Too many ecommerce businesses are making vital decisions based on feelings rather than relying on data. But the most successful ecommerce businesses are able to separate what they think is right from what isn’t. They do this by focusing on crucial metrics and then make informed decisions based on that data, not just on assumptions.
To Know Your Business Is to Know Your Numbers
You may not know that there are thousands of metrics available to you. At first glance, you could feel really overwhelmed by trying to figure out which ones you need to be monitoring. That’s why I’m here to help you understand what metrics you should be focusing on to steadily improve your store’s performance.
Understanding what I am about to share with you will help you uncover areas where your ecommerce store may be leaking money. It will also give you the confidence to make changes that directly affect those metrics.
Before I start, I need to warn you about one thing a lot of people don’t talk about or even understand—sample size. Without a big enough sample size for the data you’re analyzing, you may end up making premature decisions based on completely unreliable data and, in that way, could possibly hurt your business.
What is this “sample size” of which you speak?
Sample size refers to the number of people participating in the test or project you are measuring. The size of a sample determines the accuracy and power of the statistics from which you’d like to draw conclusions.
Let’s use an ecommerce scenario as an example … You’ve just completed a redesign of your product page and want to see the effect this has had on your add-to-cart percentage. Suppose you have the option of trying to draw conclusions from two sample sizes: 100 visitors or 1,000 visitors. Your margin of error is much greater (that is, less accurate) for the smaller sample—which is a tenth of the size of the larger sample—because the bigger the sample size in each variation, the lower the probability of a variation winning just by chance.
If I’m trying to draw conclusions from a metric within Google Analytics, I make sure that my sample size is no smaller than 100 conversions on the event I’m analyzing. You can extend this sample size, but definitely do not go any lower.
Note: You can increase the sample size by increasing the date range or by driving more visitors to your product page.
Now, let’s get into the most important metrics and how you can interpret them to drive growth to your online store!
What Metrics Should I Focus On?
Focus on the metrics that are in line with your key performance indicators (KPIs), which are values (such as a higher conversion rate or increased email list signups) that indicate the effectiveness of a business in achieving its goals. In other words, KPIs help you track how effective you are—in alignment with your goals or objectives—at whatever stage your business is at currently.
For example, there’s no value in monitoring your traffic channels if you’re only advertising on Facebook. And there’s no reason to monitor your sales by country if you’re only advertising in the United States. The results would be as useless as a submarine with screen doors!
What the Most Important Ecommerce Metrics Can Mean to Your Business
Following are five of the most universally important metrics you will need to understand and monitor. You’ll find that improving just one of the metrics below can positively impact others on the list as well!
1. Sales conversion rate
Notice that I said “sales conversion rate” and not just “conversion rate.” That’s because, by definition, a conversion rate is the percentage of visitors to your website that complete a desired goal divided by the total number of visitors. The “desired goal” can be something other than a sale, such as an email signup, a product-link click, the completion of a quiz, and so on.
For this example, we’re solely focusing on your sales conversion rate, which is the total number of sales divided by the total number of visitors:
(# of sales) / (# of users) ✕ 100% = conversion rate
This metric provides you with a good overall indicator of your site’s performance but varies depending on what niche you’re in, so keep that in mind!
In the 2020 Adobe Digital Insights Consumer Electronics Report—a study of the top 100 commerce websites—consumer electronics sales were at the bottom of the scale, typically converting at half the overall average. But, as I’ll share below, the average order value (AOV) for consumer electronics can make up for the loss of conversions.
So avoid comparing your online store conversion rate to the rates of other businesses outside of your industry as this can be disheartening and misleading.
How can you improve your conversion rate?
There are many ways to do this:
- Ensure your site is fully functional and accessible across all device types and screen resolutions.
- Use high-quality product imagery.
- Provide compelling product descriptions and copywriting.
- Improve your site speed.
But if I could suggest one method to help you find areas where you can most improve, I’d recommend user testing.
Click here if you’d like to learn more about user testing and how you can implement it in your ecommerce business.
2. Average order value (AOV)
Your average order value tells you, on average, how much your customers spend in a single transaction:
(revenue) / (# of total orders) = average order value
Improving this metric can play a key part in profitability. You may have a weak conversion rate, but having a decent average order value allows you to stay profitable as well as spend more money on acquiring new customers.
Returning to the example from Adobe Digital Insights re consumer electronics—had you only reviewed the data on conversion rates, you’d see that the consumer electronics industry had the poorest conversion rate out of a list of industries. But in that same study, consumer electronics had the highest average order value—in fact, 2.6 times the overall average!
Knowing your average order value is key to understanding the lifetime value of your customer, which allows you to forecast growth. (I’ll get into your customer lifetime value metric later in this article.)
How can you improve your average order value?
Well, the simple answer is, “Get your customers to spend more money on each order.”
How can you do that? You can do it by upselling, cross-selling, free-shipping thresholds, coupons, and bundles!
Note: We’ve got two great articles that go in depth on how you can craft these offers to really boost your average order value: Crafting Ecommerce Cross-Sells That Convert and Why Settle for a Drizzle When You Could MAKE IT RAIN! (Upsells, Cross-Sells, and Down-Sells for Dummies).
This is why it’s important not to be focused only on your conversion rate: it’s very possible for one store to generate more revenue than another despite having less traffic.
3. Gross profit
I’ve grown up hearing this business quote from my dad, and I’m sure you’ve heard it too! “It’s not how much money you make, but how much money you keep.”
Your gross profit margin is determined by the money you keep after subtracting costs of goods (COGs) and operating costs. For example, if you sell a product online for $60.00 and it costs you $20.00 to fulfill (includes cost of goods and shipping), you’ve made $40 gross profit, not including marketing costs.
We see too many ecommerce business owners falling victim to focusing on generating more and more revenue, but not on optimizing their profit margin. You may be selling a lot, but if your profit margin is taking a hit in doing so, then the increased sales and customer service influx that comes with that may not be worth it overall. After all, big numbers aren’t nearly as exciting if you aren’t earning any more money.
How can you improve your gross profit margin?
The key to improving your gross profit margin is reducing your costs where you can.
Areas to reduce overheads include:
- Reduction of product costs: This is easier to do once you build a relationship with your supplier or manufacturer. Once you prove that you can sell your product, then reach out and see if you can come to an agreement for a cheaper cost price. This is much harder if you haven’t received much order volume just yet.
- Product price elasticity: If you’re getting regular sales each day, you can split test different pricing structures to improve your conversion. You don’t have to sell your product for the same price as your competitors. We’ve been able to raise our client’s product price significantly without impacting sales. You may find that your customers are a lot more worried about the quality of your product than they are about your price, so increasing your price may not impact your conversion rate.
4. Customer acquisition cost (CAC)
Your customer acquisition cost (i.e., cost per each acquisition) is the amount you’ve spent to acquire one customer. This includes all of your marketing efforts across Facebook, Instagram, YouTube, Google Ads, and so on. Here’s an example:
(marketing costs) / (total # of customers) = customer acquisition cost
I know a lot of people like to know what numbers to aim for, but this is another one of those values that’s heavily impacted by other metrics such as your average order value, traffic source, and customer lifetime value.
For example, if you worked out your customer acquisition cost to be $30 and you had an average order value of $200, you would be very happy right?! But if your customer acquisition cost is $30 and your average order value is $25, well then you would be losing money on every sale on the front end! Unless of course you knew your customer lifetime value (we’ll get into that next!) would be a lot higher than that.
See, that’s where the caveat is: some ecommerce businesses can actually afford to lose a little bit of money on the front end because they know the typical lifetime value of their customers. They know that, eventually, the customer will come back and buy numerous times.
How can you improve your customer acquisition cost?
- Increase your conversion rate: I know this is dead obvious, but I’ll say it anyway: if you’re converting more prospects with the same amount of traffic and ad spend, your CAC will drop.
- Offer free or incentivized referrals: This works extremely well through post-purchase email flows that you can set up in Klaviyo or onsite referral apps such as Smile.io, Stamped.io, and Swell. Customers receive points for purchasing products and sharing it on their social media accounts and for referring friends and family.
- Leverage different channels: It’s not news that Facebook can be an expensive traffic source to advertise your online store on, but there are also free channels you can utilize to drive brand awareness and traffic to your site, such as social media, email, and content marketing.
- Optimize your ads: You should be continuously testing new ad creatives for your winning product(s). As some ads will eventually no longer perform as well as they once did, you need to be ready with new ad creatives to carry on your momentum. Facebook is known to favor fresh creatives and penalize stale ones.
5. Customer lifetime value (CLV)
Your customer lifetime value is a forecast metric of the average total dollar amount you earn from a customer over the entire course of their “lifetime” (that is, the time span of the relationship).
This allows you to measure how much your customers are really worth and dictates how much you can spend on acquiring new customers while staying profitable.
According to a 2017 post on the Shopify blog, “the top 1% of ecommerce customers are worth up to 18 times more than average customers.”
There are a few ways you can go about calculating your customer lifetime value. I recommend using a CLV calculator. There are free CLV calculators online.
Note: If you own a Shopify store, you’ll be able to find the data you need for the calculation in the Reports section of your Admin.
How can you improve your customer lifetime value?
Improving your customer lifetime value relies on your customer retention and average order value. You need to focus on building and maintaining relationships with your customers so they become loyal to your business.
You can achieve this by upholding excellent customer service and being completely transparent with your customers. If a customer feels as if they’ve been misled, or worse, ripped off, you can be assured that you’ve lost any future business with that customer.
Send free content emails with no strings attached, however this might look for your store! Customers are pleasantly surprised when they open an email with genuine content without a hook to get more money from them. Focus on building that relationship.
You can also reward your customers with loyalty programs, as mentioned above in the CAC breakdown. Incentivizing customers to refer others increases your CLV over time.
There are loads more metrics that are worthy of being covered, but these five are the ones I believe to be the most important metrics for measuring success. Understand these five metrics, make informed data-based decisions, and watch your ecommerce business grow!
Adobe Digital Insights. (2020). ADI Consumer Electronics Report (slides 4 and 8).
Donnelly, K. (2017). Why customer lifetime value matters (and how to calculate it for your business). Shopify blog.