Key Performance Indicators (KPIS), 6 Critical Ones for Ecommerce

What’s a key performance indicator?

A key performance indicator (also called “KPI”) is a leading indicator that shows how an individual or organization performs against their principal goals.

KPIs can be thought of as signposts. KPIs are a way to see where you are and to help you determine the best route to reach your business goals.

What’s the difference between KPIs and metrics?

KPIs simply mean the metrics that matter.

There are many metrics. Clicks. Percentage of new orders. Subscription revenue. Jonathan Taylor, Klipfolio’s Jonathan Taylor, says that not all KPIs are equal. “KPIs are the most crucial performance metrics that you have .”

Metrics can only be used to measure progress.

KPIs can be used to monitor the most important aspects in your business and help you decide what actions you should take.

Additionally, KPIs can be created from multiple metrics. Here are two examples:

1. 
   Website traffic
   
2. 
   Total sales
   

The relationship between these two metrics can be described as a KPI known as “conversion rate”

To calculate the conversion rate, divide sales by website visits and multiply by 100 to get the percentage:

(50 Sales / 1,000 Visitors) x 100 = 5% Conversion Rate

Even if they aren’t KPIs right now, many metrics are worth tracking. These numbers could be very useful one day.

Why is it important to have KPIs?

You’ll have to rely on gut reactions, personal preferences or other unfounded hypotheses if you don’t have KPIs.

This is dangerous.

You can’t have good luck forever. When a company grows, it is impossible to rely on one person’s intuition.

Worst part? The worst part?

It might seem like everything is going well until you find out that your business has fallen apart. You won’t be able to tell the reason why because you don’t track a few essential KPIs.

Your more organised competitors will outnumber you.

Understanding the results of your strategies is key to achieving your strategic goals.

Peter Drucker, a top management thinker of his day, said “What gets measured gets better.”

KPIs are objective.

You’ll be able to understand your business and make informed strategic decisions.

These leading indicators don’t have any value on their own. KPIs are only as powerful as your ability to interpret data and extract actionable insights that can help you improve your business.

You can have long-term success if you take the right actions.

Yes, it can be time-consuming and difficult to track and interpret KPIs.

Arthur C. Nielsen, the pioneer of modern marketing research, stated that “The cost of light is lower than the cost of dark.”

What is an effective KPI?

Online businesses have many options today to track various metrics, such as Google Analytics .

I mean quite a bit.

(Source)

However, Albert Einstein states that “not everything that counts counts” and that “not everything that counts can count.”

How can you determine what to count?

KPIs should have four characteristics to provide actionable insight into a company’s performance:

• A positive impact on the bottom line. Your KPIs must relate to your bottom-line.
• Accuracy in measuring: KPIs that are easy to calculate and simple to measure are the best. To create an indicator, you must accurately track the data. Effective KPIs should be well-defined, quantifiable.
• You need to have access to current KPI results in order for you make improvements. Only old data can be combined with current data to track trends.
• Actionable The most important thing is that KPIs should help you see the improvement opportunities.

It is also helpful to look backwards when trying to identify key performance indicators (KPIs).

Justin Hiatt (director of business development at Hubspot), says that “results ultimately result from the right activities.”

“Working backwards from the end goal, like revenue, to the front end will help the salesperson to understand the required activity to reach their goal.”

Six Key KPIs You Need to Monitor for Your Ecommerce Store

The 6 most important KPIs you need to monitor for your ecommerce store

Now you know what KPIs are, and how to use them to improve your business, let us dive into six key ones for ecommerce businesses.

Beware: There will be mathematics.

Perhaps you don’t like math except there’s money involvedspan styling=”font-weight 400 ;”>. This math could make you much more money.

These KPIs are a great way to gain valuable insight into your company’s strategic goals. These KPIs will enable you to spot potential disasters and capitalize on them.

1. Shopping cart abandonment rate

Cart abandonment refers to ecommerce users who place items in their shopping cart but leave the site without making the purchase.

This is a suck.

Consider all the effort you made to get customers to check out. You created an offer, captured attention, nurtured relationships, and finally got them to the finish line.

It’s very common.

According to the Baymard Institute , the average abandonment rate of ecommerce websites is almost 70%.

Why does abandon their carts and use ?

There are many reasons why this happened. These include unexpected shipping costs and website errors. A complex check-out process or visitors not being ready to purchase.

It’s not all doom & gloom.

BI Intelligence estimates that online retailers could lose up to $4 trillion annually to cart abandonment. However, savvy retailers should be able recover approximately 63% of that revenue.

You should monitor and measure the abandonment rate of your cart.

Calculating the shopping cart abandonment rate involves dividing the number completed orders by the number created shopping carts. You can convert the rate to a percentage by subtracting your number from 1 and multiplying it by 100.

1 – (No. Number of completed transactions / No. Number of completed transactions / No.

If you have 50 purchases made from 250 shopping carts, your shopping cart abandonment rate is 80%.

1 (50/250) x 100 = 88%

Learn how to increase cart abandonment rates by consulting our guide, Help! I have lots of “Add to Carts” but no sales!

2. Conversion rate

How effective is your landing page and calls for action?span style=”font weight: 400 ;”>?_ Are they simply looking good or doing their job to encourage more people to purchase your products?

The truth is in the conversion rate.

The conversion rate is the percentage of visitors to your website that take action. This could be signing up for your email newsletter, or purchasing something.

The conversion rate is a measure of how effective your website is in encouraging people to take action.

You might need to look at ways to increase conversions if you have a landing page that receives a lot of traffic, but is not getting enough conversions.

What is a good conversion rate?

The global average conversion rate is 2%.

This is because of the fact that two visitors will convert for every 100.

The best thing? Even small changes can make a big difference.

Let’s say you have 20,000 visitors to your site and that only 2% convert into customers and purchase a $100 product.

You’ll make $45,000 in this example.

Increase your landing page conversion rates by 0.5% and you’ll earn an additional $10,000

The real power of conversions rates can be unleashed when you track and improve every step of your marketing funnel .

The effect is multiplied in this way.

To calculate your conversion rate, divide the number of conversions–whatever conversion you’re looking for, whether it’s newsletter signups, purchases, etc.–by the number of visitors to your store, and then multiply it by 100 to get the percentage:

(No. (No. Number of Conversions / No.

An example: If you sell 50 products to 1,000 visitors on a website, your conversion rate is 5%.

(50 Sales / 1,000 Visitors) x 100 = 5% Conversion Rate

Learn more about conversion rates in our guide, How to Get More Sales with Ecommerce Conversion Optimization.

3. Customer acquisition cost (CAC).

The cost of customer acquisition, also known as CAC, is the amount of money required to “buy” customers.

Let’s take, for example, that you spend $1,000 on marketing and sales in one month and close 25 new customers. To acquire each customer, it would have cost $40.

It is important to know your CAC.

A $100 purchase to get a new customer for $4,000 in industrial machinery is an amazing deal! If you sell backpacks at $80 per piece, you will need to reduce your CAC.

Knowing your CAC allows you to determine how many customers you would like to acquire over a given time period and to allocate your marketing budget accordingly.

You can also reduce your customer acquisition costs by understanding the factors and metrics that underpin it.

First, you must understand what it is in order to maintain it under control.

Yes, marketing can increase sales. However, if your CAC goes up, increasing sales can lead to lower profits.

The bottom line: Your business could collapse if you don’t understand the cost of converting a prospect to a paying customer.

To calculate the cost of customer acquisition, divide the total marketing and sales budget by the number of customers served.

The amount of money spent to acquire customers / No. Number of customers acquired = Customer acquisition cost

4. Average order value (AOV)

The average order value, also known as AOV, is an ecommerce metric. It refers to how much money customers spend per order.

An easy way to increase your revenue is to increase your AOV.

By receiving more money from customers, you can absorb higher customer acquisition expenses while still making profits

To calculate the average order value for a time period, multiply your total revenue by the number of orders.

Total Revenue / Total Number Total Revenue / Total No.

If you make $10,000 from 120 sales within a month, your AOV would then be $83.33.

Learn how to increase your AOV with our guide, 10 Ways to Increase Average Org Value.

5. Customer lifetime value (CLV)

What is a customer worth for your business?

The average customer lifetime value, also known as CLTV, CLTV or LTV, is the amount of net profit each customer will contribute to the business over the course of a relationship.

It is difficult, but necessary, to determine how valuable a customer is to your business

This will allow you to see your return on investment (ROI) and can be extremely helpful when planning for the future.

This KPI will also help you determine how well your business retains customers. This is important when you consider the following:

• An customer retention increase of 5% can help increase company profits by 25% to 95%.
• Getting new customers can be as expensive as compared to retaining existing customers.
• Repeat customers are 67% more likely to spend than new clients.

(Source)

Please note that LTV is not always exact.

But, what it lacks is precision, it makes up for it with its expansive bird’s eye view.

This KPI is more difficult to calculate. Before you can start, you must have calculated three additional averages from your metrics.

1. 
   Average order value
   
2. 
   Average number of customers who buy products per year
   
3. 
   Average customer retention in months or years
   

Next, multiply your averages to calculate the lifetime value for your customers:

Customer lifetime value

This is a crucial KPI. For more information, see our detailed guide Customer Lifetime Value for Ecommerce Stores.

6. Margin of net profit

There are many things to think about when running a business: Product creation, marketing and building a team. Customer service is just one example.

However, you must remember Profit

If a company doesn’t make a profit, it isn’t considered a business. Remember that revenue is the money you make from sales. To make a profit, we must subtract costs.

The net profit margin is the sum of your revenue and profit. It’s a percentage.

Let’s say that you need to purchase parts for your bike. You then build a bike from scratch and sell it for $250. Your profit margin in this instance would be either $150 or 60 span>

Knowing your net profit margin can help you gauge the health and performance of your business.

A high net margin is an amazing thing.

A high net profit margin means that you will have plenty of money left over to invest in growing your business.

A low net profit margin can cause cash flow problems that eventually lead to slow business growth.

To calculate your net profit margin, you will need to know the following:

1. 
   Total Revenue: How much you have made in sales.
   
2. 
   Costs of goods sold (COGS), your total business expenses, including marketing, manufacturing, and employee salaries.
   
3. 
   Income taxes: What you pay to the State.
   

Let’s first calculate your profit. Add your revenue for the given period to your cost of goods and subtract it:

Revenue = Cost

To calculate your net profit margin percentage, multiply your total revenue by your profit and multiply it with 100.

(Revenue-Costs + Taxes)/ Revenue x 100 = Net profit margin in Percent

If you had $20,000 in sales and $12,000 in taxes, your profit margin would equal $7,000. Divide $7,000 by $20,000 and multiply it with 100 to get a net profit margin equal to 35 %.</span

(from $20,000 to $13,000) / $20.000 = 0.35×100 = 35%

Shopify’s profit calculator is available to assist you!

Learn more about pricing and margins in our detailed guide Pricing Your Products-Pricing Strategies For Ecommerce.

Tracking key performance indicators

It can be overwhelming to understand key performance indicators.

It will be worth the effort and time spent tracking KPIs, and understanding their purpose.

Understanding the relationships between core business components will help you make objective and informed decisions. These decisions can have a tremendous impact on your bottom line.

Knowledge is power.

Understand your business data and use the performance measures to propel you forward

What KPI do you want to master? Comment below to let us know!

Key Performance Indicators FAQ

What’s the difference between leading indicators and lagging indicators in ?

Leading indicators are metrics that keep companies on track in order to reach their strategic goals. These indicators provide early indications of performance such as the number customers who buy complementary products for ecommerce businesses.

Lagging indicators, on the other hand, measure current production and performance. These indicators are easy to measure, but difficult to modify. They can be used to assess the impact of existing efforts.

What’s the difference between financial and non-financial KPIs, and

Financial KPIs measure financial performance based on income statement and balance sheet components. These KPIs are used to measure the company’s ability to use its financial resources in order generate sustainable operating income.

Other metrics are used to measure qualitative aspects of a company’s business. Non-financial KPIs are typically measures that measure employee satisfaction, customer satisfaction and company pipeline.

What are the top KPIs in ecommerce?

1. 
   Shopping cart abandonment rate
   
2. 
   Conversion rate
   
3. 
   Customer acquisition cost
   
4. 
   Customer lifetime value
   
5. 
   Average order value
   
6. 
   Net profit margin
   

Do you want to know more?

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  4 Simple Ways to Massively Increase Sales With Upselling and Cross-Selling
  
  
• 
  
  Target Markets and the Value of Facebook Ads for Ecommerce
  
  
• 
  
  Marketing Guide for Psychographics
  
  
• 
  
  9 ways to increase sales by making your store more trustworthy
  
  

Author: Thomas J Law