Ecommerce businesses that want to succeed and achieve year-over-year growth need to have concrete data that will allow them to make informed decisions to improve their business. While there are many different metrics ecommerce businesses can track, not all will help in achieving growth.
It’s crucial that ecommerce businesses focus on a few key metrics (known as KPIs) that will enable them to track their progress, interpret their results, and make informed changes to their sales and marketing strategy that will result in increased revenue and sales.
KPIs (Key Performance Indicators) are measurable values that show whether a business is achieving its goals and objectives. They are used to measure progress and help pinpoint specific areas for improvement.
KPIs can be used to measure every part of a business, including sales, marketing, and customer support.
Don’t make the mistake of confusing KPIs with metrics. While all KPIs are metrics, not all metrics are KPIs. Metrics are objective data points that show the results of an activity while KPIs are of subjective value for each business, i.e., they show how a business is performing.
Ecommerce businesses need to track KPIs to be able to track progress and understand if what they’re currently doing is working. If businesses don’t track KPIs, every decision they make will be based on gut instinct, a personal preference, or belief, rather than hard data. KPIs allow businesses to make strategic decisions.
The average order value (AOV) is a metric that shows how much customers spend, on average, on every order they make. AOV is calculated by dividing revenue with the total number of orders. It’s crucial for ecommerce businesses to track AOV to understand how much a customer is worth, and in turn, how much they can afford to spend to acquire a new customer.
AOV can also help make informed decisions regarding pricing and selection of main marketing channels for customer acquisition. Ecommerce businesses can improve average order value in a number of ways, including upselling, cross-selling, and setting minimum order value thresholds for discounts or free shipping.
Cost of goods sold (COGS) is the total cost of creating a product, including labor, materials, etc. COGS does not include indirect expenses such as sales or marketing. It’s calculated by adding up starting inventory and purchases, and then subtracting ending inventory.
By knowing how much it costs to produce their products, ecommerce businesses can seek alternative methods of production in order to increase their profit. Understanding COGS also enables businesses to create a pricing plan for sales, offers, and promotions.
Conversion rate is a metric that shows how many of your website visitors ended up making a purchase during their visit. To calculate your conversion rate, you need to divide the number of sales with the total number of visitors.
The average conversion rate for ecommerce businesses is around 2%. If your online store is converting at a substantially lower rate, you might want to look into the possible reasons for why this is happening.
Audit your website and see if there’s anything that might be making it hard for visitors to check out. Consider placing an exit survey pop-up to ask visitors why they gave up on purchasing from your website.
Apart from measuring sales conversion rate, ecommerce businesses might also want to opt for measuring the conversion rate of various micro-conversions such as newsletter signups or referral program signups.
Cart abandonment rate denotes the percentage of visitors that added one or more products to their cart but then left your website without completing their purchase. It’s calculated by dividing the total number of completed transactions with the number of shopping carts created by visitors.
According to the Baymard Institute, the average ecommerce cart abandonment rate is 69.57%, with the most common reasons for cart abandonment being extra costs (such as shipping or taxes), the need to create an account, and a too complicated checkout process.
Shoppers who abandon their carts also cite trust issues, website errors, slow delivery, unsatisfactory return policy, and a lack of payment methods as major reasons for shopping cart abandonment.
By focusing on tracking cart abandonment rate, ecommerce businesses will be better equipped to improve their website and checkout process, which will ultimately result in an improved conversion rate and an increase in sales.
Purchase frequency is a metric that shows the average number of times a customer buys a product from a business in a given period. PF is calculated by dividing the total number of orders with the total number of unique customers.
The best way to look at purchase frequency is to limit your calculation to a set period such as one year. Calculating the average PF for a single year will give you the opportunity to increase the amount of revenue you generate from each customer within one year by working on shortening the average time between repeat purchases.
Customer lifetime value (CLV) is the revenue that an average customer would spend with your ecommerce business during their lifetime. CLV is calculated by multiplying your average order value (AOV) with the average purchase frequency. Calculating CLV allows you to understand how much you can spend on acquiring a new customer.
CLV enables ecommerce businesses to estimate their marketing costs more easily, as well as improve their customer acquisition strategy.
Customer acquisition cost (CAC) is a metric that shows how much it costs, on average, to acquire a new customer. It’s best used in conjunction with AOV and LTV in order to determine the profitability of your marketing efforts. CAC is calculated by dividing your marketing expenses with the total number of new customers generated.
By understanding how much you need to spend to acquire a new customer, you’ll be able to judge the effectiveness and profitability of each of your marketing channels, which in turn will allow you to make informed decisions about what percentage of your budget you should be allocating to each specific marketing channel.
Return on ad spend (ROAS) shows how much revenue you’re generating from your advertising campaigns. To calculate ROAS, you need to divide the total revenue generated through advertising with the total cost of your advertising campaign.
A ROAS of 1 means that you’re breaking even, while anything higher than 1 means that you’re making a profit on your campaign. However, to make a profit while accounting for other expenses, most ecommerce businesses should aim to have a ROAS of 3 or higher, which means that they should be generating at least 3 dollars of revenue for each dollar spent on advertising.
Ecommerce businesses need to keep an eye on their ROAS to be able to evaluate the performance of their advertising campaigns and make modifications to their advertising strategy if necessary.
The Customer Satisfaction Score (CSAT) measures how much a customer was satisfied with a specific purchase, interaction, or business. It’s determined by surveying customers after a specific interaction, with answers usually being offered on a scale of 1 to 5 or 1 to 10.
By surveying customer satisfaction after a specific interaction, such as a purchase or customer support chat session, ecommerce businesses can pinpoint the exact moment that causes an unsatisfactory experience. This allows them to work on ways to improve the overall customer experience and increase customer satisfaction, which will, in turn, lead to repeat purchases, referrals, and positive reviews.
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