventory spend. The foundational measure of consistency and consumer experience.
There is one big additional benefit here.
Some of the most common metrics tracked by sellers of all sizes are fundamentally downstream from these inputs. For example, EBITDA equals your Contribution Margin less ACOS (Advertising Cost of Sales). Therefore, when you have deep knowledge of your contribution margin and its drivers, you’ll have a crystal clear understanding of how efficient your advertising needs to be to drive a profit.
Our bottom line: You need the right inputs, not the most inputs, to reach the best solutions for your brand. Once you’ve tackled the “Rule of 4,” you’re already well positioned to control other table-stakes metrics that factor into your day-to-day decisions.
Unlock Hidden Insights in Your P&L
You worked backwards from your brand-level goals. You have the brand-level metrics you need to prioritize and track.
Take it one step further to read between the lines of your P&L. Unlock 3, entirely new, advanced business indicators using the financial and operational metrics you mapped out.
Let’s call these “Hidden Insights” on your path to profitable growth:
- Free Cash Flow Conversion Rate - Free Cash Flow ($) / EBITDA ($). A snapshot of the EBITDA you pocket from your business. A high Free Cash Flow Conversion Rate (anything above 1.0) means you have the cash on hand that you can use to invest in growth - marketing, advertising, creative and design, and more. A low Free Cash Flow Conversion Rate (anything below 1.0) means you aren’t converting your EBITDA into cash that you can use elsewhere.
- Contribution Margin Adjusted MROI - Contribution Margin ($) / Trade Spend ($). A measurable indicator of the profit generated for each dollar of advertising and marketing spend. Determine if your strategy is serving your bottom line, and if you need to make adjustments.
- Gross to Net Bridge - The conversion of Gross Sales to Net Sales, subtracting out refunds and promotions ($). Gross to net bridge is effectively the efficiency on every $1 GMV you’re generating. It’s also your best aggregate metric on if your actual product is resonating with consumers as a low bridge indicates that there is inelastic demand for your product at a higher price and that few shoppers are returning. In effect, it’s the beginning of tracking if you have true brand loyalty.
Our bottom line: Treat your P&L as a living, breathing source of truth for your brand. With a few simple calculations, you can find a world of new insights.
A Final Thought
If you remember one thing from this blog post, let it be this: drill down your brand objectives, deprioritize the data you don’t need to get there and use your P&L to unlock hidden insights to get the most out of your brand.
With these simple steps, you can track the metrics that matter, faster. Get after it!
If you found Reuben’s pointers for tracking key metrics valuable and are interested in exploring how Brandable can help your business, reach out to their team today!
Ruben is CEO of Brandable.
Ruben started his career in investment banking at Credit Suisse, where he focused on M&A, fundraising, and market research in the technology space. Following Credit Suisse Ruben joined TA Associates driving buy-and-build, integrations, and acquisitions of companies in the consumer and technology sectors. Ruben has been an active advisor to several startups, providing counsel on business development and go-to-market strategy.
Ruben holds a Master’s in Engineering from Ecole Centrale Paris and an MBA from Stanford Graduate School of Business.
