How do successful ecommerce businesses know they’re succeeding? They track their KPIs of course! However, KPIs are a little different in the ecommerce world. On top of standard commercial KPIs, online stores must also pay attention to the engagement of online shoppers to understand how their store is performing.
This article will discuss how each KPI can impact your conversion rate and what it means for your business’ growth. Tracking this data is critical to determining your business’ strengths and weaknesses and will enable you to enhance your growth strategy over time.
What are the top ecommerce metrics?
Relevant metrics will depend on the stage your online business is in. Once you have identified the stage you’re in, you will be able to focus on the right metrics for your business.
Early-stage start-up businesses might find that order volume is the best KPI to track in their early stages. This will help indicate how well word is spreading of the brand, and therefore the extent of the brand’s exposure.
Meanwhile, more established start-ups may move from order volume to focus on metrics like average revenue per customer or repeat purchases. As your business begins to grow, you will have opportunities for optimising various KPIs depending on what stage you’re in.
As your business grows, you will need to focus more on customer lifetime value and return rate KPIs. This is important as it can help determine whether or not new marketing efforts positively impact the retention and/or acquisition of customers.
If your store is growing, you should be looking at the following KPIs:
- Order Volume (New and Repeat)
- Conversion Rate by Traffic Source
- Customer Lifetime Value
- Return Rate/Dissatisfaction Rate
As an online store begins to thrive, the focus should shift towards KPIs like Customer Lifetime Value and the Lifetime Value of customers. Start looking at metrics such as Customer Acquisition Cost, Average Order Size and Repeat Purchase Rate to optimise growth. Customer Churn Rate will also be a great indicator of where you sit in your industry.
Every ecommerce business will experience different stages throughout its lifetime, which is why tracking the proper KPIs for your store is essential to its growth and success.
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A list of KPIs Every Ecommerce Business Needs to Track
It is important to note that not every KPI will impact your store and its growth, so testing specific KPIs can help determine which metrics is the most beneficial for your business.
The Ecommerce funnel metrics is an excellent illustration of how you might want to structure your ecommerce tracking strategy. Ecommerce funnel metrics track the various stages that a customer goes through before they complete a purchase.
- Awareness (Online traffic to your website)
- Interest (Time on site)
- Desire ( Shopping Cart abandonment rate)
- Action (Average Order Value, Ecommerce Conversion Rate)
- Retention (Customer Lifetime Value, Repeat Purchase Rate)
By tracking these key performance indicators monthly, both long term and short term goals can be met by improving areas of weakness within your ecommerce store.
Ecommerce Conversion Rate
Ecommerce Conversion Rate is essential as it shows the percentage of customers that took a desirable action (i.e., made a purchase) on your website. This KPI is great to track as an ecommerce business begins growing and works well for companies at every stage in their life cycle.
The Ecommerce Conversion Rate definition can vary depending on what type of business you have. Still, it is typically calculated by dividing the number of completed sales transactions by the total number of visitors to your ecommerce store over a specific period.
Average Ecommerce Conversion Rate = Total visitors / Number of conversions * 100 to get the percentage.
The Average Ecommerce Conversion Rate by country or industry can differ significantly, so keep that in mind when you are attempting to benchmark your business’ performance. Some research indicates that a good Ecommerce Conversion Rate can be around 2.68 – 5% on a quarterly basis.
There are several Ecommerce Conversion Rate calculators accessible online that may assist you in determining where your website ranks and, more significantly, how to improve your conversion rates.
Average Order Value
It can be difficult for an ecommerce company to grow without focusing on average order value, which means tracking this KPI over time without doubt beneficial for business growth.
Average Order Value = Total revenue / Total orders for the period
Average Order Value is the average amount your customers spend on their orders. Understanding your business’ Average Order Value will enable you to evaluate your pricing and marketing strategies and contributes to measuring the long term value of your customers. It is generally accepted that as the Average Order Value increases, profit sees an increase as well.
Tactics such as cross-selling, up-selling, volume discounts and free shipping are proven to strengthen Average Order Value.
The Average Order Value will also provide the measures needed to evaluate long-term customer value. (i.e., the Customer Lifetime Value KPI).
Customer Lifetime Value
This KPI informs as to the total worth of a customer to your business over the whole period of your relationship. It costs less to keep a customer than to acquire a new one, so increasing the value of existing customers makes for a much easier growth pathway.
Knowing what your Customer Lifetime Value is will help you develop strategies to acquire and retain customers, all while ensuring the integrity of profit margins. Common tactics for improving Customer Lifetime Value include loyalty programs, addressing unhappy customers early, and investing in customer experience.
To calculate Customer Lifetime Value, a business owner must make assumptions. For example, they need to estimate the average sale and the number of times a customer buys from them. This is easier for an established business with historical data.
How to calculate Customer Lifetime Value:
Lifetime Value = Average Order Value × Average number of Transactions × Retention period
Average Customer Lifetime Value = Lifetime Value × Gross Profit Margin
Measuring Customer Lifetime Value will help to better understand client loyalty and retention, which will directly help you understand your target market and cut down your customer acquisition costs. Keeping an idea of the average customer lifetime value by industry will help you benchmark your customer value and understand how you stack up against others in your industry.
Retention rate is another KPI that allows you to understand how engaged your customers are with your brand. This metric will help you to understand your customers’ loyalty and will assist you in implementing tactics to encourage repeat business by showing the percentage of returning buyers over a certain period, such as one year.
Retention rate = Total number of returning customers over a certain period (i.e., one year) / Number of new customers in the same period * 100
To improve your retention, it is crucial to understand what you can do better for your existing clients, such as providing samples in their orders, improving the customer experience or providing discounts to loyal customers.
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Cost of Goods Sold
This KPI will allow business owners or marketers to know how much inventory they need to maintain product availability and to meet customers’ demands throughout their lifecycle.
Costs of Goods Sold = (Beginning inventory + Purchases) – Ending inventory
Gross Profit Margin
To achieve a healthy level of profitability, you must monitor your Gross Profit Margin. This KPI will help you track the earnings from your products after accounting for all costs associated with producing and selling them.
Profit = Revenue / Cost of Goods Sold
Gross Profit Margin = Profit / Revenue x 100
This KPI can be looked at monthly or yearly to better understand how much money is being made on each sale. Gross Profit Margin should be tracked consistently no matter what stage you’re at in the business life cycle. It will also help provide an indication of the business’ efficiency. As it scales, a business must become increasingly efficient to ensure the integrity of its gross profit. This KPI will therefore enable you to understand whether you are growing sustainably.
Customer Acquisition Cost
Customer Acquisition Cost measures the cost required to acquire each customer. It is essential to track this KPI to determine if you are getting a return on investment from sales and marketing efforts. The costs associated with acquiring customers include any sales costs, marketing costs, pricing incentives or retailing costs.
The customer acquisition cost formula is:
Customer Acquisition Cost = Cost spent on acquiring customers(e.g. Sales, Marketing Spend) / Number of customers acquired
Customer Acquisition Cost varies considerably based on the company and items being offered. A customer acquisition cost benchmark is a 3-to-1 ratio. (Lifetime Value-to-Cost of Acquisition ratio.)
As a business gets mature, it must begin looking at metrics such as Customer Lifetime Value and Customer Acquisition Costs to determine whether or not certain marketing efforts are helping the business thrive. Over time, successful KPI tracking will allow you to make timely changes where necessary for your store to continue thriving.
Average Profit Margin
Average Profit Margin KPI demonstrates a business’ profit margin over the long term. The percentage is arrived at by totalling all costs and all profits and finding the profit margin.
Average Profit Margin = Profit / Revenue
This KPI can be useful at any stage in a company’s life cycle because it allows you to keep track of changes in your business. The more products you sell for a given profit margin, the greater your average revenue. The inverse is true when this KPI decreases: the fewer products you sell, the lower your average profit margin.
According to Shopify, the average profit margin for ecommerce stores is higher than brick and mortar stores, ranging around 8.5%. Meanwhile, the latter tends to be lower by 5% on average.
Average Order Size
The Average Order Size KPI is used to track the number of items purchased in each transaction. This KPI can be beneficial for all stages of an ecommerce store as it shows how many products are being sold on your website at any given time, per order.
To calculate your Average Order Size KPI, you can use the following formula:
Average Order Size = Number of orders / Total items sold
By tracking this KPI, businesses will be able to track and determine trends in customer behaviour over time and accordingly make changes to boost your sales.
Average Order Volume
Keep an eye on the Average Order Volume to see whether any adjustments are needed in the future based on customer behaviour. This is a statistic that describes how much money consumers spend per purchase.
Average Order Value = Total revenue / Number of orders.
One of the best ways to increase your revenue is by focusing on increasing your average order value. The way you go about this will depend on what products you sell, but here are a few things that can help: offering add-on products and services such as gift wrapping, expedited shipping, and extended warranty plans. Additionally, you could also add new products or increase the price of your high-value items.
Shopping Cart Abandonment Rate
The Shopping Cart Abandonment Rate is one of the most commonly monitored KPIs by ecommerce businesses. Abandoning a shopping cart is an act by a customer where all of their items are left in their cart, and they leave the store without purchasing anything.
Shopping Cart Abandonment Rate = Completed orders / Shopping carts created x 100 for the percentage
Calculating this KPI can help you see patterns in customer behaviour over time, which may assist you in making marketing, product and customer support decisions. It’s a beautiful technique to test your checkout system on your website if you’re just getting started.
According to ecommerce research, the typical shopping cart abandonment rate is 69% – 75% – pretty high, right? This is definitely the metric to pay attention to for increasing conversions. It may force you to review your website in terms of how intuitive your checkout experience is, how fast your website is performing, and whether you are giving the right information on your product pages.
Customer Churn Rate
Customer Churn Rate is when customers abandon your business for another. The higher the churn rate, the more customers have left your business. The lower the churn rate, the more customers that stay with your business. Never fear – churn is natural, however as a business owner you will need to monitor this metric closely.
Churn Rate = (Total customers at the beginning of the month – Total customers at the end of the month) / Total customers at the beginning of the month x 100 to get the percentage
Generally speaking, the lower your churn rate is, the better your business is doing, as it indicates that fewer clients are switching to a rival. A negative churn rate means that many consumers are departing your website, and may signal that it is a good time to do a churn rate analysis on why they are leaving. The optimum churn rate will differ from one industry to the next but generally, an average churn rate will be 5% – 7%.
Churn Rate vs Retention Rate
Churn Rate is similar to Retention Rate but looks at customers that left your company over a certain period, as opposed to the Retention Rate which looks at the customers who have stayed.
Repeat Purchase Rate
The Repeat Purchase Rate KPI tracks the number of customers who made another purchase within a set period. This KPI is used to determine whether customers are satisfied with your business and the quality of the products you’re offering. Repeat purchases are a great sign you’re doing well! Knowing who these repeat buyers are will also enable you to forge deeper relationships with those who are looking like they will contribute to a higher Customer Lifetime Value.
To calculate your Repeat Purchase Rate, you’ll need to use this formula:
Repeat Purchase Rate = Total Purchases from Repeat Customers / Total Purchases.
If a customer makes two purchases in one month, they are counted as one unique customer, and no additional KPI is recorded. To get the most accurate KPI, you’ll need to have a large enough sample size for your KPI to be reliable and dependable. KPI’s like Repeat Purchase Rate and Churn Rate are essential aspects of growing and thriving in an ecommerce business.
This is an exciting statistic to evaluate when comparing your new and returning visitors to your website. This can be found on your website’s Google Analytics platform.
Ecommerce KPIs are your best friend when evaluating the performance of your online store. Bricks and mortars metrics, while still relevant, do not encapsulate the nuances of doing business online. Our main tip is to start with a few key metrics based on the stage your business is at today.
In time as your business grows, you will be able to pivot to more advanced metrics which will help continue to provide you insight as to your business’ performance. By following this guide and monitoring these specific metrics on an ongoing basis, there is no doubt that you’ll see results in no time.