The events of the last two years have contributed to e-commerce growth in ways none of us could have imagined. In fact, according to IBM’s U.S. Retail Index, the pandemic accelerated the shift from physical stores to digital commerce by as much as five years. And forecasts suggest online sales could account for nearly half of all retail revenues by 2024.
But digital commerce growth alone is not enough. You need that growth to be profitable, which is where key performance indicators (KPIs) come in. E-commerce KPIs give you the opportunity to take action to improve performance and reduce costs. But choosing the right KPIs to measure isn’t easy. Your selection will depend on your company’s goals and overall strategy.
Let's look at why e-commerce KPIs are so important and how you can leverage the most critical ones to optimize your digital strategy.
Why are e-commerce KPIs important?
E-commerce KPIs help you evaluate different strategies so you can determine which work and which don’t. By monitoring key metrics, you can gauge progress over time and identify opportunity areas. Ultimately, KPIs allow you to make informed decisions about marketing tactics, customer experience, revenue, operations, and other areas.
How do you choose the right e-commerce KPIs?
While many online metrics exist, not every single one will be pivotal to your business's success. When you select KPIs, focus on:
- Stage of growth: the KPIs you identify will be different depending on whether your business is in the start-up, growth, expansion, or maturity stage
- Business goals: choose metrics that support your business strategy, overall performance, and bottom line
- Relevance to your business: select KPIs that will provide meaningful and actionable insights for your unique business model
While there isn't a one size fits all approach, some metrics are considered the gold standard for most online businesses. Here are the top ten:
Conversion rate
Without a doubt, conversion rate is considered the top e-commerce KPI. It is the number of visitors that make a purchase divided by the total number of visitors to your site. This metric is especially important if you are selling physical products. By tracking conversion rate, you’ll gain a better understanding of which strategies are working and which are not.
Average order value
While there are several important e-commerce KPIs, average order value (AOV) is one of the top ones. AOV is the average amount of money your shoppers spend per transaction. The higher your AOV, the more you can spend on customer acquisition. Therefore, increasing AOV is one of the most efficient ways to increase your e-commerce revenue. It also helps you capitalize on cross-selling and upselling opportunities.
Customer lifetime value
Undeniably one of the most valuable KPIs is customer lifetime value (CLTV). That’s because it’s the one metric that best captures the overall health of the business. Conversion rate, AOV, and return customer rate are all reflected in CLTV. When you focus on CLTV, you increase the value of each customer by improving their experience with the brand.
Customer retention rate
Customer retention rate (CRR) is the percentage of shoppers who remain your customers within a specific period. Did you know studies show that it costs anywhere from 5x to 25x more to acquire a new customer than retain an existing one? And a Harvard Business School study confirmed that just a 5% increase in retention could increase profits anywhere from 25% to 95%. So there's no question that finding ways to get more business out of existing customers is hugely profitable and cost-effective. That’s why long-term digital commerce success is often attributed to CRR.
Shopping cart abandonment rate (CAR)
The shopping cart abandonment rate (CAR) refers to the percentage of online shoppers who fail to complete a purchase after adding a product to their virtual shopping carts. This KPI shows if your sales conversion strategy is making the desired impact. By lowering your CAR, you can easily generate more revenue.
Return on investment
Return on investment (ROI) measures the amount of return on an investment relative to the investment's cost. This is a popular KPI used to evaluate how well an investment has performed. To get a positive ROI, you will want to continue improving the conversion rate while decreasing the cost per lead.
Customer acquisition cost
Customer acquisition cost (CAC) is one of the most critical yet overlooked digital commerce KPIs. It’s the amount spent to acquire customers divided by the number of customers acquired. Understanding your CAC helps you determine how many customers you want to acquire in a certain period so you can allocate your budget accordingly.
Return on ad spend
Return on ad spend (ROAS) is the amount of money you earn for every dollar you spend on promotion. ROAS measures a digital advertising campaign's effectiveness and helps determine how to improve future marketing efforts.
Net profit
While this metric is often overlooked, net profit is a clear indicator of your online store’s overall health. It is calculated by subtracting total expenses from total revenue. Things like discounts, low-margin product lines, and advertising can negatively impact net profit. However, by ensuring your online store is profitable, you will be able to invest in sustainable growth.
Cost of goods sold
Cost of goods sold (COGS) helps you understand your manufacturing and production costs. Also known as the cost of sales, it refers to the direct costs of producing the goods sold by the company. COGS is calculated by adding beginning inventory to sales and then subtracting ending inventory. It's important to note that the value of COGS will change depending on what accounting standards you use in the calculation.
The massive shift to digital commerce is here. And with so many e-commerce metrics at your disposal, it can be hard to determine which ones will help you move the needle. By focusing on the most critical KPIs and tracking their trends over time, you’ll be able to offer greater value to your customers while ensuring long-term business success.