Before you make any sudden moves, learn and monitor these ecommerce KPIs.
As an ecommerce business grows, the necessity to meet market demands grows, too. In this fast moving industry, scalability is so important, it is one of the major reasons why nine out of every 10 online businesses will ultimately fail. Growing strategically also requires consistency. Scalability cannot be completed once and then be forgotten about. Fast, unsustainable growth can be as devastating as slow growth. The challenge for most ecommerce businesses is trying to find the sweet spot right in the middle.How to Scale Without Losing It All: Before you make any sudden moves, learn and monitor these #ecommerce KPIs. Click To Tweet
A large part of scaling ultimately comes down to the owner’s ability to see growth in the context of the bigger picture. If a seller moves too quickly and the business isn’t ready for such expanded growth, the effects can be just as devastating as moving too slowly and letting the competition swallow the business whole. Scalability is a balancing act that should be attempted with caution—and a full understanding of the risks.
With that in mind, here are crucial data points ecommerce sellers can actively and routinely assess to help strike the right balance when scaling.
Customer Acquisition Cost (CAC)
One of the most critical data points that sellers should be assessing for scalability is CAC. CAC is the average amount of money you need to spend to acquire a single new customer—of course, taking into consideration expenses like marketing, sales, expenses, fees, and costs. To calculate CAC, divide all of the money you spent on acquiring new customers by the total number of customers you actually acquired during a given period. If you spent $10,000 on marketing over a month and brought in 100 new customers, your CAC for this period would be $100.
Customer Lifetime Value (LTV)
Next up is customer LTV. This is a measurement of the average amount of money each customer brings into your business. Calculating LTV requires a seller to know the business’ repeat purchase rate. This is otherwise known as the percentage of people who continue to buy from your business again and again.
Assuming your existing customers have a 10% chance of returning after their initial purchase and your average order is valued at $100, you can calculate LTV by dividing that average purchase price by 1 minus the repeat purchase rate. So, in this example, the equation would be $100 / (1 – 0.1), equaling a customer lifetime value of $111.11.
What does this mean for scaling?
How CAC and LTV matter in terms of scalability has to do with the relationship between the two. As your business grows and becomes more successful, your customer lifetime value should always be increasing and your customer acquisition costs should always be decreasing.
Ideally, for a business to scale appropriately to meet market demands, its LTV to CAC ratio should be as close to 3:1 as possible. For example, in order to maintain proper financial scalability with an average customer lifetime value of $750 over a given period, your customer acquisition costs would need to be roughly $250 or lower.
If the ratio was much higher than this—at 5:1 or even 6:1—it means that your business is spending too little and you’re not scaling fast enough. Your marketing efforts need a closer look because you may be leaving a great deal of money on the table.
If your ratio is lower than this—at 2:1 or even 1:1—you’re spending far too much to acquire each customer. This growth level is unsustainable, and it’s very likely that you’ll be running into significant cash-flow problems (if you haven’t already). Since cash flow is another one of the major reasons why businesses prematurely close their doors, it’s clear why the smartest sellers always keep a close eye on these metrics.
The Moving Target
As any business grows, one of its most important objectives is to meet consumer demands. Because no market is static, this sounds simpler than it is. In the ecommerce industry, where customers see sellers more as guides rather than authority figures, it’s crucial to keep up with the market’s changing needs with the right operational tools. This means only adding applications, systems, and technology that will help you scale on both the customer-facing side of the business and on the back end, with a clear awareness of cost of keeping the wheels turning—with inventory, fulfillment, shipping, financials, and a million other behind-the-scenes details.
To reiterate: Scaling too fast almost always equates to a drop in efficiency, quality of service, or both. This doesn’t just lead to dwindling customer relations, but a damaged business reputation in the form of bad online reviews as well. Scale too slowly and you’ll be left behind by the competitors who are stealing away customers you’ll never get back.
Sellers play an essential role in their battle for true scalability, regardless of the business you’re running, or even the industry you’re operating in. The keys lie in customer acquisition cost, customer retention rate, and customer lifetime value. However, monitoring data isn’t going to be enough, maintaining a careful watch, an informed understanding, and firm knowledge of the risks are all important pieces of keeping it all in balance long enough to see some profits.CUSTOMER STORY