You’ve heard it countless times; knowledge is power. This is especially true if you’re tailoring your digital marketing strategy to become a leader in your industry. If you want your eCommerce brand to succeed, you’ll need to understand the consumer behavior of your target demographic.
As Avinash Kaushik of Google has said, “Most businesses are data rich, but information poor”.
Enter key performance indicators or KPIs. We’ll explain everything you need to know about setting helpful KPIs for your business.
What is a KPI in eCommerce?
KPIs are metrics that represent how well your eCommerce brand is performing. Metrics and KPIs are often confused with one another, but they are not the same thing.
Brands can find endless amounts of metrics surrounding their audience and how they interacted with their brand. For example, metrics include average order value, customer acquisition cost, conversion rate, clicks on an ad, etc. Think of metrics as a general way to measure things.
However, KPIs can help pinpoint the most important metrics to your brand so you can track them consistently. Most KPIs stem from the combination of two or more metrics.
For example, combining the metrics of how many sales you’ve had in addition to your website traffic, you will get a common KPI called a “conversion rate.” This number is calculated by taking your number of sales and dividing it by your number of visitors, then multiplying that number by 100.
Although you may not need to pay attention to every number surrounding your business, it’s always ideal to collect more data than you think you need. Having a variety of data points over long periods of time makes it easier to see patterns that you may not have recognized otherwise.
Why Are KPIs in eCommerce so Important?
Running a successful and established eCommerce site takes a lot of time and effort. Operating a business solely based on what you think is the right strategy can blow up in your face. Even the smartest individuals in the digital marketing industry don’t rely solely on instinct to drive growth.
In the case that something goes awry with your approach and you aren’t getting the customers that you thought you would, KPIs are a roadmap that explains how you got to that point. Establishing a list of essential KPIs allows you to take positive strides toward meeting these goals and establishing new ones.
You can think of KPIs as an objective force in your marketing strategy void of any emotions or personal feelings. Once you have hard data to look at, you can then take that information and turn it into important insights to improve upon your marketing strategy.
Can the Wrong KPIs Kill Your eCommerce Business?
It’s not recommended to spend money on digital marketing without establishing KPIs that will guide your campaigns. Without a thought-out approach and metrics that you are striving for along the way, you may develop a false sense of success about how well your business is doing.
As your business begins to hit your set KPIs, you can make changes to them to reflect your growth. It’s natural for it to take some time to hit your KPIs, but having something to work toward will keep you and your team motivated.
Examples of the Wrong KPIs for eCommerce
Now that you’re ready to start determining what KPIs make sense for your eCommerce business, consider what KPIs you should avoid. Some KPIs can provide business owners and marketing teams with a false sense of accomplishment if they aren’t calculated correctly.
Website Traffic without the Conversion Rate
Your website is your brand’s main hub and the platform on which you make sales. The more visitors who spend time browsing through your website, the higher the chance that they will end up making a conversion.
The term “conversion” refers to the desired goal that the website visitor takes. Different marketing companies have different definitions of what a conversion is to them, but typically, it involves the user completing one of the following:
- Signing up to receive emails from you
- Filling out an online form
- Making a purchase
While tracking metrics such as website visitors can help you better understand how consumers are behaving on your site, the number of website visitors you get does not equate to an increase in sales.
Solely focusing on how many website visitors you have is only seeing part of the picture; if your potential customers aren’t taking action on your site, they may as well not have been on it at all.
Instead of focusing on gaining more website visitors, try focusing on your conversion rate. Once you increase the percentage of customers who make a purchase on your site, you will notice an increase in overall traffic as well.
Calculating Profit without Factoring in Other Costs
You know what they say; you have to spend money to make money. This saying goes hand-in-hand with another mistake that eCommerce brands make: focusing solely on the bottom line without factoring in a budget to tackle marketing.
For brands in their infancy, exposure is one of the most important factors in brand growth. Getting your brand’s name out there is easier with strategies like paid ads, SEO campaigns and email marketing campaigns on your side.
eCommerce businesses that focus solely on the bottom line are taking away important funding that can be invested in other areas of the business, including marketing.
Make sure to address any marketing challenges that your eCommerce company is facing and be mindful about how to spend any profit in the future.
Mistaking Marketing Success for a Profit
Getting too caught up in the numbers behind your marketing efforts is a downfall for many eCommerce brands. While it’s exciting to see that you’ve just hit 5,000 followers on Instagram or you are ranking on the first page of Google for the top 10 keywords that you’re tracking, these numbers aren’t sales.
While positive marketing numbers are always a good sign, they shouldn’t be confused for profit or conversions. Taking a step back and seeing your brand from a 10,000-foot view can help you find missing holes and change your approach if needed.
Do More KPIs Mean More Sales?
KPIs can be applied to many different areas of your business to help monitor and track growth. Examples of different types of KPIs include sales, marketing, customer service, or manufacturing. As a result, businesses need to separate their marketing KPIs from their overall business KPIs in order to determine what marketing efforts are working and what aren’t.
Calculating profit solely based on your marketing channels isn’t an accurate representation of your business’ financials. Don’t lump all of your KPIs in one place and treat them as equals, and avoid making an endless number of KPIs simply because you think it is the right thing for your brand.
Helpful eCommerce KPIs to Measure Sales
With so much information surrounding eCommerce KPIs, you may not know where to begin in your journey of tracking them. All of your KPIs should have the following four attributes:
- They are accurately and consistently measurable
- They are in real-time
- They create an impact
- They have action items that allow you to make improvements as you go
We recommend tracking the following KPIs for your eCommerce business.
A “churn rate” is applicable to online businesses because it is the rate at which your customers are walking away from your brand by canceling their subscription.
In order to calculate this number, you’ll need to know the number of customers that you have at the beginning of a month and at the end of the month. Subtract the number of customers remaining from the number of customers you started with and multiply that by 100. You can also take this number and multiply it by 12 to get your annual churn rate.
Time Between Purchases
How long each customer takes between their purchases is another KPI that eCommerce businesses should track. If you can encourage your customers to purchase from you more frequently, you will be able to build a solid customer base.
To determine this number, simply take the customer’s purchase frequency and divide it by 365 days. If you realize that the average number of days between purchases is longer than you’d like, tailor your future campaigns to help draw more attention to your store.
Average Order Value (AOV)
This KPI determines how much money the average customer spends on each order. To determine this number, take the total revenue and divide it by the number of orders that you received.
Cost of Goods Sold (COGS)
The cost of goods sold refers to how much you are spending to sell your product. In order to calculate this number, take your beginning inventory costs at the start of the year and add it to any additional inventory costs that you purchased throughout the year. Then, subtract the ending inventory amount at the end of the year.
One of the most important KPIs that your eCommerce business can track is gross profit. Your gross profit is calculated by taking the total costs of goods sold and subtracting the total number of sales.
Gross profit can help determine the overall profitability of your eCommerce business and reflects how efficiently you utilize raw materials, labor and supplies.
Customer Acquisition Cost (CAC)
How much does your eCommerce store spend to acquire a new customer? The customer acquisition cost provides insight on what it takes to acquire a new customer. Of course, eCommerce businesses should try to keep this number as low as possible in order to maximize profit.
To calculate your customer acquisition cost, take the total amount that you’re spending on acquiring new customers and divide it by the number of customers acquired.
Repeat Purchase Rate
This KPI tracks the number of customers who visit your website again to make an additional purchase. Not only can this data help drive your marketing strategies, but it can help give you a sense of how loyal your customers are to your brand.
Take the total number of purchases from repeat customers and divide it by the total purchase.
Shopping Cart Abandonment Rate (CAR)
Shoppers are inevitably going to visit your eCommerce website, add items to their cart and not check out. This number is referred to as your shopping cart abandonment rate and you can calculate it by taking the total number of completed transactions and divide it by the total number of shopping carts. Then, multiply that number by 100 to get your shopping cart abandonment rate.
If this is a high number, make sure to consider revamping your checkout process to make it easier for your customers to convert.
Shopping Cart Conversion Rate (CCR)
Just as it is helpful to track how often your customers abandon their shopping carts, it’s also helpful to track how often a shopping cart becomes a conversion.
To determine this eCommerce KPI, take the total number of conversions and divide it by the number of visitors to your site. Then, multiply this number by 100 to get your cart conversion rate.
Your conversion rate is one of the most important KPIs that you can track for your eCommerce business. It outlines the rate at which people are purchasing your products.
To determine your conversion rate, take the total number of visitors on your website and divide it by the total number of conversions, and multiply this number by 100.
You can calculate separate conversion rates depending on the specific conversion goal that you are tracking. For example, you may have different conversion rates for form submissions, purchases made, phone calls, etc.
Average Profit Margin
The average profit margin refers to how much profit you’ve made over a certain period of time. To calculate this KPI, take your gross profit and divide it by the revenue.
Revenue Per Click (RPC)
Many eCommerce stores also run pay per click advertising campaigns to attract more customers to their brand. One KPI to consider is measuring revenue per click, or RPC to see how effective these campaigns are.
To determine this number, take your total revenue and divide it by the total number of clicks that you received.
Customer Lifetime Value (CLV)
Each customer is worth a monetary amount to your business, which is referred to as customer lifetime value. To improve this number, focus on establishing a strong relationship with your customers and ensuring they are loyal to your brand.
To calculate the customer lifetime value, take the customer’s annual profit contribution times the average number of years as a customer subtracted by the initial cost of customer acquisition.
The purchase frequency KPI refers to the number of customer orders during a certain period of time. This is a helpful KPI when determining how loyal a customer is to your brand and can highlight successful products versus products that need more marketing help.
Although this isn’t as popular of a KPI to track, it can provide important insight. This rate is the percentage of visitors who add at least one item to their cart.
To calculate this number, take the total number of sessions in which a customer adds an item and divide it by the total number of sessions.
This KPI can provide insight on whether or not you’re attracting the right audience to your store or if your consumers are simply browsing online to see what is out there.
How Often Should eCommerce KPIs Be Evaluated?
With so many different KPIs to measure, you may wonder exactly how often they should be evaluated. Like most answers to common digital marketing questions, the answer of how often a KPI needs to be evaluated depends on many different factors.
How established is your eCommerce business? Are you just getting started or do you already have a following? Do you have a seasonal product that needs to be heavily marketed during certain times of the year? These are examples of what you should consider when determining how often to look at your eCommerce KPIs.
Plus, the frequency at which you look at your KPIs is dependent on what the KPI is; some require more hands-on monitoring while others you can check in on periodically for important insights.
Some metrics need to be measured on a weekly basis to track and monitor growth. Examples include website traffic, engagement on social media, or overall impressions.
If you want to collect a larger sample size than a weekly snapshot of KPIs, consider tracking some data points bi-weekly. This allows for a more accurate representation of numbers. Examples of bi-weekly KPIs to measure include average order value, cost per acquisition or shopping cart abandonment.
Observe relevant traffic patterns by monitoring monthly KPIs including revenue per click, reach, or multi-level engagement.
Quarterly KPIs can help you tailor your digital marketing strategy and can show you a big-picture view of how your eCommerce business is growing. Quarterly metrics can point to larger trends and patterns that are impacting your business. Examples of KPIs to track quarterly include customer lifetime value, average profit margin, and repeat purchase rate.
Which KPIs Should be Tracked if You Have Minimal Time?
If you only have a limited amount of time or resources to dedicate to tracking KPIs, consider the following.
Cost Per Acquisition AND Lifetime Value
In order to get customers interested in your brand, you have to invest money into grabbing their attention. All of your marketing efforts to reach new people will cost money, and this is something that you should track.
However, in order to paint a more accurate picture of your brand, it’s important to also track customer lifetime value. Again, this refers to how much a customer will spend on your products over their lifetime.
The connection between these two pieces of data is extremely important. For example, if you spend $50 to acquire a new customer but their lifetime value is $45, this shows that your cost per acquisition is too high. If this trend continued over the scope of your business, it wouldn’t be worth it to run a company at all.
It’s ideal for eCommerce businesses to have plenty of customers with a higher lifetime value than your cost per acquisition. This is especially true with eCommerce businesses that are subscription-based and can maximize their return on their investment each month.
As a general rule of thumb, when you are looking at the results from your eCommerce KPIs, always start by looking at both your customer acquisition cost and their lifetime value.
Average Order Value
The other important KPI to focus on if you have minimal time is your customer’s average order value. This KPI provides insight on how big the average order is on your eCommerce website.
When determining this number, make sure to analyze a specific period of time such as a month, a quarter and a year to gain insight on how effective your selling strategies are.
If you notice that you don’t have a ton of customers but their average order value is high, this is a good thing. Typically, the fastest way for an eCommerce store to increase revenue isn’t to attract more customers but to solidify spending habits with your current customers.
Repeat purchasers typically spend the most with a business compared to a one-off customer who likely won’t make a purchase again.
Your AOV can also be utilized to determine your shipping threshold. For example, if you notice that your average order value is $40, you can provide free shipping on orders over $50 to encourage additional spending.
Getting caught up in tracking too many KPIs for your eCommerce brand can be overwhelming and stressful. In the beginning, only focus on the KPIs that matter the most to your business and begin adding in more KPIs over time. This approach can help you identify the strengths and weaknesses of your own company.
Understanding when and how to use KPIs can help you become a leader in your space and fine-tune your strategies to gain more loyal customers.
Our team at Catapult Revenue is happy to provide guidance and insight to help you feel confident tracking your KPIs. We’re happy to provide you with a free marketing consultation to get you started.