Selling online is easier than ever—with platforms like Shopify, Amazon, eBay, and Etsy, online merchants can be up and running an eCommerce business in no time. But as sales grow and your business begins to process a higher volume of orders, it becomes more valuable to become more strategic in how you define and measure the health and success of your business. Every business owner has different goals that define success, but there is really just one way to measure it: metrics.
In eCommerce, data is knowledge, and knowledge is power, but many eCommerce businesses aren't utilizing their data to its fullest extent. It's unfortunate because data allows you to learn about your customers and helps you make the right decisions to best scale your business and reach your targeted level of success. This is why the most successful eCommerce brands are the ones that harness their data into metrics to make informed decisions.
To get you started in being able to glean critical insights from your data, we’re diving deep into how to use metrics and KPIs can help you get a pulse on your business.
Your eCommerce Business Vital Signs—Metrics and KPIs
With all the access we have to digital analytics, it’s a perfect opportunity to use that data to glean actionable insights to make informed improvements to your business. The data you collect on your customers can indicate how healthy your business is and what you can do to make improvements, but it’s important to make that data actionable.
What is a Metric?
A metric is any quantifiable measurement of online performance. eCommerce metrics range from tracking conversion rate, to cart abandonment, to traffic sources, to social media engagement. It’s essentially any rich data source that captures quantifiable data that a business can use to track trends and influence strategy.
What is a KPI?
While a metric is any quantifiable measurement, a KPI, or key performance indicator, is a significant metric that can impact your business. All metrics give you insight, but KPIs are specific metrics that are tied to objectives and help you define success. What makes a good eCommerce KPI?
- It creates an impact
- I can be measured accurately
- It can be measured in real-time
- It must be actionable
The Difference Between Metrics and KPIs
While the terms are often used interchangeably, there is a significant difference between metrics and KPIs: metrics measure processes, while KPIs measure the performance of that process. This means every KPI is a metric, but not every metric is a KPI. For example—your metric is to track daily transactions through your website, but your KPI is to hit 400 daily transactions through your website.
Why KPIs are Important to eCommerce?
The main benefit of eCommerce KPIs is that they provide objectivity. KPIs allow you to interpret metrics to draw out actionable insights so you can have a clear, accurate understanding of your business that you can use to make strategic decisions to improve your business.
Defining KPIs—The Top 4 Must-Track Numbers
The sheer amount of data that’s available on customers can be paralyzing, especially for small eCommerce businesses that don’t have a full-blown analysis team. That’s why brands don’t need to track and optimize every single metric that’s at their disposal. The key is to know which eCommerce metrics make the biggest impact on revenue. While there may be additional eCommerce KPIs that are beneficial to track for your business, these are the top 4 numbers that every company should be tracking.
Lifetime Value of a Customer (LTV)
Customer lifetime value (LTV) measures the total amount that you earn from an average customer throughout their lifetime. Knowing this metric gives you insights on how much you can spend to acquire a customer and how much effort you should put into retaining them.
There are multiple ways to measure LTV, but usually, the calculation includes multiplying the average value of a sale by the annual purchase frequency by the expected lifetime of a customer.
For example, if a customer spends $10 each time they purchase, purchases from you 10 times a year, and is a loyal customer for 5 years, then LTV = $10 x 10 x 5 = $500.
There are several ways to increase a customer’s lifetime value, but they all boil down to increasing the average order value as well as promoting long-term relationships with buyers.
Tips to Improve LTV:
● Personalize the shopping experience
● Provide great customer service
● Reward customer loyalty
● Show your appreciation
● Provide exclusive offers
● Encourage long-term subscriptions
Average Order Value (AOV)
Simply put, the average order value is the average amount of a typical order on your site. The equation for this is basic, you find the total dollar amount of sales by the number of orders you sold.
This KPI helps eCommerce businesses understand their customers' purchase habits. Since these customers are already purchasing, increasing your AOV is a way to drive direct revenue and increase profits without necessarily spending more money. Optimizing your AOV can be done across all steps of the sales funnel with abandoned cart reminders, cross-selling other products, or upselling to a more expensive alternative.
Tips to Improve AOV:
● Discounts for Higher Volume Purchases
● Free shipping for a minimum purchase
● Offering a coupon for next visit
Customer Acquisition Cost (CAC)
The customer acquisition cost (CAC) is essentially how much money your business spends to gain one customer. Knowing you CAC is vital—it helps you understand the return on your investment and gives you an idea of how much you should be spending on sales and marketing. It allows you to allocate an appropriate budget toward customer acquisition. The bigger value of figuring out your CAC is that once you understand how much you’re currently spending, you can take steps to optimize that number to make sure your revenue is at its highest.
To calculate your customer acquisition cost, divide the total amount you’ve spent to acquire a customer by the total number of customers acquired.
Calculating CAC is easy when you’re looking at one piece of the puzzle. For example: if you’ve spent $1000 on Google Adwords, and you’ve gotten 10 people to purchase, then your CAC is:
$1000/$10 = $100
It gets a lot more complicated when you look at organic efforts like when you add in content marketing, lead generation, or SEO agency costs. With complicated customer journeys, your customer may have multiple organic touchpoints before purchasing your product, so you may have to dive deeper into attribution.
There is no “typical” CAC for eCommerce businesses, it all depends on your industry and product and how much it is worth for your business to spend on acquiring a customer while still making revenue. In order to make money, your CAC needs to be less than your customer lifetime value, and should ideally be less than your average order value so you make money off of every new customer. Your LTV-to-CAC (lifetime value/CAC) ratio tells you your ROI for each dollar invested in sales and marketing.
Tips to Lower your CAC:
● Improve your eCommerce site for conversions: make purchasing your product as easy as possible.
● Optimize your paid ads constantly so you aim to spend less for the same results.
● Build out your marketing channels, including email marketing, social media, and online communities to optimize your organic growth
● Create a referral program to encourage happy customers to share with other customers
Repeat Purchase Rate
The repeat purchase rate, also called a customer retention rate, measures the percentage of customers who return for a follow-up purchase. Calculating a repeat purchase rate can be done over any period and divides return customers over the total number of customers.
Industry averages vary but usually trend around 20-40% as a baseline. eCommerce brands that offer subscriptions or consumption-based products often have higher RPRs. Brands with longer buying cycles like mattresses have relatively low repeat purchase rates.
Tip: If your customers tend to have a high repeat purchase rate, you can spend more on cost per acquisition because the lifetime value of the customer will be higher.
Tips to Improve RPR:
● Loyalty or rewards programs often incentivize customers to return to a company
● Provide excellent customer service
● Maintain communication before and after purchases
● Personalize for each target customer
Putting it All Together
The ideal business will have a high lifetime value, a high average order value, a high repeat purchase rate, and a low customer acquisition cost. This makes for the ideal situation and the highest revenue, which may be critical depending on your margins. When looking at these numbers, you want to look at every channel together, not just each channel individually. And most importantly—keep on testing ways to optimize your numbers, there is always an opportunity to improve.
While there are additional metrics that eCommerce brands can look at, the four can give a clear picture of how your business is doing at any moment so these are the most important KPIs to track and metrics to report on. Too many companies just look at the short term and lose out on opportunities. Understanding and taking action on your business’ data will be the thing you need to propel your eCommerce business forward.
At Sparkfive, we know the importance of supercharging your eCommerce marketing and scaling your efforts to reach the full potential of your marketing team. Whether you’re ready to grow your team internally or externally, our platform is here to increase your eCommerce marketing productivity and efficiency. Check out our Pro and Premium plan features for growing businesses or get in touch to learn more about our Enterprise tier for large customers.