KPIs for e-commerce businesses
Quantifiable Key Performance Indicators (KPIs) are essential for any business and certain sets of KPIs are important to be tracked regularly for measuring the business performance. Companies doing well on these performance indicators usually do well and have a long run. We dwelled on what could be some of the most important KPIs in the e-commerce businesses and we came up with these; read on and share your comments on this.
Important KPIs:
- CAC (Customer Acquisition Cost): As the name suggests, it’s the cost of acquiring a customer. This is the sum of the total cost of sales, costs involved in promotion, and the like.
Formula:
CAC = Total cost of acquiring customers / Total number of customers
Example:
Suppose the owner of an e-commerce brand notices that the sales are declining and also the percentage of abandoned carts is high. The owner then decides to run ads for the popular products and he also decides to target the abandoned cart users who have to be reached out to. Customer Acquisition Cost (CAC) here is the total cost of sales and the cost involved in promoting the products and also to run advertisements for the abandoned cart users. - Customer Lifetime Value (CLV/LTV): Customer Lifetime Value, often known as LTV or CLV, is a statistic that shows how much money a firm anticipates making from a single customer throughout that customer's association with them. It is an essential indicator in determining the long-term value each client provides to the company and helps direct activities related to marketing and customer acquisition.
In addition to the money made from a client's first purchase, CLV accounts for the possibility of subsequent purchases, upsells, cross-sells, and referrals over time, less the expenses incurred in providing customer service to the customer.
Formula:
CLV/LTV = (Average revenue per customer * gross margin percentage ) / churn rate
Here:
Average Revenue Per Customer: The average amount of revenue generated from each customer over a specific period.
Gross Margin Percentage (GMP): The percentage of revenue that represents the gross profit after accounting for the cost of goods sold (COGS) or the cost of providing services (over a specific period).
Churn Rate: The rate at which customers stop doing business with the company over a specific period. This can be expressed as the inverse of the average customer lifespan.
Example:
For a business, let’s consider the below values for a company:
The average revenue (for an year) of all its customers is $ 1000.
The Gross Margin Percentage for the same year (rate of COGS) is 5%.
Churn rate: This represents the change in the number of customers over a specific period. If the total number of customers at the beginning of a year is 100 and if 10 customers are lost by the end of the year, then the Churn rate is 10/100 = 0.1.
Then, in this scenario, the CLV/LTV = (1000*0.05)/0.1 = 500. - Average Order Value (AOV): It is the monetary value of customer orders. It is calculated by dividing the entire amount of money received from sales by the total number of orders placed in a given time frame.
Formula:
AOV = Total revenue / Total number of orders
Example:
If a company generated $10,000 in revenue from 500 orders in a month, the average order size for this month would be: AOS = $10,000/500 = $20
This means that, on average, each order placed by customers during this month is worth $20.
Businesses use Average Order Value as a key performance indicator to gauge the success of their marketing and sales campaigns and the customers' purchasing habits. It is possible to achieve greater revenue and profitability by raising the Average Order Value without adding more clients. Strategies such as upselling, cross-selling, and offering volume discounts can help increase the average order value. - Conversion Rate (CR): As the name denotes, this KPI tells the rate of conversion of user actions. The e-commerce websites typically have various Calls to Action (CTA) points in the application(s). These CTAs have to be typically chosen by the user(s) so as to be called a conversion. The CTAs can be an item purchase, a survey completion, or signing up for a newsletter or instant voting responses, etc.
The Conversion Rate denotes the effectiveness of the application in attracting customers to take action.
The Average Conversion Rate for online shopping sites is around 2% i..e only 2 users out of 100 convert.
Formula:
Conversion Rate, CR = (Number of conversions / Total number of visitors)*100
Example:
If the number of sales for a website in a given timeframe is 10 and if the total number of visitors in this time frame is 100, then the conversion rate here is (10/100)*100 = 10%. - Return on Advertisement Spends (ROAS): This KPI denotes the returns on the total money spent on the advertisement for a particular product or service or an e-commerce website.
It conveys the efficiency of online advertisement campaigns. A high ROAS means that the ads are effective and are helping the website generate more revenues. By employing effective advertising campaigns, companies can generate higher ROAS.
Formula:
ROAS = (Revenue generated by an advertisement/cost of this advertisement)*100
Example:
If the revenue generated by an advertisement is $3000 and if the cost of making this advertisement is $1000, then the ROAS in this case is:
ROAS = (3000/1000)*100 = 3*100 = 300 %.
This means that the e-commerce company made $3 for every $1 spent (on this advertisement). - Click Through Rate (CTR): This is a KPI to measure the efficiency of advertisements or search results or whether the CTAs in newsletters or other similar places are working or not.
The CTR is the number of clicks that an advertisement search result or newsletter link is clicked against the total number of times (impressions) these are displayed to the users.
According to a study by Wordstream, the average CTR in Google Ads across all industries is 3.75% for search and 0.77% for display.
Formula:
CTR % = (Total number of clicks / Total number of impressions)*100
Example:
Let's suppose that the total number of impressions (advertisements, search results, etc.) for a marketing campaign for an e-commerce website is 200, and only 50 people engage with these impressions. In this case, the Click Through Rate is 50/200 * 100 = 25%. - Annual Repurchase Rate (ARR): This parameter denotes the percentage of customers making repeat purchases within a year. It's a crucial sign of client loyalty and the success of a business's retention initiatives.
A high annual repurchase rate (ARR) indicates that the customers are happy with the products or services and are likely to continue purchasing from the business in the future. On the other hand, a low rate of Repurchases can indicate that to keep clients, the business needs to enhance the quality of its offerings, and customer support, or incorporate loyalty initiatives.
Formula:
Number of Customers Making Repeat Purchases / Total Number of Customers
Example:
If a company had 500 customers at the beginning of the year and 200 of them made repeat purchases during the year, then the annual repurchase rate would be:
Annual Repurchase Rate = (Number of Customers Making Repeat Purchases / Total Number of Customers) * 100 = (200 / 500) * 100 = 40%
This means that 40% of the customers made repeat purchases in the year (being considered). - Shopping Cart abandonment rate (SCAR): Shopping cart abandonment is one of the biggest perils of the e-commerce industry. The users leaving carts unattended after adding items to carts is not a good sign for any e-commerce business. According to the Baymard Institute, the incidence of shopping cart abandonment is as high as ~70% for the e-commerce industry. Hence, it’s a very important parameter and this KPI has to be tracked very closely at all times.
Formula:
SCAR = 1 - (Number of completed transactions / Total number of carts created) *100
Example:
If the total number of completed transactions/purchases is 100 and if the total number of carts created is 300, then the Shopping Cart Abandonment Rate is calculated as:
Shopping Cart Abandonment Rate (SCAR) = (1 - 100/300)*100 = 0.667*100 = 66.7% - Customer satisfaction (CSAT) score: For any business, customer satisfaction is the pinnacle success parameter. Customer satisfaction (CSAT) is a metric used to assess how happy customers are with a product, service, or overall engagement. Customers can rate their experiences on a scale in customer surveys, which are typically used to assess the experiences.
Surveys are a great way to measure customer satisfaction and it’s always best to send the surveys after an order has been placed or after an item has been delivered to the customer.
Questions can range from How satisfied are you with the app experience to How happy are you with the overall experience can help garner responses from customers. Scales can vary from 1-5 or 1-10 with the top 2 denoting the count of satisfied customers.
Formula:
CSAT = Number of satisfied customers (with top 2 ratings) / Total number of responses
Example:
For a particular e-commerce application Alpha, out of a total of 100 responses it received from customers for surveys that were after products were delivered to their homes, 40 responses had 5 as their CSAT score 20 had 4 as their CSAT, and the remaining had scores of 3 and 2, then in this case, the CSAT for this application is: CSAT score = (40+20)/100 = 0.6 - Site Traffic: As the name denotes, this is the measure of the website's traffic, the e-commerce website in this case (in a given time period). This is an important KPI as it denotes the number of people interacting with the e-commerce site, providing insights into its visibility. It also denotes the success of the SEO (Search Engine Optimisation) and the content/product marketing initiatives.
For any e-commerce business to do well, it should have a high site traffic i.e. a lot of customers should visit it. The Website Traffic is key to understanding how many people are visiting the application’s site. A site should also have a higher number of unique visitors.
Given that the website traffic is now measured, next, the users should spend time on the site, browse through the various pages, and place an order. If the users don’t spend enough time or place order(s), the application has a higher Bounce Rate. A higher bounce rate is not an ideal parameter to have for any e-commerce application.
Example:
Consider two websites A and B and if A has higher unique visitors than B and also the website traffic to A is higher than B. This means that the content/product marketing strategies and/or the SEO strategies are working well for site A. If people spend more time browsing website B than A and place more orders in B, it denotes that the Bounce Rate is higher for A than B.
Additionally, the Traffic source is an important statistic that e-commerce companies use to determine the effectiveness of their marketing campaigns and the origins of website traffic. Businesses can maximize their marketing efforts, manage resources more effectively, and eventually boost revenue and conversions by analyzing this KPI. A site may generate more visitors from its Instagram handle than its email campaign(s). Another site may generate more leads from its Facebook page than any other marketing channel.
What are we doing at Valmi:
At Valmi, a new eCommerce data platform centered around Google spreadsheets is in the works, one that’ll help you track your important KPIs. We also shall have integrations to the downstream applications so that relevant action can be communicated for immediate user attention.
Stay tuned as we bring the product to you in the upcoming weeks.
