The Profit Pyramid: where eCommerce money actually comes from

The Profit Pyramid is a way of picturing where your time and energy belong. It has three layers, and the relationship between them is the whole point.

The three layers

• •The base is finance: margins, expenses, payroll, healthcare, and the revenue coming in that creates margin against your sales-related expenses. This is the foundation.
• •The middle is output metrics: average order value, conversion rate, lifetime value, customer acquisition cost. These are results of decisions made elsewhere in the business, not levers in themselves.
• •The top is eyeballs: click-through rate, impressions, bounce rate, going viral — the things most often argued about with marketing agencies.

All of the money lives at the bottom. The further up the pyramid you go, the less impact those activities have on net profit.

The consequence is that you can be the best marketing team in the world, going viral constantly, and the business can still lose money — because the layers underneath the impressions are broken.

What to do instead

Invert how you think about it. Understand first how the business needs to operate in order to make money — the finance, revenue, margin and expense layer at the base. Everything above it gets more effective, easier and more powerful once that is solid.

The middle layer still matters. Average order value, conversion rate, lifetime value and customer acquisition cost are mission critical. They just matter a great deal less when the foundation is broken. Pricing in particular has a heavy impact on what happens in that middle layer, which is why it comes up early in the levers.

These do not have to happen strictly in sequence — they can run at the same time. But if the base is working reasonably well, customer acquisition can perform worse than you hoped and the business can still be profitable, because everything underneath is operating at a much healthier capacity.