Ecommerce Essentials: The Top 5 KPIs You Need To Use
You can only improve upon what you can measure.
While the above phrase is paraphrased from the late Peter Drucker, it is one of our business mantras here at Alena Solutions. Sure, if you’re educated and experienced, making a guess or an estimation could very well work half of the time.
But, what if you’re a new entrant into the sea of online business?
And, what if you don’t want to be right half of the time?
Half the time won’t cut it for many entrepreneurs and shop owners. As we mentioned in our last article on ecommerce, technology is facilitating an increasingly more personalized shopping experience for their visitors, especially at the top of the funnel.
You need to improve your ecommerce shop. Eternally. And, you can’t improve what you can’t measure.
Ladies, gentlemen, and everyone in between – here come the KPIs.
Plainly, Key Performance Indicators are measurement tools for informing yourself if something is working or not. They can be applied to business, management; heck, even your children’s household behavior.
For example, and we’ll get into this in detail shortly, if you take the metric of ecommerce website traffic and compare it to how much of that traffic results in new customers, then BOOM – that’s the KPI of your customer conversion rate.
While a KPI for customer conversion rate might seem universal, KPIs, in fact, vary greatly from industry to industry. (Imagine the KPIs for a political campaign compared to those of an antennae manufacturing plant.)
If you’re reading this article, you came here for ecommerce insights. So, to help you improve your ecommerce operations, our team measured the data for the five ecommerce KPIs that were mentioned over the past 12 months as the most important to set and monitor from a few dozen of the top read articles by industry experts. (Noticed our recurring emphasis on the relationship between measuring and improving?)
1. Customer Conversion Rate
As we mentioned above, this may sound universal across industries, and if you replace “customer” with “subscriber,” “client,” or “enrollee,” it very well is.
Yet, that underlines its importance, and while its universality is near tangible, that means that you cannot set it and leave it as long as you’re still turning a profit.
Customer conversion rate is easily the paramount KPI for ecommerce organizations, regardless of size. Traffic (and in particular, referral traffic) and revenue have an undeniably strong correlation with one another, as only a negligible amount of visitors in an ecommerce shop find themselves there by sheer accident.
Improving your customer conversion rate KPI is the first thing you should do as soon as your marketing team (even if it’s just yourself) starts attracting a sizable number of visitors to your website.
Conversion rate optimization (CRO) is the set of processes and the tools you use to increase the ratio of customers from visitors. Here’s a superb guide from the CRO masters, HubSpot, on the best steps to improve your conversion rate.
2. Average Order Value
Average order value (AOV) is a handy KPI for monitoring whether your long-term growth is red or black. In theory, as you build customer loyalty, your customers should be making increasingly larger purchases from your company. Trust in your product(s) leads to more purchases at a time.
However, depending on the type of ecommerce operation you’re running, a stagnant or negligible positive trajectory isn’t something to fear. For example, if your company manufactures industrial conveyor belts and new models are only produced every five years, then you’d be expecting for AOV to remain steady for years at a time. Only when it dips should you be worried that some of your customers are being lured by your competition.
For most ecommerce shops, though, a positive AOV is essential to measure your sales and marketing teams’ success. If over time AOV isn’t increasing, this means there’s either a deficiency in your ability to upsell your customers, poor new product marketing, another gap in your processes or new product features.
3. Shopping Cart Abandonment Rate
This is an ecommerce KPI that needs little explanation given its title, yet is a crucial KPI for ecommerce profitability. First, though, if you’re new to the ecommerce industry, be prepared for your cart abandonment rate (CAR) to seem staggeringly high. Yet, don’t stress!
It’s par for the course if your CAR is well over 50% for visitors adding items to their cart. In fact, if your CAR is at 50% you’re doing exceptionally well. ~75% is the global average across devices (and above 80% for mobile alone.)
There’s any number of reasons why people add items to their cart and then leave your website behind without checking out, and we’ll get more into this topic in a future article. Plus, there are now dozens upon dozens of software tools to help you optimize your CAR.
That being said, CAR is particularly useful for measuring the quality of your website’s UX, retargeting efforts, brand messaging and the checkout experience for customers (pro-tip: hidden shipping costs result in a tremendous CAR during checkout. Avoid those.) In the same future article we mentioned above, we’ll also get into how to recover abandoned ecommerce carts.
4. Customer Lifetime Value
Customer lifetime value (LTV) is as crucial as the next KPI we’re going to cover for measuring ecommerce success, and they’re intertwined. LTV essentially lets you know the average revenue being earned from each of your customers from when they first made a purchase to their last purchase.
LTV demonstrates the efficacy of several key metrics – product quality, marketing strategy, brand loyalty, competitor landscape, and more.
5. Cost Per Customer Acquisition
Abbreviated as CPA, your customer cost per acquisition is one of the easiest KPIs to measure, as you simply take how much you’ve spent on acquiring customers in any given timeframe, and then divide that by how many new customers you gained in that timeframe. The resulting figure is your CPA.
Yet it’s vital; a necessity to measure along with the other top for KPIs in this article.
When measured against its sibling KPI, LTV, it demonstrates your overall ecommerce profitability. If LTV is lower than CPA, you’re operating at a loss; when LTV is higher than CPA, you’re in good financial standing.
It takes money to make money, and if you’ve chatted with your marketing friends then you already know there are plenty of ways to spend yours to get more visitors into your shop and have them leave as customers.
There are some bloggers out there that will tell you that LTV is the most important KPI to measure for ecommerce, actually, in truth, there’s a lot of them.
Yet, we have to politely disagree with individuals that think only one single KPI will allow you to keep your business afloat and can let you scale your growth in a manageable fashion. For our company, we’ve collaborated with plenty of different ecommerce enterprises and there’s no “one size fits all” solution or measuring tool.
That’s why we researched and compiled the 5 most important KPIs for any type of ecommerce operation. No single person or organization can be right 100% of the time, but if you take a large sample size of experts of varying backgrounds and distill the common denominator between them all, it’s a safe bet that you’re going to be aware of what universally matters for ecommerce growth and success.
The KPIs above are by no means exhaustive, and you’ll need to establish a few if not dozens of other KPIs to measure your specific company’s sales and growth.
Speaking of that, what type of an ecommerce company do you have, or are planning to launch? Let us know either by sending us an email or leaving a comment below. We’re always open to pick each other’s brains and provide a bit of gratis ecommerce consulting.
We’ll see you next time, with most likely an article on the Social Media Selling side of ecommerce.