When managing any type of business it is important to know what success means to you and your business. These success measures go so much deeper than your bottom line profit margin. There are a range of metrics – called Key Performance Indicators or KPIs – that help to navigate your business success and potential for growth and improvement.
This data can be particularly valuable to eCommerce businesses who rely primarily on virtual interactions with customers and potential customers. By learning to measure success in the eCommerce world, you can begin to understand how your business can improve and be competitive in your industry.
Here’s what we’ll cover
What are KPIs?
Performance indicators are metrics used to evaluate goals and objectives that are relevant to your business. Performance indicators are based on quantifiable metrics which in simple terms are metrics that can be measured and are not based on subjective opinions. Performance indicators are objective, measurable and help to gauge performance in relation to your goals.
Key performance indicators, otherwise known as KPIs, are the primary performance indicators that are relevant to your business and your goals. These outcome-based performance metrics are measured by raw data and the data’s life cycle including progress and changes. KPIs are generally categorized by the measurement they reflect. The four primary categories of KPIs are:
- Target
- Measure
- Frequency
- Source
Without defined KPIs for your eCommerce business, it would be very difficult to understand the correlations between your hard work and the success you may (or may not) be experiencing. Gut feelings, personal preferences and understandings have no place in KPIs – data simply doesn’t lie.
What Defines an eCommerce Business?
eCommerce, or electronic commerce, is the all encompassed term used for businesses whose transactions are conducted online. These types of transactions span all industries and can involve the trading of goods, services or other. The transfer of money and data is critical to the eCommerce exchange. It is important to note that eCommerce is not limited to the selling and purchase of a tangible product. Intangible goods and services could also be included in the eCommerce umbrella.
There are three traditional types of eCommerce business models.
B2C – Business to Consumer
Businesses sell their products or services directly to consumers
B2B – Business to Business
Businesses sell products or services to other businesses to aide in their day to day operations
C2C – Consumer to Consumer
These types of eCommerce formats are often online marketplaces where consumers sell directly to others informally.
How do You Measure Success in eCommerce?
There are a few important factors to keep in mind when evaluating the use of KPIs in your eCommerce business plan. These factors contribute to the overall success of KPIs and include:
- The value of KPIs lies in the analysis of data. Data for data’s sake is not valuable. Understanding your data will present opportunities to make evidence-based decisions for your business.
- Data will help to clearly identify problems and concerns within your business
- KPI data is designed to facilitate problem-solving and solution-based thinking
In order to be effective, a KPI should be an amalgamation of two or more data sets to properly align within a key performance indicator matrix. These metrics should be treated as a roadway in themselves and combined they provide a deep analysis of your business and the actions necessary to improve. The relationship between two metrics (that make up a KPI) is called a conversion rate.
There are a number of important principles that govern the use of KPIs for your eCommerce business. These principles include:
- Every key performance indicator should be tied to a specific business goal or outcome
- For a key performance indicator to be valuable it must be able to be measured over time
- Key performance indicators should be tied to reasonable metrics (metrics you can reasonably attain with your, or your team’s, knowledge and skillset)
- Results or trends highlighted in key performance indicator data should be applied to your goals
There are a wide range of KPIs designed to address every possible business need or problem. For eCommerce businesses, there five primary categories of key performance indicators. These KPIs are all data-driven, qualitative and outcome-based. These five primary categories include:
- Sales
- Project management and administration
- Marketing
- Manufacturing or production
- Customer service or client relations
Top KPIs for eCommerce Businesses
Overall Sales
This may seem obvious, but the most important KPI for eCommerce shop metrics is sales. Sales data can be refined to show the total sales, or number of goods sold, in any given month, week, day or even hour.
The ultimate goal of any eCommerce business is to generate profit so this is important, and obviously, this KPI cannot be overlooked as an indicator in the overall success of your business.
Sales Conversion Rate
Conversion rate is a percentage figure that shows the rate at which visitors to your eCommerce site make a purchase. This is one of the more simple metrics to understand and it can provide great insight into the customer experience on your site.
Sales conversion rate is created by calculating the number of unique sales in a specific time frame by the number of web visitors in that same time frame. Your end result will read something like “of every 1000 unique visitors to our eCommerce website, 30% of customers made a purchase.” This data can be further refined to show what types of products showed higher sales conversion and the points when your website converts visitors into sales most effectively.
Did you know that you can apply psychology to increase your conversion rate? Here are “ 5 Marketing Psychology Techniques to Improve Your Conversions.”
Website Traffic
Similar to sales, website traffic is an obvious but often underutilized KPI. Website traffic, in its simplest terms, is the amount of visitors to your website. For an eCommerce business, it’s key in driving sales. However, website traffic can also be refined to be much more complex.
Through cultivating data, website traffic numbers can show where your visitors are finding your site (Google, social media etc.), how they are navigating your site once they get there, how many times they revisit your site before making a purchase and where they may become bottle necked or leave the site. All of this data can give a comprehensive overview of your site’s overall usability, conversation success and customer service experience.
Writing Increasing your site traffic is no easy task, but it can be done if you follow these steps. Read more in “SEO Campaign: 7 Steps to Relevant Content And Long-Lasting Traffic.”
Cost Per Acquisition
This KPI tells a business how much your business pays to acquire a new customer. This total cost is calculated by totaling all the business, development, manufacturing and marketing costs associated with attracting new customers.
The types of activities that should be calculated in your Cost Per Acquisition would be social media management, digital marketing initiatives, staffing costs, cost of physical location if your business has one, web hosting and management costs etc.
The threshold of what qualifies as a new customer is based on the customer making one purchase from your eCommerce site. Cost Per Acquisition does not define customer loyalty or outline the value of this customer’s overall relationship with your business.
Average Order Value
The average order value, sometimes market basket, is the average size of an order or the average cost of an order. This data is insightful to understand how much a customer, on average, spends when making a purchase from your eCommerce site. Learning how to maximize and increase this value is a useful KPI to help increase overall sales.
Customer Lifetime Value
Customer Lifetime Value is the value assigned to a customer that ranks their loyalty to your business. Commonly abbreviated to CLV, this value is a fairly simple calculation, although for larger organizations with multiple consumer touch points this calculation can become significantly more complicated. CLV is calculated using this formula:
(Customer revenue/year) x (number of years as a customer) – (Customer Acquisition Cost + Cost to Serve) = CLV
CLV is a critical measure of a customer’s loyalty and relationship with your business but it is not the only metric that can be used to determine a customer’s value. There are numerous other KPIs, such as the Net Promoter Score (NPS), to factor in a customers influence and satisfaction into your customer retention model.
Want to how to increase this KPI? Check out “How to Calculate Customer Lifetime Value – What You Need to Know.”
Percentage of Returning Customers
Once you do the calculations on the Cost Per Acquisition, you will notice that it is significantly less expensive to retain existing customers than to constantly be dedicating money and resources to attracting new customers.
While customer acquisition and retention are both important, customer retention is much cheaper and often easier. The percentage of returning customers is the rate of customers that make multiple purchases compared to those who only make one purchase.
This data can further be refined to understand how long it takes for a customer to return to make a purchase and the type of products or services they purchase on their second purchase.
Shopping Cart Abandonment Rate
This KPI is unique and especially critical for an eCommerce business. The shopping abandonment rate is the number of users that add items to their shopping cart without ever checking out.
The lower this number is the better and it often denotes a high overall sales conversion rate.
If your shopping cart abandonment rate is too high, it could mean there are customer limitations or challenges in your check out processes. Some ways that eCommerce businesses work to lower their shopping cart abandonment rate is through automated reminder emails to revisit their cart or special offers that pop when a customer is partially way through the checkout process.
Gross Profit
Calculated from subtracting the total cost of goods sold from total sales, and is also one of the most important factors to measure online success.
Revenue Per Visitor (RPV)
The dollar amount your ecommerce store earns per visitor to your store. Improving this metric will dramatically increase your gross profit.
Churn Rate
The rate at which customers are leaving your brand or failing to renew a subscription to your service/product. This rate can also be understood as the metric at which customers are switching to alternative offerings from competitors.
Key Takeaways On eCommerce KPIs
Whether you are a new eCommerce business or an established brand, monitoring these key performance indicators will present a comprehensive picture of how your business is progressing and developing at this moment in time.
Analyzing the data in these areas will help to improve your business model, drive online sales, encourage growth and understand your business more fully.
