Editor’s Note: Thanks to Charles Palleschi of Spark Shipping for the following guest post.
The saying, “What gets measured gets managed” (often erroneously attributed to Peter Drucker), shows that tracking key metrics is important. But it still leaves the question, what e-commerce metrics should we be measuring? These seven KPIs should top your list. Let me explain why.
1. Conversion rate
Conversion rate is the frequency at which a conversion action is taken. A conversion action may be a sale or checkout, but it could also be a micro-conversion such as a user opting into a lead magnet or entering their email address to download a coupon. Each action that you would like a user to take form a funnel. Once you understand how users transition from the top of the funnel to the bottom, you will better understand the conversion rate at each step in the funnel. For instance, users might enter their email address for a coupon code, then convert to a buyer via a follow-up email.
2. Cost per acquisition (CPA)
Cost per acquisition is the aggregate cost to acquire a paying customer.
CPA may be calculated in two ways. The quick calculation is to know how much you’re spending on a given marketing channel, then determine what the conversion rate is starting from that step in the funnel all the way to checkout. Once you know your funnel conversion rates, you’ll be able to quickly come up with an estimate.
Total channel spend x conversion rate at that step of the funnel = rough cost per acquisition
The second method to determine your CPA is to generate a significant amount of conversions in a short window of time (for example, over 100 conversions in five days). You’ll need more data for this, but if you can generate it, you’ll have a more accurate CPA.
Total spend over the short window of time ÷ number of conversions during that same window = cost per acquisition
3. Return on ad spend (ROAS)
For each of your paid marketing channels, ROAS is thought of as “for each dollar put in, how much revenue does that produce?”
This important e-commerce metric enables you to make two critical calculations. The first is to know which paid marketing channels provides the best return. Second, as a paid marketing channel is scaled upwards, you’ll eventually see your ROAS taper off. Tracking your ROAS as the budget increases will help to determine when to level-off the ad spend. Once you level one ad spend, it’s time to scale the next marketing channel.
Related: How to split test Facebook Ads on a budget
4. Average order value (AOV)
Average order value is a metric used to estimate what a single order is worth to the business. This e-commerce metric can be quickly pulled from most shopping cart platforms.
To calculate the AOV, divide the total revenue by the number of orders.
Total revenue ÷ number of orders = average order value
Your store’s AOV may drive key business decisions such as ad spend, store UI and layout, and product pricing.
5. Repeat purchase rate
Once a customer has purchased from your site, what is the rate at which they buy again?
Repeat purchases are the golden ticket in e-commerce. Once you’ve paid to acquire users, it’s much cheaper to get sales from them versus acquiring new ones. That’s why the repeat purchase rate is such a critical metric to track and improve.
6. Customer lifetime value (CLV or CLTV)
The Customer Lifetime Value gives a complete picture of the total value each customer brings to the business.This metric is also sometimes called lifetime customer value (LTV).
Once you know your AOV and repeat purchase rate, you should be able to quickly calculate the CLV.
Average order value ÷ (1 – the repeat purchase rate) = Customer lifetime value
Knowing the CLV enables you to budget what you can and should spend to acquire each new user.
7. Cost of goods sold (COGS)
Last (but certainly not least) is what does it cost to produce each product that you sell?
COGS varies widely based on costs to import, drop ship, manufacture, etc. But it’s critical for you to have an accurate total cost of each product you sell. Once you know the true COGS, you’ll understand the profitability of every sale. You can calculate the cost of goods sold well before the sale is fully booked into your accounting system, which will also help you to grow your business profitably and more quickly.
Related: Choosing Inventory That Sells
E-commerce metrics and the importance of data
In order to be profitable, the numbers have to align the right way. You need to know your upfront cost of goods and other expenses. Then, once you start paying for advertising, you want to keep track of the channels where your spend brings the greatest return. Once buyers are in your orbit, understand how much it costs to acquire them, how often they purchase from your store again, and what their lifetime value to your store is. These e-commerce metrics will strengthen your decision-making.
Charles Palleschi is the founder of Spark Shipping, which helps e-commerce retailers automate their connections with their suppliers and vendors. He first got his start with e-commerce when he purchased a small e-commerce site. During this time, he found a need to automate parts of his business. That need inspired Charles to create Spark Shipping, the leading e-commerce automation software which automates millions of e-commerce orders.
Also published on Medium.