What you’ll learn
E-commerce businesses sell products online. Companies like Amazon, Walmart.com, and Alibaba are all e-commerce companies. But you don’t need to be a giant retailer to be an e-commerce business. Most online businesses, in fact, are e-commerce. Do you sell a product through your website? You’re an e-commerce business.
In this post you’ll learn the most important metrics to track for e-commerce businesses, which are:
- Conversion Rate
- Purchases Per Year
- Revenue Per Purchase
- Customer Acquisition Cost
- Customer Lifetime Value
- Email Metrics (Open Rate And Click Through Rate)
Let’s examine each of these metrics in more detail.
Conversion rate is the percentage of people visiting your website who buy something. This is one of the most basic metrics you need to track. In the early stages of your business, conversion rate is usually more important than revenue as you want to determine whether anyone will buy your product (rather than scale up and drive volume).
Purchases Per Year
Purchases per year is a measure of how many times a customer makes a purchase every year. If you sell something that runs out on a regular basis — think personal health products — then you’re likely going to have many purchases per year. If you sell something lasts for a long time — like a blanket — then you’ll probably have fewer purchases per year. Purchases per year is important for two reasons. First, it indicates whether you should focus on customer loyalty (getting existing customers to buy more) or customer acquisition (finding new customers). Second, it is a key factor in determining the lifetime value of your customers (we’ll get into that metric more shortly).
Revenue Per Purchase
The number of purchases a customer makes is only one part of their actual value to your business. Another key factor is revenue per purchase, or how much they spend each time they make a purchase. Comparing the revenue per purchase of your customers in different segments is a great way to determine who is going to be the most lucrative for your business. And because revenue per purchase is disconnected from your acquisition cost, anything you can do to increase revenue per purchase will improve your margins.
Abandonment is a measure of the number of people who start making a purchase — they enter your funnel — but then do not finish the purchase process. This is a key part of your funnel, and you’ll want to look at the abandonment rate at each stage of the purchase process to figure out where people are falling off. For example, your buying flow might look like this:
- Visitor visits product page
- Visitor adds product to cart
- Visitor clicks to review cart
- Visitor goes to checkout page and enters address details
- Visitor enters billing details
- Visitor completes purchase
If you measure the abandonment rate at each phase, you’ll quickly find out where you need to optimize the checkout process. You’ll also quickly discover the need to keep the checkout flow as simple as possible and eliminate unnecessary steps.
Customer Acquisition Cost
The customer acquisition cost is a measure of how much you have to spend to acquire each customer. You can determine this number by dividing the amount you spend on customer acquisition marketing in a month by the number of new customers you acquire that month. So if you spend $500 on customer acquisition in a month and get 10 new customers, your CAC is $50.
In aggregate, calculating CAC is simple. But you’ll want to dig a bit deeper than that and determine at least your CAC for each of your marketing channels. So for example, maybe you spend $1000 each month on Facebook ads that generate 10 new customers for a CAC of $100. You also pay someone $2,500 /month to write blog articles, which bring in 50 new customers for a CAC of $50. This channel-segmented CAC will allow you to more efficiently allocate your marketing budget.
Customer Lifetime Value
Customer lifetime value is a measure of how much revenue you get from a customer throughout their relationship with your business. There are a bunch of different ways to measure Lifetime Value, but the most simple way to do it is to use this formula:
(Revenue Per Purchase) x (Purchases Per Month) x (Average Retention in Months)
We have covered the first two metrics already. The third, average retention, is how long your average customer remains a customer for. Calculating this requires you to determine some arbitrary line in the sand at which you no longer consider someone an active customer. For example, you may determine that if someone hasn’t bought anything in 12 months they are no longer an active customer. Where you draw this line in the sand will be dependent on the sort of business you’re in.
Measuring the Lifetime Value of your customers is crucial because it will determine the maximum customer acquisition cost you can afford to pay. A good rule of thumb is to aim for a Lifetime Value at least 3x your Customer Acquisition Cost. Obviously if your CAC is above your Customer Lifetime Value then you’ll lose money.
If you can drive traffic through virality, or referrals, you should absolutely try to do so. Referral traffic is cheap (or free) and often higher value than other traffic since people coming in via a recommendation from a friend are already more likely to make a purchase.
Many businesses use the viral co-efficient, or K-Factor, to measure virality. The K-Factor is calculated with the following formula:
Viral Co-Efficient = # of invites sent by customer / % conversion of each invitation.
Notice that you need to actually be able to track the number of invitations someone sends, so it’s not enough to slap a couple share buttons on your website if you’re going to actually measure virality.
You’ll need to create a referral system that you can measure. For example, you might build an incentives program that allows your customers to send their friends a discount. If their friends make a purchase, they get store credit as well. Because you have to track who referred who, you can see the actual impact of virality on your business and work to improve it over time.
We’re including email metrics because for most e-commerce businesses email is still the best marketing channel available. Growing your list and keeping it healthy is going to drive revenue.
We all know how to measure click through rates and open rates (all email marketing programs will give you this data). What some businesses don’t do is track email marketing through to revenue and then measure this against the cost of unsubscribes. If you have 10 unsubscribes, for example, and it costs you $10 to get an email address, then your email campaign cost you $100.
If you want to get more in depth, you can figure out how likely someone on your email list is to become a customer and then assign them a value based on that. This will give you a more accurate picture of how much an unsubscribe costs.
Understanding Your Model: Retention or Acquisition?
One of the most important things to understand about your e-commerce business is whether you ought to focus on retaining existing customers or finding new customers.
Businesses that focus on retention should focus on increasing the number of purchases per year and increasing customer lifetime value. Businesses like this are going to have a small number of customers making many purchases over a long period of time. Secondary metrics for retention e-commerce businesses will be open rates and click through rates on email campaigns, as this will be the best medium to drive repeat purchases.
Businesses that have many one-time buyers (or fewer one-time, high value buyers) are going to focus on different metrics. They’ll need to pay close attention to the revenue per purchase and acquisition costs as these are going to have the biggest impact on profitability. Secondary metrics for acquisition e-commerce businesses will be virality, as this will be the cheapest way to acquire new customers.