Starting up an online store is pretty effortless today. With convenient and inexpensive ecommerce solutions like Shopify, Magento, or Wix, anyone can create a clean-cut online store — even without coding skills — in a couple of hours.
But few businesses can ultimately hope to square off with global retail giants like Amazon or eBay. One reason is ineffective and non-scalable business processes.
Ecommerce profitability correlates strongly with a seller’s forethought and flexibility. Setting pricing, adding loyalty programs, choosing promotions, managing stock items — the more you control the details, the more predictable your revenues are.
The best way to get the information you need to manage those details is by choosing the right metrics to monitor. In this article, we’re going to explore them and give you some practical optimization tips.
How to determine which metrics matter for your business
Your store’s size and the stage you’re at in its lifecycle will inform which specific metrics you need to pay the closest attention to.
As an example, for a small store just starting out with a relatively low number of clients, it may be too early to obsess over average order value or customer lifetime value. On the flip side, for ecommerce giants that launch expensive advertising campaigns and spend millions handling sales and marketing teams, all types of “returns on” metrics may be key to consider.
Choosing your “just-right” set of ecommerce indicators comes from experience. It’s neither a good idea to confine the number of metrics to one or two, nor to track several dozen benchmarks without a clear strategy. Likewise, poor analytics drawn from inaccurate data won’t provide enough information for you to make smart business decisions.
Before you dive into the “universe” of ecommerce metrics, track where your store’s performance currently stands using the items below:
- Website traffic
- Total number of conversions
- Operational expenses
- Ad expenses
- Abandoned purchases
These are the minimum data required for calculations. With these figures, you can define 3 groups of metrics:
- Gross (e.g. revenue or profit)
- Mean values (e.g. an average value of the order)
- Percentages (e.g. returns on advertising expenses)
What are the key metrics for retail ecommerce?
The nine indicators listed below fit any type of online retail business, regardless of size or industry. You can calculate these metrics as soon as you're done reading this article using Google Analytics or your preferred data reporting tool
Total Sales (and Total Revenue)
Revenue is the income from selling goods and services. In financial reports, it’s often referred to as a “top line” indicator. Revenue fluctuation reflects the pace of business development and proves that your company can generate profit, making it good for investment.
In terms of accounting, sales may be either equal to revenue or simply one of its components if you have additional revenues from supplementary operations. Overall, this metric is a strong high-level indicator of growth and stagnation for your store.
Conversion Rate (CR)
A conversion is when your lead takes a specific desired action that you’re tracking. Store owners can treat conversions as certain events, such as a click on the “Book a call” button or filling in the contact form.
In ecommerce, conversions most often mean the act of purchasing. However, the “total” conversion consists of several subsequent actions, each of which can be monitored separately:
- Adding an item to the wishlist
- Adding an item to a shopping cart
- Proceeding with a shopping cart to a checkout
- Finalizing payment
Conversion Rate is calculated as the number of conversions to the total number of online store visitors.
It’s a good metric to judge how relevant your website traffic is. You may have many unique visitors, but if the majority of them leave without a purchase, start investigating your ad targeting and lead generation to make improvements.
Average Order Value (AOV)
AOV shows how much your leads spend on a single purchase, making it a good indicator for use in revenue predictions. All else being equal, growing traffic will positively influence your total income. But what's more important, AOV shows how commercially successful your product assortment is. If the dynamics for an average order value are negative, it’s time to review your product assortment and pricing strategies.
There are some common tactics to increase AOV, and most target actions in the checkout: discounts, upselling, cross-selling, free shipping, and others. You can track checkout actions as well to get an even more complete picture and improve your AOV.
This metric shows how many times an average customer buys something at your online store within a given period of time. To have meaningful value, you should calculate the metric for a considerable time frame — like six months to a year.
Purchase frequency shows the share of repeat customers, as well. If the indicator is greater than 1, it means every lead makes more than one purchase in your online store, on average.
Customer Retention Rate (CRR)
Aside from acquiring customers, another big issue for ecommerce businesses is retaining them. That’s because nurturing existing clients is much cheaper than gaining new ones. The higher the retention rate is, the fewer expenses a company will need to impose to maintain and increase revenues in the future.
You can use various techniques to re-engage online store visitors, with email marketing being one of the most popular retention channels. Create a sequence of nurturing emails or refer to drip campaign examples, e.g. ones by Snov.io, and send out interesting mass emails to clients. These may be assortment updates, reminders, special offers, or exclusive deals. The goal is to keep leads engaged and stay top of mind to drive sales.
Customer Lifetime Value (CLV)
CLV shows how much revenue a lead generates during their entire history as a client. In other words, this is a predicted sum of money that a customer will spend on products or services. CLV is closely connected with returns on acquisition expenses. If the lifetime value doesn’t cover and (ideally) exceed acquisition costs, the business won’t be profitable in the long term.
You can determine CLV in a couple different ways:
1. Cohort analysis
Divide your clients into groups with similar characteristics, e.g. upon the time they made the first purchase. Then, calculate the average revenue per user, per every cohort.
2. Individualized CLV
Rather than calculating aggregated indicators, you can measure CLV for individual customers. This method requires more time, yet is more precise.
Cart Abandonment Rate
This metric shows the share of uncompleted shopping deals. An abandoned online shopping cart means your customers picked out items but left the website without purchasing them.
Obviously, the higher the rate is, the more potential revenue you’ll lose because of an unclosed funnel. Users may be unable to complete the purchase due to technical issues, e.g. when the link to the checkout page doesn’t work, or due to the nature of goods.
So, it makes sense that online stores selling luxury items have, on average, a higher cart abandonment rate than grocery stores.
Although it’s impossible to reduce this metric to zero, keep it at 40% or lower and you’ll be in decent shape.
Return on Advertising Spend (ROAS)
ROAS shows the overall effectiveness of ad campaigns. It is usually calculated for different ad groups to compare the ratio of revenue and costs to earn it.
ROAS less than 1 (or 100%) means a company loses money, as it spends more to acquire customers than it earns from them.
Cost per Acquisition (CPA)
CPA shows an average cost associated with a single conversion.
CPA differs from ROAS in that it doesn’t take into account the money a company earns due to a conversion.
Consider an example. An advertiser launched 2 ad campaigns and set a budget of $1,000 each. The first campaign resulted in 10 leads and $1,500 revenue, and the second yielded 10 leads and $2,000 revenue. The two campaigns will have equal CPAs ($1,000/10 leads = $100 per lead), but different ROAS (150% and 200%, respectively).
Do you need to track all these metrics?
It’s up to you which ecommerce metrics to track. Most of them are interrelated or complementary, so if something goes wrong, you’ll notice the issue anyway. For example, if CRR increases over time, the lifetime value and average order value will most likely increase as well. Or, at least, they won’t worsen.
Small retailers that don’t run regular ad campaigns can neglect some indicators, e.g. CPA or ROAS. But as you reach a mid-sized level or plan expansion, it’s better to put analysis back on track and monitor all nine metrics.
Ecommerce metrics: important questions to ask
What’s the most important KPI for online retailers?
Every business comes up with a unique set of KPIs, ultimately. However, CLV and Average Order Value are the top 2 metrics to monitor for the majority of retailers.
How to increase conversions on an ecommerce website?
First, use responsive styles for your online store. Make sure all images are well-optimized so that they look good and don’t worsen website loading speed. It’s also advisable to implement an online chat and a callback option.
In the end, planning and development are impossible without frequently assessing performance. The nine metrics we’ve disclosed are basic for the majority of retailers. With these, you’ll see the big picture and have the intelligence to make informed business decisions.
This is a guest post from Yulia Zubova, Outreach Specialist from Snov.io.