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Chapter 36: Build an NPV Calculator in eCommerce Business Space Using Python

Rather than saying that this is a new piece, I prefer to say it’s a comprehensive chapter that combines several pieces of articles I released before. You can better understand the elements needed and the tips to create an NPV calculator made by Python.

In this Python Tutorial, I’ll walk you through how to use Python, and the approach OOP to build an NPV calculator. You can definitely learn the codings, but also explore the knowledge of investment evaluation, and what eCommerce P&L elements matter.

Knowledge Modules: investment evaluation (WACC, CAGR, NPV, IRR), 7 variable costs in eCommerce, eCommerce & digital marketing

Table of Contents: NPV Calculator

NPV Calculator: 4 Core Sections for an eCommerce Business Investment Evaluation

The goal of a business is to earn profit. In the whole journey of a business, basically you will approach a segment of customers in one place by marketing to sell your products or services. In the end, after a while of years, you aim to get back the investment and earn money.

NPV or net present value basically tells us if this business is worth investing in. So the eCommerce GMV, operation cost, and capitalism cost matter. But please don’t think it might be complex. Basically, these are the 3 core sections you need to handle and calculate the numbers.

  1. Market growth rate, Capitalism cost & investment cost
  2. E-commerce product price and operation cost
  3. Gross profit from organic channels and partnerships
  4. Gross profit from paid media channels and partnership

And here we try to break down what specific metrics are in each section

Market growth rate, capitalism cost & investment cost

  1. WACC: Weighted Average cost of capital
  2. CAGR: Compound average growth rate
  3. Initial Outlay: Upfront investment before the start

These 3 factors do vary in different industries, products, and markets. In this piece, I’ll take smart home electronic products for example. Also, the initial outlay is just the investment you need to pay in advance before the project starts. This number size can affect the NPV at the end or force you to extend the investment windows for earning profit.

If you like to learn more details, please check out this article – NPV and IRR in eCommerce business evaluation

Private Equity Investment: eCommerce Business Valuation Using NPV and IRR

E-commerce product price and operation cost

  1. SKU price or average order value
  2. COGS: cost of good sales
  3. Fulfillment cost
  4. Refund rate
  5. Payment processing cost

Define the cost of good sales, it depends on your financial model. In this article, I will put it as the landed cost, which includes the product production or sourcing cost, interrelationship shipping cost, and the import custom cost. Some parties would add the cost per sale as well. But I would put this into the paid media section.

For more details, please check out this article – 7 varible cost in eCommerce space

Selling Well But Be Losing Money? 7 Variable Costs Are Impacting Your Online Store Profit Margin

Gross profit from organic channels and partnerships

  1. Organic traffic per year
  2. Organic avg conversion rate

The definition of organic traffic very depends on the business status and the anchor you like to use. For example, if it’s a new business without any historical data, you could refer to your competitor’s web traffic or search engine keyword search volume. If the business has been running, you can refer to the web traffic from the last year. This approach can be applied to the conversion rate as well.

I’ll release another article regarding a bot for scraping conversate rate benchmark data by sectors.

Gross profit from paid media channels and partnership

  1. Cost per click from the paid media channel
  2. Avg conversion rate
  3. Target to gain paid traffic per year
  4. Partnership commission cost
  5. Order% from partnerships out of total orders

Create an OOP – 15 Variable Number To Input for NPV Calculation

Here is the code sample for your reference. It’s a class and self-object creation. Then, assign the 15 variable numbers separately to the self-object.

EBITDA level involves the fiat cost like manpower, equipment rent, etc, I will suggest you deduct from the present value if it’s necessary.

But It’s supposed to have the 16th variable number that can affect the final result of NPV, which is how many years to invest. I will add it to the flask script instead of putting it in the class. It’s because you don’t need to create a specific method for the number of years. It can be just a variable later you set in the flask script.

Regarding more details about Python OOP, please check out this article and you can learn how to connect your flask function script with the front-end scripts such as HTML. It’s for the purpose of getting the data from user inputs – Python OOP

Chapter 33: Create an eCommerce Profit & Loss Calculator Using OOP

5 Core Calculation Formulas

The calculation formulas are vital because you like to generate realistic and convincing results to guide you on the investment. It’s difficult to be accurate, but it’s totally feasible to generate a number to be more convincing and make sense.

eCommerce operation GMV and cost

Basically, total GMV and cost consist of the total amount of organic and paid. So in the class oop, you need to create the methods upfront before writing down the codes of the flask script.

The first thing first is the GMV formulation. It is very straightforward, basically, the result is from the multiply among traffic, conversion rate, and the AOV number respectively from organic and paid media.

def organicGMV1stYear(self):
return self.organicTraffic * self.organicCVR * self.aov

def paidGMV1stYear(self):
return self.paidTraffic * self.paidCVR * self.aov

Second, it is the cost formula. It might vary case by case as it depends on the fee structure of your refund, or which payment gateway you would use. And in paid media, it also deals with the 3rd party commission cost as well. Or if you run an Amazon store, you also have referral fees in both organic and paid media.

def organicCost1stYear(self):
return self.organicTraffic * self.organicCVR * (self.cogs + self.fulfillmentCost + self.refundRate * (self.fulfillmentCost + self.cogs) + self.aov * self.paymentRate)

def paidCost1stYear(self):
return self.paidTraffic * self.paidCVR * (self.cogs + self.fulfillmentCost + self.aov * self.partnerCommissionRate * self.partnerOrderPercentage + self.refundRate * (self.fulfillmentCost + self.cogs) + self.aov * self.paymentRate) + self.paidCPC * self.paidTraffic

Present Value or PV

The PV formula is EBTDA / (1 + WACC), but I will suggest how to handle and deduct those flat and tax costs at the NPV level. It’s because it varies by market, sector, so it creates more difficulties for the users to find the number by using your calculator.

So below is the formula I use for gross profit instead:

PV = gross profit / (1 + WACC)

For the WACC calculation, I would suggest you provide the list to the end users for reference. And I’ll release another article to elaborate. If you are interested in how to scrape the data, please check out this article – CCA bot for scraping the financials

Chapter 28 – Build the Comparable Company Analysis Bot Using Easy2Digital APIs

The total amount of PV

Just now, we get the 1st year of PV based on the business’s historical and industrial data. And according to the length of year you are about to invest, you need a CAGR number to calculate the PV from each year and work out a total amount.

Lum sum of PV = PV1st + PV2nd + ………+ PVnyear * (1 + CAGR) ^ years

For more details regarding the CAGR calculation, please check out this article – NPV and IRR

Private Equity Investment: eCommerce Business Valuation Using NPV and IRR

NPV

Last but not least, the total amount of PV minus upfront investment is the NPV. For more accuracy, you could also minus the flat cost like 5 years’ manpower cost, equipment cost, etc

NPV = Total amount of PV - Initial Outlay

Use if/elif/else to tell users if the investment is worthy or not

The value of the calculator is giving hints and a brief direction to the users if the investment is worth. The NPV result indeed varies based on the investment length. And the result must tell the user if the investment is earning money or losing money in the end. So here deals with the conditions. Below are the codings respectively for the total amount of PV and NPV.

Other factors you should be aware of that can affect the NPV result

This approach has also considered the financial perspective of discounted cash flow. After all the money would depreciate after some years than the year you invested in the 1st place.

However, I assume if your SKU price or AOV might not change, it can be more accurate to calculate as there are some costs that might increase as well. Below is the list of variable costs you can further break down to calculate by year. There, you can mark up an incremental percentage.

  1. COGS
  2. CPC
  3. Payment processing fees
  4. Fulfillment cost
  5. Refund cost

Full Python Script of eCommerce Business Investment NPV Calculator

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FAQ:

Q1: What is an eCommerce Business NPV Calculator?

A: An eCommerce Business NPV Calculator is a tool that helps businesses calculate the Net Present Value (NPV) of their eCommerce ventures. It takes into account various factors such as initial investment, expected cash flows, and discount rate to determine the profitability of the business.

Q2: Why is NPV important for eCommerce businesses?

A: NPV is important for eCommerce businesses as it helps in evaluating the financial viability of their ventures. By calculating the NPV, businesses can assess the profitability of their investments and make informed decisions regarding their eCommerce strategies.

Q3: How does the eCommerce Business NPV Calculator work?

A: The eCommerce Business NPV Calculator uses a formula to calculate the present value of expected cash flows from the eCommerce business. It then subtracts the initial investment to determine the NPV. The calculator takes into account the discount rate to adjust for the time value of money.

Q4: What factors are considered in the eCommerce Business NPV Calculator?

A: The eCommerce Business NPV Calculator considers factors such as initial investment, expected cash flows over a period of time, and the discount rate. It also takes into account any recurring costs or revenues associated with the eCommerce venture.

Q5: How can the eCommerce Business NPV Calculator help in decision making?

A: The eCommerce Business NPV Calculator provides businesses with a quantitative measure of the profitability of their eCommerce ventures. By comparing different investment options or scenarios, businesses can make informed decisions about resource allocation and prioritize projects based on their NPV.

Q6: Is the eCommerce Business NPV Calculator suitable for startups?

A: Yes, the eCommerce Business NPV Calculator can be used by startups to evaluate the financial feasibility of their eCommerce ventures. It helps startups assess the potential return on investment and determine if the venture is financially viable.

Q7: Can the eCommerce Business NPV Calculator be customized for specific business scenarios?

A: Yes, the eCommerce Business NPV Calculator can be customized to suit specific business scenarios. Users can input their own values for initial investment, expected cash flows, and discount rate to get a personalized NPV calculation for their eCommerce business.

Q8: Are there any limitations to using the eCommerce Business NPV Calculator?

A: While the eCommerce Business NPV Calculator is a useful tool, it does have some limitations. It relies on accurate input data and assumptions, which may not always reflect the actual performance of the eCommerce venture. Additionally, it does not account for external factors such as market conditions or competition.

Q9: Is the eCommerce Business NPV Calculator suitable for all eCommerce businesses?

A: The eCommerce Business NPV Calculator can be used by a wide range of eCommerce businesses, including both B2C and B2B ventures. However, its suitability may vary depending on the specific nature of the eCommerce business and its revenue model.

Q10: Where can I access the eCommerce Business NPV Calculator?

A: The eCommerce Business NPV Calculator can be accessed online through various platforms or websites that offer financial calculators. Some eCommerce consultancy firms or software providers may also offer the calculator as part of their services.

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