Key performance indicators (KPIs) and an in-depth understanding of what to do with them are a gift to eCommerce merchants.
Think of your KPIs as checkpoints that ultimately guide the success of your online store.
Not understanding your KPIs is similar to an amateur hopping in a plane’s cockpit for the first time. While the amateur may have some semblance of an idea of what each dial and meter means, it likely isn’t enough to get the plane up in the air, let alone get it to a cruising altitude and safely guide it.
On the other hand, merchants that are able to understand their KPIs are able to pinpoint exactly what they need to in order to adjust to times of turbulence or to take advantage of favorable winds for even more speed.
Think of your KPIs as your go-to method to understand what needs to be done and when. Merchants that are able to make critical business decisions based on these KPIs will ultimately be able to steer their store to new heights.
Monitoring your KPIs can help with everything from increasing sales and marketing to expansion and recruitment. It’s all about knowing what to look for in the ever-growing fields of data.
This guide will help you streamline your process in finding actionable KPIs that will help take your eCommerce business to the next level.
How to Use KPIs
Key Performance Indicator (N)
A data point or otherwise quantifiable measurement that can be used to observe performance in the scope of a specific goal.
The first step in learning how to use your KPIs is relatively simple. You essentially have to set a reachable goal for your business. For example, you may want to increase your monthly sales by $1,000. So, with this goal in mind, you could monitor a handful of different KPIs, including the number of monthly visitors, conversion rates, and cart order value.
Many merchants trip up in the goal-setting part and that can make KPI analysis difficult later on. This is why it’s helpful to set goals using the SMART goal setting framework, which is simply:
- Specific: Be absolutely clear so you know what you are looking for. Is it sales-oriented? Is it marketing-oriented?
- Measurable: Your goals must be absolutely quantifiable, or else you’re chasing a moving target. In the above example, you wanted to increase your monthly sales by $1,000.
- Achievable: Is it within reach? If you set astronomical goals, you could over-stretch your abilities. KPIs are a way to gauge your performance and allow you to improve it, but they will not improve it for you. That happens over time as your skill set grows.
- Relevant: Is this something worth pursuing, or relevant to your business?
- Time-bound: Setting a time-bound goal adds a friendly parameter to gauge your success. Whether you hit it or not, you will have a condensed data point of what you can improve or do differently for your next goals.
Your KPIs are your most important performance indicators and serve to help business owners simplify the analytical observation of their performance. The beauty of KPIs is that they can be combined to help merchants hit virtually any goal.
Key Performance Indicators for Marketing
The following KPIs will help you to gauge the success or failure of your marketing efforts:
Site Traffic: Your site traffic KPI is one of the most important KPIs and should be monitored frequently. This is essentially your site’s heartbeat, and it is reflective of all your marketing efforts. If you are running multiple different campaigns at the same time, it’s helpful to dive into this KPI a little deeper to understand where your traffic is coming from.
Traffic Source: The “Traffic Source” KPI is a go-to KPI for any savvy marketer. Whether you are experimenting with different marketing channels and strategies or primarily relying on a single method such as SEO for your traffic, it’s still useful to know where the traffic is coming from. This KPI is directly tied to the marketing channels you are using.
Time on Site: This KPI works in unison with Site Traffic, and it serves to qualify the amount of traffic you get. Sure, your marketing efforts might be getting you boatloads of traffic, but is that traffic hanging around? Are they spending enough time on your site to understand your value proposition and products? The Time on Site KPI can also be reflective of how good a job your site is doing at keeping users engaged.
Day Part Monitoring: This KPI has to do with the time of day that your site visitors come. This is very helpful to understand if you are utilizing marketing channels such as social media, email, or influencers.
Pay Per Click (PPC) Traffic Volume: Pay Per Click can be a fairly expensive marketing strategy, especially if it is not constantly being monitored and adjusted to ensure the maximum bang for every dollar you spend.
Social Media Followers: Social media essentially acts as an extension of your site and brand. Understanding how your Facebook, Twitter, Instagram, etc. followers are engaging and growing is very important since you will likely use social media as a marketing tool in the future.
Email Subscribers: Email is one of the few marketing channels that helps you to retain your marketing efforts, as opposed to merely just making them less expensive in the future, such as social media. The “Email Subscribers” KPI can also be used to measure customer loyalty and interested leads.
Unique Visitors vs. Returning Visitors: To top off the list of marketing KPIs, the “Unique Visitors vs. Returning Visitors” KPI shines a light on how well you do at retaining visitors and how well your remarketing efforts are performing.
Keep in mind that KPIs measure performance and can be used to reach a wide variety of different goals. Some are relatively straight-forward, such as your “Pay Per Click (PPC) Traffic Volume” KPI—and the higher it is, the better your campaign is moving.
Other KPIs such as your Unique Visitors vs. Returning Visitors can be further expanded on based on the goal you want to hit. For example, if you want to focus on building retention, you may want to set a goal of hitting 2,000 monthly returning visitors by November 2017.
On the other hand, if you want to focus your marketing efforts on attracting new visitors, you would similarly set the goal to hit 5,000 unique monthly visitors by November 2017. The strategies you would use to meet either situation would differ, and it would take a careful balancing act to be able to execute both. The Unique Visitors vs. Returning Visitors KPI, however, can be used to gauge your performance in either direction.
Key Performance Indicators for Sales
The following KPIs are reflective of how well your site is performing at turning the traffic generated by your marketing activities into revenue. These metrics are incredibly important for eCommerce merchants looking to grow their business and ultimately increase the amount of money they make through their sites.
Number of Sales: While this may be an obvious first KPI to track, it’s important to note that breaking it down can reveal some important information about your business and overall industry. Annual sales can provide a longer view of your site’s performance; quarterly sales can reveal seasonality; monthly can be more reflective of short-term marketing efforts; and hourly can help you to gauge your influencer and PPC campaigns in near real time.
Additionally, viewing the Number of Sales KPI alongside a few marketing KPIs such as Site Traffic and Traffic Source can reveal how effective your marketing strategies and site are at converting visitors into revenue.
Conversion Rate: Your conversion rate is the true test for your site when the tire meets the road. How good of a job does your site do at turning a site visitor into a sale? While this KPI does help with quantifying your site’s ability to do so, there are a few stipulations you must be aware of. This KPI is very sensitive to your marketing efforts.
For example, let’s say your site gets 1000 visitors, of which 150 convert into your specified goal of completing checkout. Your conversion rate would be 15%. Now, let’s assume you decided to work with a popular Instagram influencer that increased your site visitors by 1500 to 2500 total, yet your total “converted” visitors were only 200. Your conversion rate would now decrease down to 8%.
This decrease in conversion rate doesn’t necessarily mean your site performed any worse; it could just mean that the traffic you received from the influencer wasn’t ready to buy. This is why it’s important to constantly be looking at which KPIs are interdependent to figure out what the true variables are that are influencing the bottom line. In this scenario, it would be useful to look at the Time on Site KPI to see if they spent any time on your site—or bounced immediately.
Shopping Cart Abandonment Rate: Your shopping cart abandonment rate is a critical component to understanding your conversion process. Perhaps your site is receiving interested shoppers but, for some reason, they aren’t completing their purchases. Your shopping cart abandonment rate can help tell a story that would otherwise be guesswork.
For example, if 60 out of every 100 shoppers that place an item in their cart abandon their order, you would have a cart abandonment rate of 60%. This should raise some red flags. You are losing every 3 out of 5 sales, for whatever reason. Now, you can postulate and experiment different reasons why shoppers are leaving your site before completing an order.
Let’s say you decided to advertise your shipping costs on the product page instead of introducing them in the checkout. Doing so decreased the number of shoppers that placed an item into their cart from 100 to 80, but now only 20 shoppers jumped ship. By eliminating the shipping cost “surprise,” you were not only able to drop your shopping cart abandonment rate to 25%, but you were also made 20 more sales than if you weren’t aware of and didn’t react appropriately to this KPI.
Profit Margin: Your profit margin is one of the most critical back-end business KPIs. Your profit margin is expressed as a percentage and is essentially your net profits divided by sales. Understanding what percentage of your sales is actually profit will not only help you to have a better idea of how profitable your shop is but how much more money you can invest into marketing and promotional efforts.
Merchants that fail to observe their profit margin KPIs could end up accidentally devoting the majority of their marketing budget to promoting low-profit products, leaving the true drivers of profit to sit idle in inventory.
Average Order Size: This KPI also helps reveal how much money your shoppers are spending during a single transaction. Sites with high average order sizes are likely doing a phenomenal job at curating a shopping experience and suggesting complementary products.
Your Average Order size can also be paired with your New vs. Returning Visitor marketing KPI to see whether it would be a better investment to attract new users or to better entice returning visitors to make more purchases.
Product Affinity: The Product Affinity KPI is very important for merchants who are looking to increase their Average Order Size, as well as those who are searching for different products to add to their stores.
Your Market Size vs. Total Market Size: This business KPI is critical for merchants that are looking to capture a larger share of their market, or seek out new products in new markets. Your Market Size vs. Total Market Size is a great way to understand the magnitude of your industry, and how much room there really is for your business to grow. It’s an unfortunate situation when merchants choose to enter a small market and struggle with making sales when the potential customers are just really not there.
It’s also important to look at how competitive your industry is. For example, the cell phone case market might be gigantic, but the sheer amount of competitors could instantly engulf any new competitors in a pricing race to the average market price.
Cost of Goods Sold: Your Cost of Goods Sold, or CoGS, is a KPI that can be tracked to streamline production and increase profits by decreasing costs that can be avoided. Your CoGS includes the direct costs of the production of your products, such as the cost of materials and direct labor costs. Keep in mind that COGS excludes indirect expenses, such as the cost of distribution, sales, and marketing efforts.
Understanding how much your products really cost can help you to search for different methods of production to increase your profits. For example, many eCommerce merchants frequently use drop-shipping as their primary method of sales and never seek to reduce the cost of goods sold, leaving a lot of money on the table.
Instead of increasing prices or spending more money on marketing to sell more products, they could make small changes in production by working directly with a manufacturer in bulk and achieve the same result. Keep in mind that results may vary and that any substantial changes in your manufacturing should be done only after extensive and well-thought-out research.
Competitive Pricing: This KPI is very helpful for merchants who want to become and remain a reasonable option in the highly competitive eCommerce landscape. While this information isn’t as easily accessible as other KPIs, it’s extremely useful to keep track of your total product price (what consumers pay—or price of the product + cost of shipping + any taxes), and that of what your top five (large, similar size, and smaller) competitors are charging.
Understanding the market in this manner will make it much easier for you to use the information from the Profit Margin KPI to your advantage. For example, if you find that the average price a customer would pay with your competition for a bamboo plant is $50, and you’ve been able to charge $40 and still make a profit, you could leverage the price discrepancy to win more customers. Alternatively, if you find that your customers are charging less than you are, if your profit margin allows for it, offer free shipping.
Customer Acquisition Cost (CAC): Your Customer Acquisition Cost (CAC) is a hybrid KPI that combines the cost of your marketing efforts and the revenue your site is bringing in.
This marketing and business metric highlights your bottom line and allows you to measure how effective your paid media efforts really are. CAC can be broken down by specific marketing channel. By doing so, you can see which channels are the most effective and worth funding more, and which ones are the least effective and should be minimized or further optimized.
Early-stage eCommerce businesses need to be looking at their CAC on a daily or weekly basis to be able to pick out the marketing channels that work best for their business early on, so they can allocate their marketing budgets intelligently. CAC can be measured two different ways:
- Direct sales conversions from a specific channel. This is based on a last-click interaction, where shoppers who buy something directly after engaging with that marketing channel are considered customers.
- Assisted conversions based on multiple different visits. Sometimes a sale isn’t as black and white as a single click. For example, working with an influencer might have sent a user to your site, but your remarketing ads might end up pushing them to the sale. It’s important to see the path your visitors take before finally making a purchase.
The higher the CAC, the more expensive it is for you to acquire new customers. This means either your profit margin must be substantial enough to justify the CAC, or you need to pursue other channels. Additionally, by monitoring the New vs. Returning KPI, you can see whether it is worth it to continue to spend your marketing budget on acquiring new customers or if it would just be more effective to market to your existing retained customers.
Average Customer Lifetime Value: The Average Customer Lifetime Value KPI is one of the many metrics that can help eCommerce merchants turn their viewers toward the long term. Customer Lifetime Value is retention marketing 101, and it is the average total amount a customer spends over their lifetime. This KPI plays directly with the CAC KPI and justifies the amount you can potentially spend to acquire a new customer.
Successful eCommerce businesses place a relentless focus on having a higher “Average Customer Lifetime Value” KPI than their “Average Customer Acquisition Cost” KPI.
Your Average Customer Lifetime Value can be derived from three different key performance indicators:
- Purchase frequency
- Average order value
- Time period (which varies based on your business)
A savvy merchant will aim to increase all of the above variables in their own capacity, and they will adjust their marketing efforts to do so.
Keep in mind that if your Customer Lifetime Value is low, many of your customers might just be buying from your site once and never coming back. This is referred to as “churn,” or the percentage of the customers who never return. For example, if you have a churn rate of 60%, then 60 out of every 100 customers will never come back to buy from your store.
The lower your churn rate, the higher your Customer Lifetime Value. This means that every visitor you are able to convert into a customer will be worth much more to you, essentially lowering the cost of your marketing efforts.
Customer Retention Rate: One of the most important KPIs for any eCommerce business looking to establish itself for long-term growth is the Customer Retention Rate. A study by Bain & Company found that a 5% increase in customer retention results in a 25% to 95% increase in profits.
To calculate your customer retention rate, simply do the following:
Customer Retention Rate = [(number of new customers at end of period) – (number of new customers acquired during the period)] / (number of customers at start of period)
Your customer retention rate can be calculated for a variety of periods, but it is recommended to do so weekly, monthly, annually, and with every large marketing push to get a better picture of how good a job at converting you are doing.
The above combination of KPIs is chosen to help eCommerce merchants acquire more customers at the top of the funnel, streamline production expenses, understand their industries and businesses at a granular level, and, ultimately, retain more customers.
There is a seemingly endless array of data out there, and KPIs break it down into digestible and actionable numbers that help eCommerce merchants to hit their goals. The next step is to pick the right KPIs for your specific goals and put together a dashboard that makes observing and acting on this information easy to do every single day.