Ecommerce KPIs /Key performance indicators/ are crucial to your ability to make informed, data-driven decisions. They are an essential part of managing a successful online store.
Of course, you want to focus on the KPIs that have the most significant impact on your profit, but in reality, this is only sometimes the case. I have been working with ecommerce businesses for almost ten years now, and I can say that the most successful brands are the ones that are driven by data and not flashes of inspiration or gut instincts (all right, maybe sometimes their directors have a little hunch). In this article, I will highlight the most critical KPIs based on my experience and how you can make a positive impact on them.
This is the money you get back in sales for every pound you spend on advertising. This one is probably the most important, and that is why it is number one. No one will buy from you if you don't promote your Shopify store. But if you don't know how much you are spending to drive new sales, you can easily spend more than you are making - a proven recipe for disaster. I have seen this in practice many times. Companies run ads to increase their sales, but the cost is so high that when you add it to the other expenditures like the COGS, fulfilment, admin, etc, it turns out the business is running at a loss. What does the management do to fix it? You guessed it - increase the spending on ads, which makes the loss more significant.
ROAS= Sales from advertising/Cost of advertising
For example, if you are spending £2000 on a campaign that generates you £10,000 in revenue, your ROAS is 5
£10,000/£2,000 = 5
For every pound you spend on advertising, you make £5 in sales. When running campaigns on social media, it can be easy to get lost in CPC, conversion rate, lead generation, funnels, etc. And they are all important, but what really matters is the bottom line. If you are only focused on Cost per click (CPC), you may misjudge how much sales your ads generate. Tracking your ROAS regularly can help you evaluate the efficiency of your ads and predict how much revenue your future ads will generate. Your ROAS depends on various things, such as your margins and sales volume, but as a rule of thumb, it should be at least 3. How can you improve your ROAS?
Customer Acquisition Cost (CAC) is the amount you spend to acquire one new client for your shop. To calculate it, you divide your marketing and sales costs by the number of customers acquired.
CAC= (Sales Costs + Marketing Costs)/Customers Acquired
Each of your customers has a lifetime value, and if your CAC is equal to or higher than the lifetime value, you will eventually be out of business. Ways to improve your CAC:
SEO optimise your site. This will create more traffic to your store without you having to pay for it, which is a significant improvement to your CAC.
AOV= Revenue/ Number of orders
The AOV reflects the average amount your customers spend per order. The higher the value, the more revenue you make. Increasing your AOV helps you get more revenue from the traffic you already have. Instead of paying for more traffic, you squeeze more income out of the clients you already have. Have you noticed how some stores promote "customers who bought A also purchased B and C"? This is their way of stimulating additional purchases and increasing the AOV. Amazon is the master of this approach. Once you add something to your cart, they immediately suggest additional products you might need. By monitoring the AOV, you can better understand your customers' behaviour and use it to increase the marketing ROI and ROAS( see KPI 1). It varies by product, but a recent study shows that the top 25% of ecommerce brands have an AOV of £80 and more. How do we increase the order value?
This KPI represents the number of your shop visitors who become paying customers. The higher the conversion rate, the more sales you generate and the less you spend on customer acquisition.
Conversion rate = (number of customers/ total visitors) x 100
The conversion rate varies by industry, but surveys suggest it is around 3% on average. That means that if you get 100,000 visitors to your website per month, you will make around 3000 sales. How do you improve your conversion rate?
This KPI represents the percentage of people visiting your ecomm store, adding items to their cart, and abandoning their carts before checkout. It is the opposite of the Cart conversion rate.
Cart conversion rate = Number of completer purchases/ Number of shopping carts opened.
Cart abandonment rate = 1 - Cart conversion rate.
Studies suggest that the average cart abandonment rate is close to 70%. The high abandonment rate shows that something is discouraging shoppers once they start checking out. Your goal as an ecomm shop owner is to reduce this number so you can increase your conversion rate and revenue. How to reduce the abandonment rate?
This KPI represents the average revenue you will likely get from your customers during your relationship. Naturally, the higher the CLV, the more revenue you will receive. It is essential to compare the CLV to the Customer acquisition costs; the closer these two are, the less profitable your business is.
CLV = (Average Order Value x Purchase Frequency) x Customer Lifetime Length
Buy frequency represents how often a customer buys from your store, and customer lifetime length illustrates how long a customer normally remains with your company. Your CLV to Customer Acquisition Cost ratio should be at least 3:1. If it costs you £100 to get a new customer, they should spend at least £300 in your shop over their lifetime. To increase the CLV, you can:
The above is only a tiny selection of metrics you could be tracking. There are many others that you could and might already be monitoring. However, not all KPIs are worth the same to your business. You should consider your business and what is important for you when developing a list of KPIs to monitor. We have a selection that we have developed with our customers and include them in our monthly management accounts review.
