With the adoption of new technology, consumers are becoming increasingly sophisticated (and demanding), and it can be hard for retailers to keep up, never mind stay ahead. Key performance indicators (KPI)s and other ecommerce metrics don’t just help a business predict trends; they also provide a way to understand the health of an ecommerce business.
In this article we will discuss the KPIs that are most important to ecommerce companies, allowing them to react to market changes and stay ahead of competitors.
What is a KPI?
What is a KPI?
A KPI is a way of quantifiably measuring a company's performance. KPIs can be used to help a company make strategic decisions. KPIs can be most meaningful when they are used to make comparisons to other businesses operating in the same market conditions.
There’s a whole range of key performance indicators that businesses can use. Financial metrics typically focus on a company’s revenue or profit. These KPIs provide a snapshot of the financial position and performance of a company.
Customer KPIs help businesses understand the behaviour of their customers and the relationship between customer and brand. KPIs focusing on customer satisfaction and retention can help an ecommerce company get to grips with customer relationships and make changes to make them stronger. Other KPIs, such as customer acquisition cost, allow companies to see how much they have to spend in order to expand their market share.
There are a huge variety of KPIs that can be used, helping provide ecommerce insights into everything from the amount of purchase returns to the amount of time that items are held in a basket.
Why use ecommerce KPI metrics?
Why use ecommerce KPI metrics?
Using ecommerce KPI metrics are a useful way of measuring key elements of a business such as:
Growth – A key aim of any ecommerce business is to grow revenue, and profits, so using KPIs can be an important ecommerce metric to help achieve this. Being able to measure growth and make rapid changes to business plans to maximise it, whilst reversing strategies that hurt revenue, can make sure companies hit growth targets.
For example, if your KPI dashboard might show that growth targets were being exceeded in the current period. This could be explored and the business operation, marketing strategy or product sales that led to the growth could be expanded on to make sure that the opportunity was fully exploited.
Data Management - ecommerce KPI dashboards and metrics provide powerful data sets that businesses can use to inform business models and strategies. KPIs can also be used to help in conversations with potential investors and lenders. KPIs are able to show the health and financial position of ecommerce businesses and are the best way to help convince investors of sustained growth and performance so they part with their cash.
Workforce - KPIs also have a more granular role to play within an operation. The workforce can be held accountable and motivated by KPIs. Some employee roles can also have remuneration (bonuses) linked to KPIs.
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Here are the most important KPIs for your ecommerce business.
1. Conversion rate: The conversion rate is the percentage of people who visit or view a brand offering who go on to perform a desired action. This KPI can be applied to visitors to websites who make a purchase, or users who follow an advertisement on social media to subscribe to a mailing list. This KPI can be adapted to lots of different applications.
To calculate the desired conversion rate, divide the number of completed actions by the total number of initial interactions over the desired time period. For example:
In Q4 2021 there were 28,000 visitors to a website and 9,000 of them made purchases.
The conversion rate was: 9,000 / 28,000 = 0.32, or 32%.
What makes a ‘good’ conversion rate depends heavily on the individual business, the market it operates in and the performance of competitors.
2. Customer Churn Rate: This can be understood as the proportion of customers that have been lost during any given period. A low churn rate indicates that customers are happy with your brand and remain loyal. Churn rate calculations are performed differently by different businesses. A lost customer may be one that doesn’t renew a subscription or unfollows a mailing list. Alternatively, it may be a customer that fails to make a repeat purchase within a certain amount of time.
An example churn rate calculation would be:
(Total Customers Lost During the Desired Period / Total Customers at the Start of the Desired Period) x100
An ecommerce business calculates it’s churn rate for January 2022. At the beginning of this period, they had 48,000 active customers. During the period 12,000 customers failed to make a follow up purchase. The churn rate is:
(12,000 / 48,000) x 100 = 25%
Churn rates highlight issues within a business, such as incorrect pricing and product quality/functionality. It’s an important ecommerce KPI as it can highlight issues with and impacts from marketing strategies and price changes. The time periods can be finessed in order to best understand business strategy outcomes and make planning decisions.
3. Customer Lifetime Value: This can be understood as the average money value of purchases multiplied by the average period of time a customer interacts with your business.
Customer Value X Customer Lifespan
Customer value can be calculated as the average purchase value across the ecommerce business, multiplied by the average number of purchases per customer. The customer lifespan component can be the average time between initial and final purchases of all customers.
This is a simplified example, in practice this ecommerce KPI can be calculated in different ways and with quite granular detail, making it as accurate and involved as you need it to be.
This KPI is useful as it can indicate ways that business models can be developed. For example, you might find out that your average basket value is low, allowing you to focus resources on strategies to increase basket values.
4. Sales Growth: This is a sales metric that measures performance. It's used by ecommerce companies and their sales teams to monitor the effectiveness of sales activities and strategies. This metric can help ecommerce businesses optimise sales performance and identify any mistakes in planning and operations.
Tracking sales growth is essentially tracking company growth. It’s calculated by comparing the difference in revenue between two time periods. An example calculation would be:
(Sales Revenue (Current Period) – Sales Revenue (Previous Period)) / Sales Revenue (Previous Period) x100
The end product is a percentage (positive or negative) that indicates an increase or decrease in sales.
This ecommerce metric can tell you a lot about a growing business, it’s tied to company revenue/profitability and provides a big picture view of overall company health.
Being able to track sales growth is a priority for most ecommerce businesses. It allows companies to understand the outcomes of marketing activities, special offers and the performance of sales teams.
This metric is powerful in that it can be applied company wide, or to individual employees. This allows management teams to understand the performance of different aspects of their sales teams and company, across different customer sectors and markets, ensuring that they have the best data available to them when it comes to decision making.
5. Website Traffic: This metric is very easy to understand but is also one of the best indicators out there of brand reputation and performance.
Digital marketing for ecommerce is in the company DNA. It’s also a very competitive space, with businesses of all sizes all scrapping it out for the same audience across multiple channels and platforms. This ecommerce KPI helps businesses to understand the impact of their digital marketing.
Website traffic is important for many reasons. Simply put, the more people visiting a website, the more opportunities there are to make sales. Each visitor to a website provides an opportunity to make an impression, generate interest and share brand values.
Website traffic is useful to monitor as it gives an indication on the health and relevance of your brand. If traffic is increasing, you can infer that something is going right, which might be a new product generating interest or a new marketing campaign cutting through.
On the other hand, if traffic is falling, this may indicate that the current offer is being seen as less relevant and that something in the business strategy needs to change.
Website traffic is a useful metric and it allows derivative metrics to be calculated, providing more granular information. Such as:
Unique website visitors: First time visitors to your site during a defined period of time.
Pages viewed per session: The number of pages a user views in each visit to your website.
Average time per session: This can help you to understand the quality and relevancy of your content.
There are many (many!) more digital KPIs that can be applied, and these can be done across all channels and platforms, not just a website.
6. Cart Abandonment Rate: This is the percentage of ecommerce customers that put items in their basket and then leave without completing the purchase.
It is calculated by dividing the number of customers who complete a purchase by the total number of baskets created, multiplied by 100.
This KPI can help ecommerce retailers understand the behaviour of their customers. It also provides information on the success (or otherwise) of upselling strategies and the accessibility of the selling platform used.
Strategies that specifically target decreasing the abandonment rate will have an immediate positive impact on revenue. Such strategies might include an email reminder to customers that they left without completing a purchase or offering alternative products.
The KPI itself is useful in that it provides an indication that something is wrong, it then becomes a matter for business leaders to develop strategies to overcome these barriers for customers.
In this blog we’ve addressed KPIs that an ecommerce business can use to understand the health and performance of the business. They can also be used to identify how to increase average order size, revenue and growth. By making the best use of all the data already present in a company, business strategies can really focus on the fine detail of your customers’ needs and on the company’s strengths (and weaknesses).
As these metrics are deployed, how they are calculated and used can be refined and developed, making them more effective. The key to successful KPI and metric use is to do it in a way that informs the decision makers, so that they are empowered and confident in their management decisions.
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