10 Metrics to measure the health of your e-commerce business
To make sure your e-commerce business doesn’t fail alongside 50% of all start-ups in South Africa, you need to keep a firm grip on the numbers. This applies equally to mid-size businesses and large corporates aiming to grow through implementing e-commerce.
The reality is “what gets measured, gets managed “(Peter Drucker). That means keeping an eagle eye on the health of your e-commerce business by checking your numbers, or Key Performance Indicators (KPIs), from week to week. If you’re paying attention and you know what the numbers are telling you, it’s easy to spot the start of a negative trend before it spirals out of control. Then you can take proactive action early on and adjust your course.
There are many useful numbers you should track. We’re going to focus on the ten we feel are most critical.
What to compare your e-commerce numbers against
This depends on what you’re measuring and how you want to look at it. Some options are:
- Same month last year:
Year on year (YoY) progress is one of the best measurement methods to use. For example, December sales this year vs December last year will minimise the effect of variables like season, holidays, special shopping days, etc. In this case though, look out for significant shopping days that move from year to year. For example, Easter can be in March or April, and Cyber Monday may sometimes fall in November and sometimes in December. When assessing if you’ve grown YoY, check that these significant date changes are not the main cause of your “growth”.
- Goal vs actual numbers:
Set a target you would like to aim for and then measure that against what you achieve. For example, if you have a target of R100,000 in sales this month and you exceed that, you’ll know you’ve done well. With this method, you may be above target one month and below target another month, so be sure to measure the cumulative total as well.
- Month by month:
Sometimes it makes sense to compare this month to the prior month, but in general this is not a very reliable and revealing method. For example, January vs December (Christmas) will be meaningless, as will October vs November (Black Friday).
What to do with your e-commerce numbers
Just as you would review your Cashflow, Balance Sheet and Profit and Loss statements every month, it’s important to also keep a regular eye on your e-commerce numbers. As you need to track them over time, a dashboard that shows you the health of your business at a glance makes sense.
If you’d like to make this part of your ERP or business intelligence systems, we can help you with that. Otherwise your “dashboard” can be as simple, affordable and manual as a spreadsheet. Either way, the calculations need to be consistent and accurate, and your management team needs to live and breathe these numbers on a monthly or, in some cases, weekly basis.
Once you’ve tracked your metrics for a while, you should start to see some patterns. You need to know what the numbers are telling you and possibly dig deeper to confirm the conclusions you’re drawing in as many ways as you can. Then you’ll be armed to make any fine-tuning tweaks or massive changes that are needed to optimise your business. Once you’ve made the changes, continue to keep an eye on the metrics, to make sure they’re now moving in the right direction.
The 10 most important e-commerce numbers to track
We’ve chosen the ten numbers below because of the questions they help you answer:
- Is my business model and overall business healthy?
- Is my marketing working? There are many areas here you could analyse, but there are some basic numbers you really need to understand.
- Is my website working in that it converts effectively?
While there are, of course, many other important questions, these are a good start.
Is my business model and overall business healthy?
1. E-commerce Net Sales
This is the very minimum measure of growth and health you need to track in your business and it gives you some basic information. For example, if last January you sold R2 000 000 and this January your sales are R2 400 000, that gives you 20% growth. You can also uncover very useful data by comparing sales across products, regions, marketing channels or promotions. Remember to track returns too as these will offset your sales.
2. Number of Net Orders
This is another basic health indicator. If you sold 500 products last February and 750 this February, that shows a 50% improvement., Again, tracking your number of orders per product, channel or source can be very useful. As with sales, you may decide you’d prefer to work with net orders i.e. deducting the number of orders returned.
For both of these first two numbers, returns also serve as a red flag if there are any issues with your products, e-commerce site or marketing processes. Understanding what’s happening there and optimising regularly can really pay off. This may be as simple as switching suppliers, loading better pictures or product descriptions, or getting clearer on where to engage with your ideal customer.
3. Average Order Value (AOV)
AOV is a critical number for your business. A growth in this figure indicates that your customers are spending more and more with you each time they buy (on average). This translates into more revenue, and it also tells you that any tactics you’ve implemented to grow your AOV are working. These tactics could include up-selling, cross-selling, live chat assistance, reviews, free gifts or services over a certain threshold, and many others. Essentially, an increasing AOV means your customers trust you and your products enough to spend more with you than they did before.
Another way to grow your AOV is by segmenting your customers into groups based on purchase history. This helps you identify low, medium and high spenders. Each of these groups responds to a different kind of marketing, for example, loyalty programmes (high spenders) or discounts and offers (low spenders).
AOV also helps you understand the lifetime value of your customers. This is another very importing KPI worth monitoring, but not discussed in this blog, which is focussed on the basics.
4. Gross Profit Margin (GPM)
Understanding your gross profit margin is critical because it tells you how profitable it actually is to run your business. This can be calculated for the entire business and/or for individual products. Regardless of your revenue, a low gross profit margin means you have to make that many more sales to cover all your expenses.
For example, if your monthly revenue is R200,000 with a profit margin of 10%, that gives you R20,000 at the end of the month to pay all your expenses, including your salary. Whereas if your profit margin is 50%, you will have R100,000 at the end of the month to cover your expenses and maybe even have some net profit left over.
When you’re clear on this, you can make good decisions about your products, as well as your business strategy and tactics, always with the needs of your customers in mind.
Cost of Goods Sold (COGS) is also sometimes called Cost of Sales or Direct Costs. To get a handle on this:
- Track all your inventory costs, ideally automatically, otherwise manually. Get as detailed as possible i.e. cover all related costs in your calculation, including materials, manufacturing and labour (or customs and freight if you are buying from a supplier), packaging and shipping. Exclude indirect expenses, like distribution and sales force costs.
- Check inventory sold under COGS in your income statement.
- Check beginning and ending inventory in your balance sheet.
5. Net Profit
This ultimately tells you if your business is being successful or not, once all the expenses (including overheads like rent, electricity and payroll) have been deducted from your income. Track it as a rand amount and as a percentage of sales, against last year and against your goal.
This number is usually easily found in your Profit & Loss Statement:
6. Free Cash Flow (FCF)
According to Investopedia, “Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow or FCF is the cash left over after a company pays for its operating expenses and capital expenditures.”
Your cashflow is less of an indicator of your business’s profitability and growth than it is about knowing you have enough money available at any given moment to continue to operate your business. No matter how much revenue you’re earning, if your cash flow is limited or delayed, it could be the beginning of the end.
There are many ways cash flow issues can come about. For example, even if you’ve made a sale, there could be a delay of a couple of weeks before your payment processor deposits the money in your account. And in the meantime, you may need to buy more stock or pay salaries or rent.
Monitoring how cash flows on a monthly basis through your business is therefore critically important. Look for it on your financial statements, then use it to plan ahead for expenses, both expected and unexpected.
Is my marketing working?
The basic questions these numbers help us answer are:
- Are the numbers of new vs return customers in the right proportion for my business?
- Am I acquiring new customers in a profitable way?
- Are my discounts hurting my business?
7. New vs Returning Visitors and Customers
This can be a confusing metric for marketers, so let’s first understand the difference:
- Visitors are people landing on your site and browsing
- Customers are visitors that actually make a purchase
Ideally you should track new visitors, new customers, return visitors and return customers separately, and monitor their increase or decrease over time. New and return visitors could be considered a marketing measure, while new and return customers indicate the health of your business and the effectiveness of your website.
Although analytics tools can help with this, you need to understand how to work with and interpret the numbers. For example, the Google Analytics visitor metric (see below) is interesting, but is only the tip of the iceberg. It shows that for every 10 visitors you have, 8 are new and 2 are returning. This may be a good or bad ratio, depending on your specific business.
In an ideal world all four absolute numbers – new visitors, new customers, return visitors and return customers – should be improving. However, the ratio of new vs returning needs to make sense for your business over time.
For example, new visitors are particularly important when you’re first launching your e-commerce site. After that, growing your repeat or returning customers over time should be your top priority. Why? Because they’re easier and cheaper to market to, they’re already loyal to you and they’re likely to promote your brand to others.
For marketing purposes, analysing your new vs returning visitors by channel can be particularly helpful. Have a look at this visitor analytic:
Then you can dig deeper into any one of them to see which of your channels are most effectively bringing in those return visitors. For instance, social media:
All this data only becomes valuable when you measure and interpret it over time, and understand the impact it has on your marketing spend and your revenue. This is often more an art than a science.
8. Customer Acquisition Cost (CAC)
This is how much it costs you to attract a new customer and persuade them to buy from you. You can calculate it per marketing channel to identify which channels are bringing in your ideal customers, or per product or product range.
This is the basic way to calculate your CAC:
To work out your marketing expenditure, dig down into as much detail as you can to identify all your marketing related expenses. For example:
- Offline and online paid advertising, like Facebook Ads or Google Adwords
- Email marketing software
- Lead capturing tools, like pop-ups on your site
- Salaries of your marketing team, proportioned according to where they spend their time
For example, say your Total Marketing Expenditure is R100 000 per month, and you gain 500 new customers each month. That means that your CAC is R200.
The important question we are aiming to answer by tracking your CAC is this: Am I acquiring new customers in a profitable way?
Let’s use a few of the other measures in this example:
- Gross Profit Margin (GPM): 30%
- Average Order Value (AOV): R1 500
- Cost of Acquisition (CAC): R200
So, your average customer is worth R450 (GPM x AOV).
You will know if you are acquiring customers in a profitable way if your customer value, in this case R450, is significantly higher than what they cost you (your CAC of R200). In this case you are making R250 per customer.
In some businesses it may make more sense to work out what the average customer is worth to you over his lifetime and compare that with the cost of acquiring that customer. This depends on whether your marketing efforts are focussed on bringing visitors or customers back continually, or if you only need to acquire them once. For example, perhaps they may buy a subscription or for some other reason, come back without having to be prompted by you.
Although we don’t recommend discounting as an ongoing business strategy, there are times when it’s necessary. Perhaps your market is very price sensitive and you need to keep up with your competitors, or you are using a special shopping day like Black Friday to attract new customers. Even in these instances, we recommend other strategies, like offering free gifts or services of perceived higher value.
If you are going to offer discounts though, make sure you have run your numbers. Be very clear on how a discount will improve your gross profit and reduce your CAC. Otherwise you may end up hurting your business. We suggest that, rather than making this part of your dashboard, you put your marketing department in charge of doing these calculations per product on an ongoing basis.
Using our example above again:
- Gross Profit Margin (GPM): 30%
- Average Order Value (AOV): R1 500
- Gross Profit on an average order = R450 (30% x R1 500)
- Cost of Acquisition (CAC): R200
A GPM of R450 – CAC of R200 means you are making about R250 per customer. If your average customer is spending R1 500, R250 is 16.6% of that, so you are making 16,6% on an average sale.
If you now discount an item by more than 16,6%, you will be making a loss on that sale.
If you are applying a loss-leader strategy that might be fine, so long as you are making a good profit on your other products. Again, it’s critical to run all the numbers, checking how your discount percentage (even if you’re applying a fixed rand discount instead) relates to your gross profit margin and CAC.
Is my website converting effectively?
There are many KPI’s to measure the performance and effectiveness of your website, such as:
- Bounce rate
- Pages viewed per session
- Average time on page
- Top landing and exit pages
- Goals and event completions
- Onsite search queries
- Cart abandonment rate
- List growth rate
The most important number you can look at here though is your conversion rate.
10. Conversion Rate
Your conversion rate shows you how many visitors actually buy from you and become customers. You can track this overall or per segment, for example, by marketing source or device type (desktop vs mobile).
The average conversion rate is pretty low, normally hovering somewhere around 2 – 5%. If more visitors than this are leaving your site without buying or they are abandoning their shopping carts, you need to dig deeper to find out why.
Perhaps your marketing is not attracting the best prospects or something about your website is frustrating your visitors. For example, a slow site speed, bad navigation design or lack of sufficient product information can cause visitors to quickly click away.
You can choose to measure several different types of conversions:
- How many visitors add items to their cart
- How many reach checkout
- How many actually purchase (this is the conversion rate calculation above)
- How many visitors opt in to your email list. These customers may not buy from you now, but if they hear from you regularly, there’s a good chance they will buy later.
There are many things you can do to improve the conversion rate of your website. For starters, read here about 8 must-have design components.
The bottom line…
Tracking your numbers gives you the information you need to make good business decisions. Tracking absolutely everything going on in your business though can quickly become overwhelming. Rather choose to measure what matters. When you know what makes a real difference to your success, you are better equipped to make good decisions that grow your business.