Many eCommerce stores are not fully utilizing the data they collect on their site and only depend on sales numbers as an indicator of success. This is a very short-sighted strategy that could result in poor decision making for your store. So what data should you consider when making important actionable decisions?
In this guide, we’ll show some Key Performance Indicators (KPIs) that you can easily track on Google Analytics. (Tip: if you’re not sure that your store’s data is getting tracked properly, have a look at this handy guide by Shopify, https://help.shopify.com/en/manual/reports-and-analytics/google-analytics/google-analytics-setup)
What are Metrics and KPIs
Before we go and discuss KPIs, there is a misconception that needs to be cleared up. While Metrics and KPIs are used interchangeably by many analysts, they are in fact very different when it comes to business decision-making.
Metrics are any quantifiable measurements that you make about your site. It can be traffic, sales, bounce rates, demographic breakup or device usage to name a few. All KPIs fall under metric but what makes KPIs different is that they are used as business performance indicators. Focusing on KPIs tells you whether your business is moving towards meeting your objectives or not.
You should choose KPIs based on your business goals so that you can monitor and focus on only those metrics that directly relate to your business goals. Benchmarking is another important consideration you have to take with KPIs. It’s not enough to just track them but you need to know how you’re doing compared to the industry average or your own goals.
How can KPIs help your business
In analytics, the saying goes “What can be measured, can be improved.” You might feel like your business is doing well but in reality, there could be some red flags that you could be missing. Depending on which KPIs you track, you will be able to:
- Increase Conversion Rates
- Better the Return on ads
- Improve the Average Order Value, or
- Reduce the Cost of Acquisition
With this let’s get down to business.
5 Significant KPIs for eCommerce Stores to Track
Now with the basics out of the way, here are the top KPIs to track for an eCommerce store.
- Average Order Value
- Shopping Cart Abandonments
- Customer Lifetime Value
- Customer Acquisition Cost
- Return on Ad Spend
Average Order Value (AOV)
Average Order Value (or AOV) is a metric the measures how much a customer will spend on average on your store. Increasing your AOV is one of the easiest ways to improve your revenue.
AOV is also used frequently when calculating more complex KPIs like Customer Lifetime Value or Cost per Acquisition.
To calculate AOV, all you have to do is divide the total revenue you generated over a specific period and divide that by the total number of orders.
AOV = (Total Revenue) ÷ (No. of Orders)
A shortcoming of AOV is that it doesn’t take into account if there have been multiple transactions from the same account or not.
Shopping Cart Abandonment Rate
This metric refers to how many visitors place items into their shopping carts but don’t complete the purchase. One study by Baymard Institute, says that eCommerce stores have an Abandonment rate of almost 70%. According to them, the top reasons for this are:
- High shipping fees and taxes
- Slow checkout process
- Opaque checkout costs
- Security issues, and
- Slow delivery
You can calculate the abandonment rate on your store by dividing the number purchases left incomplete vs the total shopping carts created.
Shopping Cart Abandonment Rate = [(Incomplete Purchases) ÷ (Total Purchases)] x 100 Incomplete Purchases = (Total Purchases) - (Complete Purchases)
While tracking this KPI doesn’t directly impact revenue, understanding the reasons for why this is happing on your store can help you improve conversion rates.
Customer Lifetime Value (CLTV or CLV)
Customer Lifetime Value (CLTV or CLV) is a metric that estimates how much a customer is likely to spend on your store over your entire “relationship”. Typically for eCommerce stores, this is assumed to be between 12-24 months.
Tracking this KPI can help you strategize various other goals as this sets a bar for the ROI for any activity that you might do. It is also easier to convince an existing customer to make a purchase than acquiring a new customer and are more likely to make a repeat purchase.
To calculate CLTV, you need to first calculate a few other metrics:
- Purchase Frequency (PF) - how often a customer makes a purchase in a year
- Average Customer Lifetime (ALT) - for how long you are able to retain customers in numbers of years
CLTV = AOV x PF X ALT
While it is hard to get a precise value because this changes every month. But you can get an even better insight if you look at the CLTV and CAC (we’ll explain this too) ratio. For the best results, companies aim for a ratio of 2.5-3 as a sign of a healthy business.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) measures the cost of acquiring a customer and is used by businesses to estimate their profitability. CAC gives you the money you had spent during a specific period to acquire a new paying customer. Lower the CAC is for a business, the better it is. This means that you are spending money efficiently to acquire new customers.
CAC = (Total Cost of Sales and Marketing) ÷ (Number of New Customer)
Just like CLTV, this KPI is also very time-specific and can fluctuate month to month.
Return on Ad Spend (ROAS)
In the simplest terms, the Return on Ad Spend (or ROAS) metric tracks how much revenue you were able to generate for a given ad campaign. This is used by eCommerce businesses to track the profitability of various ad channels like social media, banner ads, etc.
ROAS = (Revenue from Campaign) ÷ (Cost of Campaign)
Having a ROAS of 4:1 or 5:1 is considered to be a sign of success for the campaign. While this figure may vary from store to store, if you are getting consistently low ROAS, you might consider lowering your ad budget.
ROAS provides a very in-depth view of the success or failure of an individual campaign but is not very useful for strategic level decision making.
Implementing KPIs can be a very difficult process but well worth the effort. With these benchmarks in place, you will be able to make more informed business decisions that have an impact on your revenue and profitability.
For a small or medium-sized eCommerce business, it would be best to start by focusing and improving only one metric at a time rather than looking at them all. You should also take care to change KPI benchmarks as you grow.