If you are thinking about starting your own e-commerce business, we think you would find our guide very useful: How to start your e-commerce business from scratch.
Key Performance Indicators (KPIs) are a set of predetermined measurements used to quantify the overall progress and performance of an organisation. Various data points relating to financial, operational, and strategic initiatives are used to gauge the successes and shortcomings of an organisation. In simple terms, it helps businesses understand what is working and what isn’t, and highlights areas for improvement for continuous growth.
Each industry and business type has its own set of KPIs relating to its unique areas and parameters of operation. For instance, a logistics company will have completely different key metric measurements than an IT company. But when it comes to the digital sphere, there are a few key metrics which are essential to the success of all e-commerce businesses.
Without further ado, here are our top 6 key metrics for e-commerce businesses.
1. Monthly Active Users
As the name suggests, the Monthly Active Users (MAU) metric shows how many “active” users visit your platform website each month. In this sense, “active” relates to users who engage directly with your platform by way of click-throughs, blog visits, contact page queries, etc. including various other ways of site interaction. The MAU metric shows the number of people who are sufficiently engaged with your platform to make use of your website’s content and/or functionality, meaning they aren’t just window shopping.
Every e-commerce business should aim to witness formidable growth in the MAU metric each month as it is a clear indication of the growth of your business. Of course, the more MAUs you receive the more sales conversions you are likely to experience. Simply click on the MAU tab in your e-commerce dashboard to find out how many “active” monthly users your site receives.
2. Conversion Rate
The Conversion Rate (CR) metric is crucial for e-commerce businesses to learn how many users are taking the prized leap from browse to purchase on their platform. Having clearly defined and quantifiable data indicating your precise sales conversion rate allows you to witness in real-time just how successful your site is at doing what it is designed to do – sell.
It is common to have an under 5% CR compared to your MAU metric. If you are experiencing a low CR there could be multiple attributing factors which need to be addressed: is your UX up to scratch? Are your CTAs clearly visible? Are your prices competitive? Or is it simply because you haven’t fully understood your target market? The list of possibilities for why your CR is low is almost an endless stab in the dark, but thoroughly understanding the contributing elements to your website’s CR is the first step in realising when and how action is required.
You can calculate your Conversion Rate quite simply:
Conversion Rate = number of sales / number of visitors
3. Customer Lifetime Value
Your Customer Lifetime Value (CLV) metric is important in determining the total amount of revenue that you are likely to expect to receive from each customer. Of course, it is impossible to get lifetime buy-in from each and every customer, so the CLV metric looks at your customer base as a whole, understanding that while some may leave, others may never, so an average typical customer lifetime is calculated with an economic worth. Your CLV helps you understand what your customer is “worth” to your business, and indicates how much you should be willing to spend in order to retain and/or acquire them.
Calculating your CLV depends on 3 major criteria: the length of time the customer uses your platform, the number of repeat purchases they make, and their average order size.
You can calculate your Customer Lifetime Value as such:
Customer Lifetime Value = average value order per user x average number of repeat purchases per user
4. Customer Acquisition Cost (CAC)
The Customer Acquisition Cost (CAC) metric is considered one of the most crucial metrics across most global business models. It refers to the amount it costs your business to acquire a new customer. The aim is to get your CAC metric to be as low as possible, relying on referrals and organic growth to boost your customer acquisition. However, this is not a possibility for most businesses who will require capital outlay for marketing endeavours and various other means to attract customers, which cost money.
The reality is that your CAC metric will likely be higher in the developmental stages of your e-commerce business as you rely on cash-spend to attract new customers. However, you will want this metric to significantly reduce over time as your business takes shape and you begin to cultivate a dedicated customer base.
Here’s how to calculate your Customer Acquisition Cost:
Customer Acquisition Cost = cost of sales and/or marketing efforts ÷ number of new customers
5. Churn Rate
The Churn Rate metric measures the total number of users your platform loses over a given period of time, be it daily, monthly, or annually. Like any business, it is of paramount importance to be continuously aware of how many customers you are losing in order to develop ways and means to retain them – to ‘plug the hole’ so to speak. If you are losing customers, you are losing revenue, which is obviously catastrophic for your business. Being aware of your website’s churn rate gives you an indication of what is working and what isn’t – is it marketing, messaging, products, pricing? These are things to investigate further to get to the bottom of, but knowing how many customers you are losing shows that there may be a significant problem which needs addressing.
The Churn Rate metric is especially important for businesses which rely on monthly or annual subscriptions. In this instance, if your Churn Rate is high then it is a clear enough indication that your customers are unhappy with either your product or service.
Simply go to your dashboard each month to see the total number of customers you may have lost.
6. Monthly Revenue Rate
A must-have for any business, e-commerce or otherwise, the Monthly Revenue Rate (MRR) metric indicates the predicted monthly average revenue stream of your platform. It helps you to be able to assess revenue trends over time, and make businesses and strategic decisions based on projected monthly revenue. More importantly, the MMR metric is useful when weighed against sign-up rates and customer acquisition to see how your business is growing.
The MMR metric also assists with the management of your sales team. Your MMR hinges on numerous factors (marketing, performance, value-add your business has on customers, etc.), but your sales team is tasked to directly drive MMR growth by acquiring new customers. Management are able to see quantifiable metrics as to the impact their sales teams are having in the success of the business through MMR.
To calculate your Monthly Revenue Rate, simply perform this equation:
Monthly Revenue Rate = amount of revenue per customer x total number of customers for the month
There you have it, the top 6 key performance metrics we feel all e-commerce businesses must be aware of in order run a successful enterprise. Of course, depending on the type of business you have your key metrics will be different. Key Performance Indicators show business leaders the continuous status of the performance, successes, and shortcomings of their operational output, providing tangible metrics to affect change within their organisation.