If you’ve dug into measuring your business at all, you know that there are a ton of metrics and key performance indicators (KPIs). There are actually too many for anyone to track and make use of all at once. Certain metrics are more valuable for some businesses than for others.
The metrics that are most relevant to your business are largely determined by how your business sells things.
There’s a certain cluster of metrics that are best for retail businesses. There’s a different core of metrics that work best for ecommerce companies. Omnichannel businesses need to work with still a different set of metrics.
Sure, there’s overlap in the metrics that work for each type of business.
But we’ll focus on ecommerce here.
The thing that determines which metrics are valuable for ecommerce is the way that ecommerce is structured.
Ecommerce can actually be broken down into two very broad stages:
- Product development.
Since ecommerce platforms are designed to simplify the fulfillment process, ecommerce business can focus mostly on building a product that solves a problem, then putting that product in front of people when they need it or want it.
Now, there are subsets of each of these stages, but these are the big picture.
With the rise of dropshipping and ecommerce platforms designed to simplify the ecommerce business model, KPIs related to supply chain and logistics are less important for many ecommerce businesses.
The majority of ecommerce KPIs are related to marketing. Once you’ve created your product and established your logistical relationships, it’s all about effective, efficient marketing.
One of the biggest mistakes that businesses make with metrics is being too focused on KPIs themselves. KPIs aren’t all that useful without context. They’re the best indicators of how well you’re accomplishing your business goals.
So the focus should actually be on the objectives. Your goals determine which metrics you focus on. Avoid falling into the trap of letting your metrics steer your goals. This is the way to madness.
Before you can build your suite of metrics, you need to establish objectives.
There are a lot of ways to establish goals. Many of them work just fine. Here’s one that works for many companies and people:
You may have heard it before. This is what a S.M.A.R.T. goal is:
A S.M.A.R.T. goal looks like this:
Our goal is to add 100 new, active subscribers by the end of the year.
If you use these criteria for identifying your objectives, you’ll be able to easily choose the best metrics for measuring whether or not you’re achieving your goals. The objective itself will tell you what you need to measure.
So, how exactly do you use your metrics once you’ve deduced which ones are best for you?
How to Use Your Metrics
In a word: methodically.
There are so many metrics that it’s easy to let your attention fragment and get lost in a rabbit hole of the hundreds or thousands of things you can tweak and optimize.
The key to using your metrics effectively is focus.
Even if every single metric looks terrible, avoid trying to tackle everything at once. Choose one thing, identify the metrics associated with that aspect of your business, and make adjustments until the metrics are satisfactory.
Then move onto the next aspect. Once you’ve evaluated and optimized all the pieces, go back and check on the one you started with and see if you can make it even better.
The best way to optimize things in your business is with A/B testing. Some call it split testing.
Here’s how you do it:
Build two versions of whatever your trying to improve. For example, an email subject line.
Send both subject lines to the same number of subscribers.
Keep the version that gets more email opens.
Then design a new version and test it against the old winner.
You can do this endlessly. It’s a perpetual cycle of optimization.
You can run A/B tests on just about anything. You can optimize your entire sales funnel using A/B testing.
But, don’t get carried away. You’ll lose your mind if you try to run A/B tests on everything at once. Choose one or two things, test them, optimize them, then move on to the next thing or two.
It’s like using the scientific method to improve your business.
With that in mind, these are the most valuable metrics for ecommerce businesses to understand and track:
Customer Lifetime Value
Customer lifetime value is how much revenue each customer brings your business over the course of their relationship with your company.
Revenue and quarterly profits are cool, but customer lifetime value is pretty much king of the ecommerce metrics.
Reason being: if you know your customer lifetime value, you can precisely calculate your marketing budget. This is huge, since your marketing budget could account for half of your expenses, maybe more.
But there’s a tricky thing with customer lifetime value: having the data to calculate it. If you’re just starting out, you might not have a lot of numbers to crunch.
If this is the case, you’ll have to make a few projections based on your profit margins and how many sales you anticipate once you launch. It’s best to be conservative when you make these predictions. It’s safest err on the side of caution right?
This is the first metric you should calculate. It’s useful for evaluating progress toward a whole slough of objectives. Your customer lifetime value helps you evaluate customer loyalty, repeat purchase rate, and a whole bunch of other metrics that give you a picture of how your customers are interacting with your brand.
Customer Acquisition Cost
Customer acquisition cost is how much it costs to get a prospect to make their first purchase from your business. It’s a measure of how your total marketing spend divides up among your first time buyers.
Since marketing is half of the ecommerce marketing equation, determining how much you’re paying to acquire each new customer will help you make strategic decisions and plan out how much it will cost to hit growth goals.
Comparing your customer acquisition cost to your customer lifetime value essentially tells you whether or not you’re going to make money in the long term.
Conversion rate measures the percentage of the people who visit your page actually make a purchase.
This key performance indicator measures how well your marketing is working as a whole. One good way to use the conversion rate metric is to start from the conversion (the sale), and work backwards through your sales funnel.
Once you’ve got the conversion part dialed, you can endlessly tweak your marketing to get the most people to that final stage.
Here’s how this part works:
If you have consistent conversion rates, all you really have to do is get more people to the conversion page.
To do this, you need to have a large pool of people that you can ask to come see your site. These are the best tools for this:
- Data collection.
- Data management.
Essentially, you need to get contact information and you need to know that the contact information is correct. Content marketing, lead magnets, trip wires, these are all great tools for gathering prospect data.
On the other end, validating your data makes your data collection efforts effective. If you have bad data, you’re going to expend a lot of effort reaching out to inert contacts.
There are a lot more metrics. Over 65, according to some ecommerce experts. However, the other metrics are designed for evaluating very specific parts of your business.
There are metrics for improving your emails, metrics for improving your website, metrics for improving your checkout process. The measurement is getting more granular every day.
Using all these metrics is more engineering than art. Here’s a quick roundup of how to use some of these other metrics:
- For email marketing, start with your conversion rate and work backwards. Adjust the body of your emails and calls to action until your conversion rates are decent. Then move back to adjusting your subject lines to increase open rates.
- For website optimization, look at conversions first. Tailor your product pages and checkout flow to optimize conversion rates. Then work on your content marketing and paid advertising to increase the traffic to your site.
- For social media, evaluate your conversion rate. Iterate your ads and calls to action until you’ve got acceptable conversion rates. Then start expanding your audiences and advertising channels to get more impressions.
Using the smaller metrics to fine tune things is smart.
However, the big three metrics give ecommerce businesses a good overall view of their business and can be used to evaluate how well they’re meeting most ecommerce goals.
As you work through each detail of your business and make changes to improve the individual aspects, keep an eye on how it’s affecting your customer lifetime value, customer acquisition cost, and conversion rates.
In theory, if you’re improving the individual parts of your business, your central KPIs will get better.
So pull up these key metrics, and hit us up on LinkedIn or Facebook to let us know how your business is doing!