There’s no room for guesswork in the blood-shed arena like e-Commerce.
To enjoy healthy growth and meet your long-term goals, keeping a close eye on your e-Commerce business metrics is essential.
I know, keeping up with those numbers take time and effort, which often seems unaffordable for e-Commerce business owners like you who face up new challenges every day.
But running your business without analyzing the numbers is similar to driving without checking the key information on your dashboard — it is dangerous to say the least.
To look at in in a positive way—getting clarification on your business metrics could clear your doubt and help you to identify the best track to move forward. With insight based on metrics, it is easier to scale.
Certainly, it does not mean that you should put aside your business tasks now and become a financial analyst today. But as the leader of your business empire in the making, you need to develop a sense of identifying the key metrics.
Here, we listed seven indicators that we think all e-Commerce owner need to understand and manage. They drive the health and growth potential of your business.
Let’s dive in.
1. Conversion Rate
Certainly a well-known metrics among e-Commerce owners, conversion rate is arguably also the most important metric to monitor. You probably know already, conversion rate is the percentage of visitors to your site who end up making purchases.
A higher conversion rate means you have a higher return on your investments in traffic, whether it’s paid traffic or organic traffic. That also means you can afford to have higher cost of your paid traffic, as you’re more efficient in converting traffic into sales.
If you have a lot of traffic coming to your site but your sales volume is low, it is better to invest in improving your conversion rate, rather than investing in more traffic.
2. Gross Margin Rate
All business owners should know what their “margin” is, but a positive margin figure by itself, in fact, does not say much about your performance. To know how profitable your business is—or to compare yourself with peers, it is essential to check your Gross Margin Rate.
Your Gross Margin Rate is:
(Revenue – Cost of Goods Sold) / Revenue
Sale revenue is simple—you know—that is the total amount of money generated by selling your products.
Cost of goods sold (COGS) is the total expenditure you made to sell these products. These include your costs of purchasing your products, shipping, fulfillment costs and import duties.
The differences between sales revenue and COGS is your gross margin. Then gross margin rate comes up from your gross margin dividing by your sales revenue.
Basically, you want your Gross Margin Rate as high as possible. The higher it is, the more profit you make and the more you can invest in acquiring new customers or expanding your product portfolio.
There is not one golden benchmark for what a good Gross Margin Rate is – it differs between industries and product categories. You could compare your GMR with peers to see where you are in your industry. If your GMR is low or lower than your competitors, check your pricing strategy – are you charging too little? – as well as your purchasing price, warehousing cost and fulfillment costs.
3. Average Order Value
Your average order value
(AOV) is the average amount of money each of your customers spends per order.
You can determine your AOV by taking all your sales from a given period, adding
them up, and then dividing the resulting sum by the number of sales made in the
specified period. As one of the most important e-Commerce metrics, your AOV
lets you know whether customers typically make large or small orders.
Your Average Order Value multiplied by your Gross Margin Rate tells you your average margin per order. And this shows you how much you can afford to spend on new customers to keep their first order profitable for you.
Here as well, there is no universal benchmark for what your Average Order Value should be, but in general: higher = better.
Now, we’re no marketing guru’s, but in general we recommend using the following tactics to improve your average order value:
- Cross-sell / bundling your products
- Upsell to higher ticket items
- Offer discounts for bulk and high-volume orders
- Donate to non-profit agencies for each order over a certain minimum
- Offer free shipping for orders over a certain minimum
- Create a “Money-Back Guarantee” for pricey products and services
4. Customer Lifetime Value
The amount of revenue a customer generates throughout his/her entire business-to-consumer (B2C) relationship with you is the Customer Lifetime Value.
Or, to put it simpler, it is how much the buyers contribute to your business from the first order they place to the last.
If you aren’t converting one-time shoppers into repeat buyers, your LTV could be low. And, vice versa, if you tend to have repeated customers, your LTV would be higher.
The more valuable your customers are over the course of their relationship with your brand, the higher your return on investments made in advertising and customer acquisition.
While LTV is one of the hardest metrics to track, you can
leverage this data against your cost of customer acquisition (CAC, see next
point) to determine how long it takes to make back the money you spend on
marketing and other customer acquisition efforts.
It’s impossible to calculate LTV without a margin of error since consumers consistently surprise us. However, you can use your AOV, average purchase frequency rate, and average customer lifespan to get a pretty good idea of how much money each customer will net after they’ve been acquired.
5. Customer Acquisition Cost
cost （CAC） plays into your
customer lifetime value metric. It tells you how much you’re spending to get
new leads, clients, and customers.
It is your total spending on Sales & Marketing – including content marketing, sales & marketing staff and advertising – divided by the number of new clients that period.
In general, you want to earn back your Customer Acquisition Cost from the first order. So the Average Order Value * Gross Margin Rate = Gross margin on the first order. Your Customer Acquisition Cost should be much lower than this. This is especially important for businesses where there are few recurring clients.
Low customer acquisition costs and high lifetime values are the sign of a flourishing business.
6. Return on Ad Spend
Return on ad spend (ROAS) is one of the easiest metrics to calculate. You can obtain your ROAS by dividing the revenue generated by a particular marketing channel by your total spend within that channel.
This metric is similar to customer acquisition costs but offers specific information about advertising payoff.
It is the metric that you need to know for marketing strategy, analyzing whether or which of the current marketing channels are most effective.
For example, if you spent S1,000 on PPC ads this month and these marketing efforts directly resulted in $7,000 in sales, your ROAS is 7; essentially, for every dollar you spend on advertising, your generate 7 dollar in revenue. Or the other way around, your Advertising Cost of Sales (ACOS) is 1/7 = 14,4%.
Certainly, you want your ROAS to increase overtime. Again, there is no universal benchmark for what a good ROAS or ACOS is. But at the very least your ACOS needs to be lower than your Gross Margin Rate.
7. Operational Cash Flow
AKA operating cash flow, it is a measurement of how much cash your company generates over a given period.
Your operational cash flow is how much revenue you’ve received minus all money you have spent on operational things such as purchasing inventory, shipping, advertising or overhead.
I could not stress enough how important this metric is. From experience working with many excellent e-Commerce clients, cash flow often is the a chokepoint for them to scale.
Imagine that your sales are doing well, but you receive the payment from your sales 30 days later. This month, you realized good sales and good profit, but you do not have any money at hand to pay your suppliers or the salaries of your team.
The insight in your current operational cash flow and planning your future cash flow are major stepping stones in scaling your business.
Key e-Commerce Metrics: The Bottom Line
With so much to keep track of during a typical day in e-Commerce, it’s natural to lose sight of all the metrics. However, staying on track with these critical indicators empower you to protect your business and bright fruitful results to your company.
To get insight of these metrics are the bottom-line for each e-Commerce owner.
But understanding the current figures is just the beginning.
I know, this is not an easy process. And delegating that responsibility is ok! Here at ABEL Finance, we keep track of your key metrics and help you forecast them, so you don’t have to; schedule a free consultation to learn how working with a Virtual CFO can improve your company’s growth rate and make your efforts more profitable.
PS. Our Finance Insight Program helps e-Commerce owners identify, measure and manage the key metrics for their businessSCHEDULE A FREE CONSULTATION