Ecommerce KPIs or Key Performance Indicators are a specific way to measure the performance of your ecommerce business. They help give you an idea of how well you’re doing. And also help to inform of any marketing opportunities or business areas to improve.
KPIs are not the same as metrics. A metric is what you use to measure something. For example, the number of ‘users’ that have visited your ecommerce website. Whereas a KPI is a set goal to achieve over a set period of time.
Businesses use KPIs to track and measure their performance. You can gain invaluable insights from this data to further improve upon in the future. In this blog, we’ll be talking about why every business needs KPIs. And which KPIs should be used to monitor your business performance.
Why do ecommerce businesses need KPI’s?
So, why exactly do businesses need KPIs? If you never take the time to set goals and devise a plan on how to achieve them. You’re not likely to be able to make business decisions based on solid data. You’re more likely to make emotional, gut reaction decisions. Decisions that will more than likely hurt your business in the long run.
While there are lots of metrics you can get about your business from tools like Google Analytics. This data is useless without context, understanding and insight. Your KPIs will ascertain to what metrics you pay attention to, monitor and track.
Your metrics will be able to tell you if the activities and strategies you’ve chosen for your business are working. And ultimately, if you will meet your KPIs using those strategies. If the data is showing you won’t achieve your KPI, then your strategy needs to change in order to achieve it.
Read more about how to create a marketing strategy for your ecommerce business in our blog on an introduction to ecommerce marketing.
So how do you set out your business KPIs? We’re going to cover what SMART KPIs are first and then we’ll take a deeper look at the 6 critical KPIs ecommerce business owners should be using.
What are SMART KPIs?
SMART goal setting is more commonly attributed to Peter Drucker’s Management by Objectives concept. He notes that each goal you set for your business should be:
This can help you make sure your KPIs work for your business. However it has also been expanded over the years to include Evaluated and Reviewed or SMARTER. Whilst we recommend that you use the 6 KPIs we mention later on, this is always good to know when you’re working out how to measure, achieve and evaluate your KPIs too.
Specific covers the ‘what, why, who, where and which’ of your KPI. Your goals need to be specific in order to have a focus.
Measurable covers how you intend to measure your KPI which involves analysing data and metrics to track your KPIs progress.
Achievable goals are a lot easier to attain than unachievable goals and thus to be successful, they need to be achievable. Think about any restraints that may prevent you from achieving your KPI.
Relevant KPIs are important. Your goals need to matter to your business and align with your other business goals.
Time bound KPIs all need a target date. Whether that be every quarter, every six months or every 12 months. This helps you stay on track and not let the activity for the KPI linger and get pushed down your to-do list.
So now you have an understanding of how to ensure your KPIs are SMART, let’s look at the 6 critical KPIs for ecommerce businesses.
6 critical KPIs for your ecommerce business
In order to correctly measure the performance of your business there are 6 critical KPIs you should pay attention to that will give you insight into the state of your business.
1. Cart abandonment rate
Your cart abandonment rate is the rate at which your customers are adding products to their cart, but abandoning the purchase. This can be highly frustrating for business owners as you’ve put a lot of time, effort and money into attracting these customers.
There are a lot of reasons why customers abandon their carts at checkout from unexpected shipping costs, and doing research to going to buy the product in store at a later date. This, of course, loses you money. To avoid this, you can implement cart abandonment emails to remind customers of their products. Giving them a one-click back to their carts makes it easier for them to checkout.
To calculate your cart abandonment rate divide the number of complete purchases by the number of carts created. To turn this into a percentage, subtract the number from one and then times it by 100.
(number of completed transactions) / (number of shopping carts created)
X 100 = cart abandonment rate percentage
(50/250) x 100 = 80%
If you’re able to reduce the number of abandoned carts for your online shop and reduce your percentage, then you’ll benefit from additional sales that you may not have gotten before.
2. CPA (Cost Per Acquisition)
Your CPA (Cost Per Acquisition) of customers is also an important metric to keep an eye on. This is how much it costs you to acquire a customer. The less the better and higher your profit margin will be.
An example is spending £1000 on advertising in a month and if you get 50 customers from that, your CPA would be £20. If you’re selling high value items such as Cameras with an average value of £1500 then this CPA is great. But if you’re selling photography prints at £15 each, you will need to look at how to reduce your CPA.
(total amount spent on advertising / total number of transactions) = CPA
3. Lifetime value
The lifetime value of a customer is the average amount of net profit that each customer is predicted to contribute over the length of their relationship. Figuring out how much a customer is worth to your business can be challenging, but it is essential to knowing the value of your customers.
There are a few ways to calculate the lifetime value of a customer and this will depend on how large your business is and what data you have access to.
- Small businesses with limited data: ARPU (Average Revenue Per User) = Total Revenue / Number of Customers
- Small businesses with good data: Traditional CLV (Customer Lifetime Value) – Gross Margin per Customer [Retention Rate (per month) / (1 + Discount Rate (per month) – Retention Rate (per month))]
- Larger business with good data: Advanced CLV (1 month) = Total Transactions x Average Order Value x Average Gross Margin x Average Customer Lifespan (Counted in Months)] / Number of Customers
There are also lots of free calculators available online but you will still need the right information to input into them.
4. Average order value
Knowing your average order value will help you better understand the average amount customers are willing to spend with you and it will also help you with other calculations – much like the lifetime value.
You should always aim to increase your average order value per customer as this will increase profits for your business. If you increase your average order value you will also have more room when it comes to your CPA.
Total Revenue / Total Number of Orders = Average Order Value
£10,000 / 500 = £20
5. Conversion rate
Your conversion rate is the percentage of visitors to your website that take an action. This can be anything from signing up for your newsletter to making a purchase. A conversion rate tells you how effective the page where your action is, is performing.
If you have a page that has lots of traffic but a really low conversion rate, then something is stopping your visitors from converting and you need to find out what it is. The average conversion rate for ecommerce is around 2.36%. Which means if you have 100 visitors to your site, between 2-3 will convert.
To calculate your conversion rate divide the number of conversions – the conversion rate you’re looking for, whether it’s the number of newsletter signups or number of sales / the number of visitors to your page x by 100 to get the percentage.
(Number of Conversions / Number of Visits) x 100 = Conversion Rate
6. Gross profit margin
Lastly, your gross profit margin is something you should always keep in mind. If your business isn’t making any profit then it won’t be successful, no matter how many sales you make.
Your gross profit margin sums up how much money you actually make minus all your costs. For example, if your materials cost £100 and the product you make sells for £250, then your gross profit margin would be £150 or 60%.
For working out your gross profit margin, you will need to know your total revenue and the Cost Of Goods Sold (COGS) – your total business costs including manufacturing, marketing, operations, salaries etc.
To calculate your profit simply take your revenue – cost = profit.
To then calculate your gross profit margin percentage, divide your profit by your total revenue x by 100.
(Revenue – Costs) / Revenue x 100 = Gross Profit Margin Percentage
These 6 KPIs are crucial to knowing how your business is performing, where improvements can be made and what’s working for you where you should invest. You can learn more about how to set yourself up for success in business here.
We’ve created this handy template for tracking these 6 KPIs. Get your copy here.