E-commerce continues to establish itself as an integral part of the modern business landscape, but it’s also becoming more competitive by the day. Whilst more and more consumers are going online to buy goods – a trend that was accelerated by the pandemic, there’s also an increasing number of retailers shifting to this online ecosystem. It’s not just established retailers, but also startups, as no-code website builders and software such as Shopify, along with established platforms such as Amazon and Etsy, have made it far more accessible for founders to launch e-commerce platforms.
So within the current competitive landscape, it becomes even more crucial that e-commerce business owners have a firm handle on their key performance indicators (KPIs). The right KPIs can help e-commerce businesses identify areas for improvement, manage risk, track progress and make data-driven decisions to ultimately become more successful. Therefore, in this blog post, we’ll be discussing the five most important KPIs for e-commerce companies:
- Average Order Value (AOV) – This is the average amount that a customer spends on a single order. This KPI is important because it can help you understand how much revenue you are generating per order and can provide insights into pricing strategies and product bundling opportunities. A high average order value indicates that customers are willing to spend more on your site, while a low average order value may indicate a need to re-evaluate your pricing or product offerings.
- Customer Lifetime Value (CLV) – Average Order Value often doesn’t tell the complete story, as dependent on your e-commerce site’s product offering, that order may simply be one from multiple orders from the same customer. Therefore, CLV effectively helps calculate on average what you can expect each customer to spend on your products over time.
- Customer Acquisition Cost (CAC) – Conversely to the previous two KPIs which track how much the average customer spends, this KPI tracks the average cost to acquire a new customer. This KPI effectively allows you to understand how efficient your customer acquisition efforts are (e.g. marketing and sales). As you may guess, your CAC certainly shouldn’t exceed your Customer Lifetime Value, and if it doesn’t exceed your average order value, you may run into cash flow issues in the short term. A low CAC indicates an effective marketing strategy and sales conversion (more info below!), whilst a high CAC indicates you may need to look for more cost-effective ways to attract new customers.
- Conversion Rate(s) – There are various different conversion rates that you can track, so technically this isn’t just one KPI. Tools such as Google Analytics will allow you to track conversions across your website and all email platforms should allow you to track click-throughs, subscribes etc. However, often the most important conversion will be the number of website visitors that make a purchase. This KPI is crucial for understanding how effective your website is at turning visitors into customers. A high conversion rate indicates that your website is user-friendly and that your products and pricing are appealing to your target audience. A low conversion rate, on the other hand, may indicate that there are issues with your website design or checkout process, or that your products are not competitively priced.
- Net Profit – Really, net profit is an important KPI for any business, not just e-commerce stores so it simply cannot be overlooked when tracking the overall health of your business. The cliché that’s often said is turnover is vanity, profit is sanity (often extended to cash is king). Your net profit is effectively your bottom line, it’s your total income less total expenditure. Changes in performance in any of the previously mentioned KPIs will filter down and impact this bottom line KPI, whether it’s positively or negatively, so it needs to be carefully monitored.
This is a condensed list, but in truth, the most important KPI will depend on your business’s specific circumstances, such as its stage, products, challenges, objectives etc. Dependent on this, there will be plenty of other important KPIs that you could track ranging from Return on Ad Spend (ROAS), Shopping Cart Abandonment Rate (SCAR), customer churn (if you offer subscriptions), Net Promotor Score (NPS) and more.
Once you know what the most important KPIs are for your business, it’s important that these are reported on together, so you can understand the relationship between them and reported on in a timely manner, so you can be agile with your decision-making. At The Smart Accountants, we can discuss these KPIs and support your e-commerce business in pulling together both non-financial and financial KPIs into one regular management reporting pack that allows you to continuously monitor trends and track performance.