The most important KPIs ecommerce businesses should be monitoring and why
“Metrics,” “KPIs,” and “analytics” have been buzzwords in ecommerce for at least a decade, but as is often the case with any SMB-heavy industry, individual sellers have been left to their own devices to figure out how to first find, then understand, meaningful information amid the piles of data their stores cough up every day.
To help move the discussion beyond the realm of buzzwords and into something useful, this simple primer of important ecommerce metrics spells out specific KPIs that relate to multichannel selling, customers, and products as well as why these key indicators are important to the health—and growth—of your online retail business.#KPIs guaranteed to boost #ecommerce sales #Unify #noexcuses Click To Tweet
Selling in different online locations has its own special set of challenges, the toughest of which is getting big-picture perspective on your business when every online retail entity has its own way of managing your sales data. These metrics will allow you to be strategic about how and where you sell, in a world where the list of niche sales channels grows every day.
Total Average Order Value (AOV)
The average order value is total order value of all orders over a time period, divided by the total number of orders in that same time period. Simply put, this is the average total collected from a customer, per order. Not-so-simply put: To get value out of the calculation, you’ll need to weed out unrelated amounts like taxes or marketplace fees, while completely accounting for the item prices, shipping revenue, and any discounts applied to orders.
Why is this important? Knowing AOV allows you to better plan discount initiatives, set accurate parameters for free shipping, more effectively track the value of new or returning customers, and project the number of new orders needed to hit revenue targets.
The Collectible AOV is the dollar-value that your company can actually collect in cash. Essentially, this is an important extension of your AOV which subtracts out your payment processor fees, since they are unavoidable across the board for your business. While your shipping and inventory expenditures can vary—and are often outflows of cash as opposed to deductions from cash receipts, payment processor fees, and, in some cases, marketplace fees—it is important to remove them from AOV to better depict cash movements.
Why is this important? As I hinted above, knowing your Collectible AOV let’s you keep an eye on cash flow, helps you see positive or negative trends in sales, and compare payment processors and channels to identify the best fits for your business.
This is the average value of an order in each sales channel after accounting for the cost to ship.
Why is this important? Shipping is a major variable cost for your business and can determine profitability of what and where to sell. Comparing Delivered AOV across different channels helps drill down on shipping costs to see where rates might improve or products might be promoted in geographic areas that are more cost-effective.This is a great way to investigate the need for regional fulfilment centers or to simply change carriers—or channels—for a specific item.
Average Order Profit
The average order profit uncovers exactly how much money you are making from each order on average. It is revealed by subtracting shipping, inventory, payment processor fees, marketplace fees, and sales tax from the total order value for each order.
Why is this important? Averaging this profit amount across the last 30 days helps to visualize the average profit your business generates on each order in a more logical way. Which helps you plan better, and gives you more power for negotiating. It also gives you a better picture of the performance of different channels and provides a benchmark to know who your most or least valuable customer types are.
Total Sales by Channel
This is your total revenue across all of your stores, which helps you track your current performance by how much money each of your stores bring in each day.
Why is this important? Knowing this KPI, you can monitor fluctuations over time and compare the relative performance of each channel to quickly identify trends, under performance, or breakthroughs. Let’s be honest though, this one was a gimme.
Unlike the world of brick-and-mortar stores where customers walk through the door, there is often a disconnect between online sellers and their customers. For this reason, smart online sellers take special care of their customer relationships and, by doing so, stand out from the sea of competition. Ecommerce sellers also have a leg up on their analog counterparts in that picking out the most valuable customers can often be much easier.
Returning vs New Customers
Do you have a healthy balance of returning vs new customers? Industry average for ecommerce SMBs is 40-60%, though it varies by the type of business and products sold.
Why is it important? It’s crucial to know how well you are acquiring and maintaining customers. This metric can help you spot the need for more marketing to new customers vs more interactions with older customers. Look to see if you are maintaining a steady split over time or if the comparison varies. For a product that supports repeat customers vs one-time buys, this can be the difference between not surviving and thriving. Hint: It’s also cheaper to market to current customers.
Contribution Amount by Customer
This shows the amount after all the variable costs—shipping, payment processor, item inventory cost—that each customer generates toward your fixed costs or bottom line.
Why is it important? It allows you to find your most valuable customers. You’ll see how much your top customers actually contribute toward keeping the lights on, paying your team salaries, or putting useable cash back into the business. Tracking each customer as both a dollar-value and a percent of the total will provide important context and clarity as well.
Customer Lifetime (and Lifetime Value)
This is the average duration of a relationship with your customers. This means tracking the retention rate of current customers, the interval over which they typically purchase, and averaging it across a segment or your entire business. An important extension here is to attach the Contribution Amount or Profit for each of those customer segments.
Why is it important? Let me count the ways! First and foremost, when you can identify the buying patterns of your most loyal segment, you can craft marketing for them as a way to guide other customers into longer term engagement. Add in the value of each relationship, and you can better plan your marketing spend. Imagine if you could outbid your competition on keywords because they’re calculating their ROI on a single purchase, but you know that your customers come back 4-5 times over the first 6 months. With this one single metric, you could double your marketing spend and end up with 3-5 times the results!
You can’t sell what you don’t have, and you shouldn’t sell what doesn’t help your business, so keeping a close eye on inventory and its associated costs will help reduce unnecessary chaos and irresponsible guesswork related to your products.
Inventory Days to Zero
This is an estimate based on the average of how many of each item you sell daily. If you rank the items from “almost sold out” to “greatest buffer,” you can see what the most critical re-orders are, and how much time you have left to make it happen!
Why is it important? This metric ensures you never run out of inventory or oversell.
Gross Profit Performance by Item
List the top 10 items that contribute the most gross profit to your business. Discover the items that generate the largest percentage of your gross profit and their relation to your entire inventory. Gross profit includes costs for selling on your stores and inventory costs (shipping and payment processors not included).
Why is it important? An item’s average gross profit, relative percentage of total gross profit, and your top 10’s cumulative contribution to gross profit will help you prioritize vendor orders, keep an eye on inventory, and even inform when and how you add new products.
Contribution Amount by SKU
This takes into account far more than the purchase price of your inventory items. It accounts for the shipping and payment processor costs as well. This results in a level of clarity beyond the typical “gross profit” amount on an item.
Why is it important? Simply put, it tells you what items are most valuable to your business overall. Less simply put, it identifies and attaches the unique hidden costs of selling particular products to them as expenses. You get a clearer picture which products have the power to generate useful cash for your business instead of assuming that all are equal.
Ironically, the very quality that makes bigger profits possible in ecommerce—being multichannel—is also what makes it so difficult to scale and get ahead. Making real progress in online retail comes with bringing all of your data together under one roof and insisting that it speak the same language. Taking the time and effort to identify and track your KPIs will give you better perspective on how far you’ve come and a clear view of where your business is going in the future.