E-commerce Financial Terms Glossary

ACoS measures the ratio of your advertising spend to the revenue generated by those ads. It's the Amazon equivalent of cost-per-sale expressed as a percentage. Lower ACoS means more efficient ad spend. Your break-even ACoS equals your profit margin — spend above it and you're losing money on every ad-driven sale.

The average amount customers spend per transaction. AOV is a critical lever in e-commerce because increasing it — through upsells, bundles, or free shipping thresholds — directly increases revenue per customer without increasing acquisition cost.

The minimum ROAS you must achieve on your ad campaigns before advertising becomes profitable. Any ROAS below this number means you're losing money on every dollar spent on ads. It's calculated from your gross margin — not your net margin — because variable costs must be covered before fixed costs and profit.

The total cost to acquire one new customer, including all marketing and sales spend. Blended CAC includes every channel (paid ads, organic, referral, influencer) divided by all new customers. Many founders make the mistake of calculating CAC only from their best-performing channel, creating a false picture of efficiency.

The revenue remaining after all variable costs are paid. This is the money that "contributes" to covering fixed costs and generating profit. Contribution margin is the most important metric for evaluating product viability because it shows whether each sale is actually making you money before overhead is considered.

The direct cost of producing or purchasing the products you sell. For physical goods, COGS includes manufacturing cost or wholesale purchase price, packaging, and any direct materials. It does not include shipping, marketing, overhead, or platform fees — those are separate line items that reduce profit but aren't classified as COGS.

Revenue minus the direct cost of goods sold, expressed as a percentage. Gross margin tells you how much money is left after paying for the product itself — before any operational expenses like shipping, marketing, or overhead. High gross margin businesses have more room to absorb operating costs and invest in growth.

The total revenue (or profit) a customer generates over their entire relationship with your business. LTV is what separates a business that can afford to acquire customers from one that cannot. A higher LTV allows you to outspend competitors on acquisition because each customer eventually generates more profit than they cost to acquire.

The ratio of customer lifetime value to customer acquisition cost. This single number tells you how efficient your business model is at turning acquisition spend into long-term value. A 3:1 ratio is generally considered the minimum for a healthy e-commerce business. Below 1:1 means you're destroying value with every customer you acquire.

Total revenue divided by total marketing spend. Unlike ROAS (which is channel-specific), MER is a blended metric across all channels and all revenue — including repeat customers and organic traffic. MER is often a more honest picture of marketing efficiency because it doesn't get inflated by attribution issues or last-click credit.

Revenue minus all costs: COGS, shipping, platform fees, marketing, overhead, salaries, software, and any other expense. Net profit margin is the bottom line — the actual percentage of revenue you keep as profit after every cost is accounted for. Most e-commerce businesses have lower net margins than founders expect because fixed overhead is frequently underestimated.

The revenue generated for every dollar spent on advertising. ROAS is the most commonly cited paid advertising metric, but it's also one of the most misunderstood. A high ROAS doesn't mean you're profitable — it means you're generating revenue. Profitability depends on whether your gross margin is high enough to make that ROAS worthwhile.

The percentage of orders that are returned or refunded by customers. Return rates are one of the most underestimated costs in e-commerce because they affect both revenue (the sale is reversed) and costs (shipping both ways, restocking, potential product damage). The 2026 industry median return rate is 12% across all categories, with fashion running 20–30%.

Running out of inventory before a reorder arrives. Stockouts are catastrophic for e-commerce businesses because they result in lost sales during the stockout period, loss of search ranking on Amazon (velocity drops), and potential customer defection to competitors. Prevention requires modeling sales velocity, lead times, and safety stock together.

Unlike ACoS (which measures ad spend against ad-attributed revenue), TACoS measures ad spend against total revenue — including organic sales. TACoS is a more honest measure of advertising efficiency for Amazon sellers because it accounts for the fact that PPC spend also drives organic ranking and velocity.

The number of months or purchases required before cumulative profit from a customer equals or exceeds the cost of acquiring them. Shorter payback periods mean faster cash flow recovery and lower risk. Most e-commerce businesses target a payback period of 6–12 months or 2–4 purchases.