Learn about the seven key performance indicators that will help you grow your ecommerce business.
Did you ever see the movie or read the book Moneyball?
It’s about how the Oakland Athletics revolutionized professional baseball by focusing on statistics that were traditionally overlooked.
Instead of only caring about things like home runs, runs batted in, and batting average, they focused on less sexy metrics, like on-base percentage.
Doing this allowed them to identify undervalued players who could still make a meaningful contribution to the team and increase their total wins. This analytical approach gave them a significant competitive advantage for several years and took them to multiple playoff appearances.
The moral of the story? It’s not just enough to evaluate metrics and KPIs. You need to evaluate the right ones.
It’s no secret that constantly monitoring and managing your metrics is a critical factor in ecommerce success. The most successful ecommerce brands are driven by data. Every decision they make is justified by verifiable statistics, not gut instinct or flashes of inspiration.
But it’s not enough to simply install an analytics plugin and assume that you have everything you need. Just like in baseball, you need to know which analytics and KPIs matter the most. Is it total website visitors? Overall revenue? Conversion rate? Bounce rate? Customer acquisition cost?
An abundance of data leads to an abundance of questions. We’re going to answer those questions for you.
In this white paper, we’ll highlight the key levers of growth for your ecommerce business, and how you can make a positive impact on them. We want to help you set the right KPIs and track and measure the relevant corresponding metrics.
It’s true that you can’t manage what you don’t measure, but it’s also true that measuring the wrong things will lead to mismanagement. Let’s make sure you’re measuring and managing the right things.
What Are KPIs and Metrics?
First, a few distinctions.
A metric is a statistical measurement of an activity in your business, while KPIs are specific metrics that your business has identified as indicators or predictors of overall growth. KPIs are typically more strategic, while metrics are more tactical.
In essence, KPIs are the metrics that have been deemed as most important when evaluating overall performance.
Returning to the Moneyball anecdote, the Oakland Athletics believed that on-base percentage was a KPI because those who got on base the most tended to score the most runs. A player was successful if he had a high on-base percentage. Other statistics, like fielding percentage, were not KPIs for the Athletics.
Consistently measuring, evaluating, and then responding to your KPIs allows you to stay on track and ensure consistent growth. KPIs and metrics work in tandem. As Kayla Grigg puts it:
“Let’s say inbound leads is one of your KPIs, and that number suddenly takes a nosedive. While the KPI tells you there’s a problem, your other metrics will help you to understand what happened. Maybe it’s because there are broken links on your website, or an error blocked leads from pushing to your CRM, or Facebook changed their algorithm and killed your most highly-converting ads. To identify the root cause, you’ll have to look at metrics such as site conversions, CRM data, ad impressions, and clicks, etc.”
Of course, all this raises the question: what ecommerce metrics should be KPIs?
7 Key Ecommerce KPIs To Grow Sales and Revenue
There are hundreds of metrics that you can measure within your ecommerce business. However, out of those hundreds of metrics, there are seven that are clear indicators of the growth and performance of your business.
KPI #1: Return On Ad Spend (ROAS)
ROAS is the amount of money you’re getting back in revenue for every dollar you spend on advertising to drive new revenue. This one is absolutely critical. If you don’t know how much you’re spending to drive new revenue, you can easily spend more than you’re making— which is a recipe for disaster. How do you calculate ROAS? It’s simple.
ROAS = Revenue From Advertising / Cost of Advertising
For example, let’s say you spend $3,000 on a PPC campaign. You determine that the campaign generates $12,000 in revenue.
$12,000/$3,000 = 4
For every dollar you spend on advertising, you’re generating $4.00 in revenue. When running ad campaigns, it can be easy to get caught up in Cost Per Click (CPC), conversion rate, lead generation, and more. And while these metrics are important, what matters is the bottom line. If you’re only looking at CPC or conversion rate, you may misjudge how much revenue your advertising is actually generating, and which campaigns are successful. As Jacob Baadsgaardsays:
“Click and conversion data can help you identify problem areas in your marketing, ad or keyword campaigns. But if a campaign is not producing a good ROAS, something needs to change.”
By regularly tracking your ROAS, you can evaluate the effectiveness of your advertising and predict how much revenue future advertising will generate. BENCHMARK: Your ROAS should be at least 3:1. This ensures that you’re covering the cost of doing business plus making a significant profit. How can you improve your ROAS?
- Test different ad copy in AdWords to determine which generates the most bang for your buck. Some AdWords may actually cost less and generate more revenue, depending on how they resonate with the customer.
- Improve your overall landing page conversion rate. By using carefully structured hypotheses and A/B tests, you can identify which versions of landing pages convert best and then double down on those pages.
- Ensure messages match between your ad copy and your landing page copy. If the copy on your landing page doesn’t match your ad copy, visitors will be immediately turned off.
- Reduce the number of form fields on your landing page, as multiple fields tend to reduce the overall conversion rate.
- Improve the overall user experience on your site. The easier your site is to use, the more likely visitors will convert to customers, which increases your ROAS and overall revenue.
Improving your ROAS allows you to use some of that additional revenue for more advertising, which then drives more customers and more revenue. It’s a virtuous cycle.
KPI #2: Customer Acquisition Cost (CAC)
Customer acquisition cost is simply the average amount you spend to acquire one new customer. The basic CAC formula is to divide your total sales and marketing expenses for one month by the number of new customers acquired that month. That number is the amount it costs you to acquire a new customer.
CAC = Sales & Marketing Costs / # Customers Acquired
Why does this metric matter? Because each of your customers has an approximate lifetime value (which we’ll cover shortly). If your CAC is equal to or greater than your Customer Lifetime Value, you’re going to be out of business in short order. It’s critical to know how much it costs you to get a single customer. How can you improve your CAC?
- Improve your website copy and experience so that more clicks convert to purchases. A higher conversion rate means you don’t need to get as much traffic in order to generate the same amount of revenue.
- Earn more organic traffic through strategic SEO efforts. Because you don’t have to pay for that traffic (at least not directly), customers acquired through SEO significantly lower your overall CAC.
- Optimize the customer experience for more conversions. To state the obvious, more conversions with the same amount of traffic means a lower CAC.
Your ultimate goal is to reduce the overall amount of sales and marketing required to acquire a customer, which then cuts your acquisition cost.
KPI #3: Email Signup Conversion Rate
This KPI represents the percentage of your website visitors who opt-in to your sales funnel through your email list. With email being a proven way to generate significant ecommerce revenue, improving your signup conversion rate can pay big dividends. For example, Envelopes.com used email marketing to recover a staggering 40% of their abandoned shopping carts. Benchmark: The average opt-in rate is 1.95%, with some marketers getting as high 4.77%. This means that for every 100 people who visit your site, at least two should be signing up for your email list. How can you improve your overall opt-in rate?
- Add a sign-up form to your website. Ideally, this sign-up form will offer some sort of “bribe” in exchange for their email address, like a coupon code or free digital download.
- Add social proof to your sign-up. For example, if you have 5,000 people on your list, you could say something like, “Join 5,000+ other people who get daily deals from us.”
- Don’t include too many form fields. If you only need their first name and email, don’t require anything else.
- Optimize the overall user experience around sign-ups. In other words, place sign-up forms in strategic places on your site where they will get maximum visibility without being disruptive.
With social media platforms increasingly killing all organic reach for businesses, increasing your email list is more important than ever. Don’t neglect this critical KPI.
KPI #4: Average Order Value (AOV)
As you would expect, this KPI reflects the average value of orders on your site. The higher this value is, the more revenue you generate. This is Amazon’s specialty. Once you add an item to your cart, they immediately begin suggesting other items that you might need. They know that their revenue is tied to AOV, and so they do everything in their power to increase that amount. Why is this such an important metric to monitor? As Erik Larson of Apruve puts it:
“…AOV offers decision makers insight into customer buyer patterns and trends, advertising spend habits, store layout and even product pricing. As a result, AOV is one of the most important KPIs for online and offline sales for a business…Furthermore, by monitoring a company’s AOV, online retailers and other ecommerce businesses can increase their marketing ROI. The higher the company’s AOV, the more the company is getting out of each customer – and the more the company is getting out of acquiring each customer.”
By closely monitoring AOV, you can get a deeper understanding of how your customers behave, which items make up the majority of sales, and how you can optimize your customer experience for more conversions. Benchmark: While it varies by product, the top 25% of online stores have an AOV of over $100.How can you increase your AOV?
- Include more product bundles. If it’s likely that a customer will need more than just a core product, bundle everything together into a single item.
- Utilize upsell opportunities. If you can upsell customers to a more expensive product in a way that is not disruptive to the overall experience, it’s an excellent way to increase the order value.
- Optimize your user shopping experience to encourage the purchase of multiple products. Again, Amazon does this masterfully. Their entire site is built around the idea of selling people as many things as possible.
Increasing your AOV allows you to get more revenue out of the traffic you already have, which is why it’s such a critical KPI. Instead of purchasing more traffic, which drives your Customer Acquisition Cost up, you squeeze more revenue out of the customers you already have.
KPI #5: Shopping Cart Abandonment Rate
This is the percentage of people who almost complete a purchase, only to leave. They put something in their cart and maybe even make it all the way to checkout, but for some reason, they never finish their purchase. If you can lower this number, it will increase both your conversion rate and overall revenue. And again, because this is dealing with customers already on your site, you don’t have to purchase any additional traffic to increase revenue. You’re simply optimizing what you already have. Benchmark: The average shopping cart abandonment rate is around 70%. The higher your abandonment rate, the more it indicates that something is throwing shoppers off once they initiate the checkout process. How can you reduce the abandonment rate?
- Include trust signals, such as reviews of the product, in prominent places. Enhance these reviews as much as possible with information supplied by the buyer. This can help eliminate any doubts the customer may have at checkout.
- Do everything possible to reduce confusion. When something is added to the cart, make it clear. If coupons can be applied, make it obvious where. Don’t force the customer to figure out anything. Make it all as clear as possible.
- Offer free shipping. Few things are more enticing than free shipping, which is why Amazon pushes their Prime program so hard. Additionally, fewer things will send a customer running faster than unexpected shipping costs appearing at checkout.
- Provide guest checkout. Most shoppers don’t want to create an account to purchase a product. They simply want to buy their product and then be on their way. Don’t force them to create an account.
- Improve the overall checkout experience. Using Conversion Rate Optimization, you can identify the areas where carts are being abandoned and then strategically optimize those areas for better performance.
If you owned a brick-and-mortar store and people were leaving abandoned carts all over the place, you’d work hard to make sure it didn’t keep happening. After all, every abandoned cart is money walking out the door. Approach your ecommerce abandoned cart rate the same way.
KPI #6: Customer Lifetime Value (LTV)
This metric represents the average amount a customer is likely to spend with you over the duration of your relationship. Obviously, the higher the LTV, the more total revenue you’ll receive. Knowing your LTV is critical so that you can compare it to your Customer Acquisition Cost. The closer your CAC is to your LTV, the less revenue you make. How do you calculate LTV?
LTV = (Avg. Order Value x Purchase Frequency) x Customer Lifetime Length
Purchase frequency represents how often a customer purchases from you and customer lifetime length represents how long a customer typically stays with your company. Benchmark: Your Customer Lifetime Value to Customer Acquisition Cost ratio should be at least 3:1. For example, if it costs you $100 to acquire a customer, their lifetime value should be at least $300. How can you increase your CLV?
- Invest in customer loyalty programs. The more rewards a customer receives when they shop with you, the more likely they’ll keep shopping with you.
- Invest more heavily in your most loyal market segments. Certain customer demographics are going to be more loyal to you than others, and thus will have a higher LTV. Invest more heavily in acquiring and retaining customers from those segments.
- Regularly incorporate customer feedback. When customers see you implementing their suggestions, it’s a signal that you care about them, which in turn increases their loyalty.
- Improve your overall user experience. Customers will always purchase more from sites that are easy to use and understand. The more you optimize your site for customer experience, the more loyal they’ll be.
The higher your LTV, the less you need to spend on acquiring new customers to make up for the ones you lost. Rather, that spending can be funneled into areas of growth.
KPI #7: Ecommerce Conversion Rate
This represents the percentage of your site visitors who become customers. The higher the conversion rate, the more revenue you make, and the less you have to spend on customer acquisition. Benchmark: While it varies wildly by niche and industry, surveys estimate the average ecommerce conversion rate at around 2%. Ecommerce giant, Amazon has a non-Prime conversion rate of around 33%. It can’t be overstated how important this KPI is. Without conversions, you don’t have an average order value, customer lifetime value, return on ad spending, or anything else because you don’t have any revenue. How can you improve your conversion rate?
- Fix any technical issues. Few things turn off customers like technical issues. Whether it’s slow loading time, images that don’t load, or a glitchy checkout process, get it fixed as soon as possible.
- Find areas of frustration. Using a variety of analytics tools, you can identify where potential customers are getting frustrated and leaving your site. Using Conversion Rate Optimization methods, you can systematically improve these areas to remove any and all friction customers might be experiencing.
- Give each page one job. Don’t try to accomplish a product sale and an email opt-in on the same page. Too many options confuse people and results in them taking no action at all. Rather, make sure that each page is accomplishing one thing only.
- Use a simple design. Remember, your goal is to generate sales, not win a web design award. Form should always follow function. Make it as simple to buy as possible.
- Create a sense of urgency. If you need to quickly increase your conversion rate, put a deadline of some sort in place. The prices are increasing, stock is running out, anything to make people feel like they need to buy immediately.
- Improve the overall user experience. Why is Amazon so successful at ecommerce? Because they’ve invested hundreds of millions of dollars in optimizing the shopping experience so that it’s as easy as possible. From 1-click ordering to Prime shipping, they know that the better the customer experience, the higher the conversion rate.
To ignore your ecommerce conversion rate is to put yourself on the path to going out of business. Pay close attention to it and work to increase it. Increasing this then gives you more revenue to invest in improving other KPIs.
Invest In User Experience
The common thread that runs through all these KPIs is user experience. Improving the shopping experience of current and potential customers will improve all seven of the key metrics. This is why Conversion Rate Optimization is such a powerful tool. It’s a holistic approach to ecommerce that not only boosts conversions but gives your other key metrics a lift as well. It obviously has worked well for Amazon, and it can do the same for you as well. If you’d like to discuss your options, feel free to contact us.