Knowledge is power.
But many ecommerce businesses aren’t utilizing all of the knowledge from their data that they could be.
As Avinash Kaushik, digital marketing evangelist at Google and author of Web Analytics 2.0, says, “Most businesses are data rich, but information poor.”
In other words, they can’t see the forest for the trees.
With the ease of access to key performance indicators (KPIs), this is a golden opportunity wasted.
So what are KPIs, and which ones should you measure? In this article, you’ll learn all about six KPIs that are crucial to ecommerce businesses.
You can then use these KPIs to glean actionable insights from your data and make impactful improvements to your business.
Let’s jump in.
What is a key performance indicator?
A key performance indicator—also known as “KPI”—is a leading indicator that communicates how well an organization or individual performs against their principal objectives.
Think of KPIs as signposts. They tell you where you are on the map, and help you identify the route you need to take to achieve your business goals.
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What is the difference between metrics and KPIs?
Simply put, KPIs are the metrics that matter.
“There are tons of metrics out there. Clicks. Percentage of new sales. Subscription revenue. But not all of them are KPIs,” says Klipfolio’s Jonathan Taylor. “KPIs are the most important performance metrics you have—the ones that really underscore what your key business goals are.”
Metrics are just a way to measure progress.
KPIs are a method of monitoring the most important aspects of your business in a way that helps you determine what actions to take.
What’s more, KPIs are often created from two or more metrics. For example, here are two metrics:
- Website traffic
- Number of sales
Now, the relationship between these two metrics is a popular KPI called “conversion rate.”
To work out the conversion rate, divide the number of sales by the number of website visitors, then multiply the answer by 100 to get the percentage:
(50 Sales ÷ 1,000 Visitors) x 100 = 5% Conversion Rate
Many metrics are worth tracking, even if you don’t consider them to be KPIs at the moment. Someday, those numbers may be incredibly useful.
Why are KPIs important?
Without KPIs, you’ll be forced to resort to gut reactions, personal preferences, or other unfounded hypotheses.
This is dangerous.
Good luck won’t last forever. Plus, one person’s intuition can’t be relied upon when a business grows.
The worst part? When something goes wrong, you won’t know why.
You might feel like things are going well, only to find your business is in dire straits. And because you’re not tracking a handful of essential KPIs, you’ll have no choice but to guess the reasons why.
Meanwhile, your more organized competitors will leave you in the dust.
If you don’t understand the outcomes of your strategies, you won’t be able to develop your business effectively and stride toward your strategic goals.
As Peter Drucker, the top management thinker of his time, famously said, “What gets measured gets improved.”
KPIs provide objectivity.
With them, you’ll have a clear, accurate understanding of your business so you can make informed, strategic decisions.
But these leading indicators aren’t valuable on their own. The true power of KPIs lies in your ability to interpret the data and draw out actionable insights, which can help you to improve your business.
With them, you can achieve long-term success by consistently taking the optimum actions.
Sure, tracking and interpreting KPIs can be difficult and time-consuming.
But as Arthur C. Nielsen, a pioneer of modern marketing research, said: “The price of light is less than the cost of darkness.”
What makes an effective KPI?
Today, online businesses can use tools like Google Analytics to track a lot of different metrics.
And I mean, a lot.
(Source)
But according to Albert Einstein, “Not everything that can be counted counts, and not everything that counts can be counted.”
So how can you identify what to count?
To provide useful, actionable insights into a company’s performance, KPIs must possess four characteristics:
- Impactful on the bottom line: KPIs should relate to the bottom-line and be crucial to achieving your goal.
- Ability to be measured accurately: The best KPIs are simple and easily calculated. You need to accurately track the data needed to create an indicator. Effective KPIs are well-defined and quantifiable.
- Timely: To be useful, you need access to real-time KPI results so you can implement improvements. Old data is only useful when combined with real-time data to track trends.
- Actionable: Most importantly, KPIs need to help you understand the improvements you need to make.
When trying to identify KPIs, it also helps to work backward.
“Results ultimately stem from the right activities,” says Justin Hiatt, director of business development for Hubspot.
“Working backward from the end goal like revenue to the front end of the sales process will help the salesperson understand the necessary activity to achieve their goal.”
6 Essential KPIs to Track for Your Ecommerce Store
6 essential KPIs to track for your ecommerce store
Now that you have a clear understanding of what KPIs are and how you can use them to continually improve your business, let’s dig into six crucial ones for ecommerce businesses.
Fair warning: There will be math.
Maybe you don’t like math … unless there’s money involved. Well, this math has the potential to make you a lot more money.
These KPIs can provide extremely valuable insights into your business’s strategic objectives. They will help you to identify the potential disasters to avoid, and the best opportunities to capitalize on.
1. Shopping cart abandonment rate
Cart abandonment is a term used in ecommerce to refer to visitors placing items in their shopping cart, but then leaving the site without completing the purchase.
This sucks.
Think of all the time and money you put in to get customers to the check out process: You crafted an offer, captured their attention, nurtured the relationship, and got them all the way to the finish line … only to fall at the last hurdle.
The worst part is that it’s a very common occurrence.
In fact, according to the Baymard Institute, the average shopping cart abandonment rate for ecommerce sites is nearly 70%.
So why do people abandon their carts?
Well, the reasons include unexpected shipping costs, website errors, a complex check out process, a declined card, and visitors simply not being ready to buy.
Thankfully, it’s not all doom and gloom.
Although online retailers could lose as much as $4 trillion to cart abandonment each year, BI Intelligence suggests that savvy retailers should be able to recover about 63% of that lost revenue.
This is why you should carefully track and measure your cart abandonment rate.
The shopping cart abandonment rate is calculated by dividing the number of completed purchases by the number of shopping carts created. To turn the rate into a percentage, subtract your number from one, and then multiply it by one hundred:
1 – (No. of Completed Transactions ÷ No. of Shopping Carts Created) x 100 = Cart Abandonment Rate Percentage
For example, if you have 50 completed purchases from 250 shopping carts created, the shopping cart abandonment rate would be 80%:
1 – (50 ÷ 250) x 100 = 80%
Find out how to improve your cart abandonment rate by reading our guide: Help! I Have Lots of ‘Add to Carts’ But No Sales!
2. Conversion rate
How effective are your landing pages and calls to action? Do they just look pretty, or are they doing their job and encouraging more people to buy your products?
Your conversion rate will reveal the truth.
Conversion rate refers to the percentage of your visitors who take an action on your website. This action can be anything, such as signing up for an email newsletter or making a purchase.
Your conversion rate tells you how effective your webpage is at encouraging visitors to take action.
For example, if your landing page is receiving a lot of traffic but has a very low conversion rate, you’ll need to test ways to improve the page to encourage more conversions.
What’s a good conversion rate?
The average conversion rate for online shoppers worldwide is 2%.
This means that out of every 100 visitors, two will convert.
The best part? Small tweaks can result in big gains.
For example: Say you get 20,000 visits to your website and that 2% of visitors convert and buy a $100 product.
In this example, you’ll make $40,000.
Now, if you increase your landing page conversion rate by just 0.5%, you’ll make an additional $10,000!
Still, the real power of conversion rates is unleashed when you track and improve each step of your marketing funnel.
This way, the effect is compounded.
To calculate your conversion rate, divide the number of conversions—whatever conversion you’re looking for, whether it’s newsletter signups, purchases, etc.—by the number of visitors to your store, and then multiply it by 100 to get the percentage:
(No. of Conversions ÷ No. of Leads) x 100 = Conversion Rate
For example, if you make 50 sales from 1,000 website visitors, your conversion rate will be 5%.
(50 Sales ÷ 1,000 Visitors) x 100 = 5% Conversion Rate
To learn more about conversion rates, read our guide: How to Get More Sales With Ecommerce Conversion Optimization.
3. Customer acquisition cost (CAC)
Customer acquisition cost—also referred to as CAC—is how much money it takes to “buy” a customer.
For example, let’s say that in one month you spent $1,000 on sales and marketing and closed 25 new customers. Each customer would have cost you $40 to acquire.
Knowing your CAC is vital.
If your average order value is $4,000 for industrial machinery, $100 dollars to acquire a new customer is a dream! But if you’re selling backpacks for $80, you’ll need to find a way to drastically lower your CAC—fast.
But that’s not all.
Understanding your CAC also allows you to plan how many customers you want to acquire in a certain time period, and then allocate your marketing budget appropriately.
What’s more, when you understand the variables and metrics underpinning your customer acquisition cost, you can take steps to reduce it.
Most importantly, you need to know what it is to keep it in check.
Sure, you can make more sales by throwing more money into marketing. But if your CAC increases too, making more sales could mean that profits actually decrease.
Bottom line: If you don’t know how much it costs to transform a prospect into a paying customer, your business may collapse, leaving you clueless as to why.
To calculate your customer acquisition cost, simply divide the total amount of money spent on marketing and sales by the total number of customers those activities delivered.
Amount of Money Spent to Acquire Customers ÷ No. of Customers Acquired = Customer Acquisition Cost
4. Average order value (AOV)
Average order value—also known as AOV—is an ecommerce metric that refers to the average amount of money spent by customers per order.
Increasing your AOV can be one of the easiest ways to boost your revenue.
Plus, by receiving more money from each customer, you can absorb higher customer acquisition costs while still maintaining profits.
To calculate your average order value in a given time frame, take your total revenue and divide it by the total number of orders:
Total Revenue ÷ Total No. of Orders = Average Order Value
For example, if you made $10,000 from 120 sales in one month, then your AOV would be $83.33.
To find out how to boost your AOV, read our guide: 10 Ways to Increase Average Order Value.
5. Customer lifetime value (CLV)
How much is a customer worth to your business?
Customer lifetime value—often referred to as CLV, CLTV, or LTV—is the average amount of net profit that each customer is predicted to contribute to a business over the entire length of the relationship.
Determining how much a customer is worth to your business is a daunting, but essential, task.
It will help you to understand your return on investment (ROI), and it’s extremely useful when strategizing future goals.
This KPI also helps you understand how well your business retains customers. This is crucial when you consider that:
- A 5% increase in customer retention can increase company profits by 25% to 95%.
- Gaining new customers is anywhere from five to 25 times more expensive than retaining current ones.
- Repeat customers spend 67% more than new customers.
(Source)
It’s important to note that LTV is rarely exact.
However, what it lacks in preciseness, it more than makes up for with its sweeping bird’s-eye view.
This KPI is a little more complex to figure out. Before you can begin, you need to have calculated three other averages from your metrics:
- Average order value
- Number of times a customer buys per year on average
- Average customer retention time in months or years
Then, you can calculate the lifetime value of your customers by multiplying your averages:
Average order value x Average number of times a customer buys per year x Average customer retention time in months or years = Customer Lifetime Value
To learn more about this crucial KPI, check out our in-depth guide: Customer Lifetime Value for Ecommerce Stores.
6. Net profit margin
When running a business there’s so much to consider: Product creation, marketing, building a team, customer service … the list goes on and on.
But there’s one thing you should never lose sight of: Profit.
A business isn’t a business if it doesn’t ultimately make a profit. Remember: The money you earn from sales is revenue. We still need to subtract costs to be left (hopefully) with a profit.
Your net profit margin sums up how much money you actually make by presenting the difference between your revenue and profit as a percentage.
For example, say it costs you $100 to buy bike parts. Then, you build a custom bike and sell it for $250. In this case, your profit margin would be $150 or 60%.
Understanding your net profit margin will help you to gauge the health of your business.
Now, a high net margin is a wondrous thing.
If you have a high net profit margin, you’ll be left with plenty of money to reinvest into growing your business.
However, a poor net profit margin will create cash flow problems and eventually stunt business growth.
To calculate the net profit margin you need to know three things:
- Total revenue: how much money you’ve earned in sales.
- Cost of goods sold (COGS): your total business costs, including manufacturing, marketing, operations, employee salaries, etc.
- Income taxes: what you pay to the state.
First, let’s calculate your profit. Take your total revenue for a given period and subtract your cost of goods sold:
Revenue – Cost = Profit
Then, to calculate the net profit margin percentage, divide your profit by your total revenue and multiply it by 100.
(Revenue – Costs + Taxes) ÷ Revenue x 100 = Net Profit Margin in Percent
For example, if you made $20,000 in sales with costs of $12,000 and taxes of $1,000, your profit margin would be $7,000. Then, divide $7,000 by $20,000, and multiply it by 100 to reveal a net profit margin of 35%.
($20,000 – $13,000) ÷ $20.000 = 0.35 x 100 = 35%
Feel free to use Shopify's profit margin calculator to help!
To learn more about margins and pricing your products, read our in-depth guide: Pricing Your Products—Pricing Strategies for Ecommerce?
Tracking the right key performance indicators
Understanding key performance indicators can often feel overwhelming.
But the time and effort you put into tracking KPIs and learning their purpose will undoubtedly pay off.
Learning about the relationships between the core components of your business will enable you to make informed, objective decisions. And these decisions can have an incredible impact on your business’s bottom-line.
Remember, knowledge is power.
So work to understand your business’s data, and harness the performance measures that will propel you forward.
Which KPI are you most keen to come to grips with? Let us know in the comments below!
KPIs key performance indicators FAQ
What is the difference between leading and lagging indicators?
Leading indicators are metrics that help keep companies on track to achieve their strategic objectives. They offer early indications of performance, such as the number of customers who purchase complementary products, for ecommerce businesses.
In contrast, lagging indicators measure current production and performance. They are easy to measure but hard to change, so they are best for assessing the impact of your existing efforts.
What is the difference between financial KPIs and non-financial KPIs?
Financial KPIs are performance metrics based on balance sheet and income statement components. These KPIs measure how well a company is using its financial resources to generate sustainable operating income.
Non-financial KPIs are other metrics used to measure the qualitative aspects of a business. Typically, non-financial KPIs use measures that relate to employee satisfaction, customer satisfaction, quality, operations, and the company’s pipeline.
What are the most important KPIs for ecommerce?
- Shopping cart abandonment rate
- Conversion rate
- Cost of customer acquisition
- Customer lifetime value
- Average order value
- Net profit margin
Want to learn more?
