You know what they say about performance measurement:
“What you can’t measure you can’t improve.”
Viewpoints insisting this digital marketing mantra is a fallacy exist, but even those don’t take away from the fact that data monitoring and analytics are arguably the only ways to measure how well you're tracking against your goals effectively.
Still, you can’t measure just to measure something. You should be monitoring and tracking the right eCommerce metrics and KPIs (key performance indicators). From there, you can test and tweak and then build upon the techniques that work and weed out those that don’t.
So exactly which eCommerce metrics and KPIs should you be tracking?
Metrics vs. KPIs
Before we get to that, let’s briefly discuss how metrics are different from KPIs.
The simplest way to differentiate metrics from KPIs is this:
All KPIs are metrics, but not all metrics are KPIs.
Klipfolio’s Jonathan Taylor explains further:
"There are tons of metrics out there. Clicks. Percentage of new sales. Subscription revenue. But not all of them are KPIs. KPIs are the most important metrics you have – the ones that really underscore what your key business goals are."
Determining your business KPIs
Foresight’s Taylor Davidson lists six key elements you need to define when setting your KPIs:
- Baseline. The baseline is where you are compared to the metrics you’ve chosen to track.
- Main objectives. Your main objectives can include brand awareness, traffic generation, more leads in the pipeline, more sales, and even a combination of specific targets.
- Strategy. Which digital marketing activity can help you to best achieve your goals? These can include launching a newsletter, running social media contests or celebrity takeovers, remarketing, PPC, and a whole bunch of other strategies.
- Channels. Which channels will you use to implement the strategy? Examples are email marketing, social media, Google and Bing ads, and website content that’s customer-centric.
- Time period. How long will it take you to achieve the objectives you listed above?
- Growth forecast. How much improvement do you expect to see?
The eCommerce metrics you should be tracking
#1. Conversion rate
According to BigCommerce, the average conversion rate is between 1% to 2%, and that even if you did everything right, you can only expect to make a sale 2% of the time.
Calculating an e-commerce site’s conversion rate is pretty straightforward:
Conversion Rate = # of Sales / # of Visitors
For example, if you convince ten visitors out of 1,000 to purchase from your eCommerce site, your conversion rate is 1%.
Most analytics tools automatically calculate conversion rate, so no need to manually do it yourself.
#2. Gross margin
Gross margin is calculated as:
Gross Margin = Sales - Cost of Goods Sold
To illustrate the importance of gross margin, Investopedia.com says that companies generating high gross margins will have a lot of money left over for other business operations. A downward trend in gross margin rate will pose bottom line problems in the long run.
Practical eCommerce, on the other hand, defines gross margin as a metric that “measures the profit generated from each product you sell.”
So what then is a healthy gross margin percentage for eCommerce businesses?
In the MarketingSherpa eCommerce Benchmark Study published in 2014, the average gross margin for companies earning at least $1 million was 40%, while those with under $100,000 was 30%.
Here’s a nifty gross margin calculator from Shopify, if you need help developing a sound pricing strategy.
#3. Cost of goods sold (COGS)
Also referred to as the cost of sales, COGS, according to AccountingTools, “is the accumulated total of all costs used to create a product or service, which has been sold.”
There are several factors to consider when calculating COGS, such as the company’s inventory system (periodic vs. perpetual) and costing methodology (FIFO vs. LIFO). But below is the basic way to calculate COGS:
COGS = Beginning Inventory + Purchases - Ending Inventory
Here’s an example:
- Beginning inventory: $15,000
- Purchases: $25,000
- Ending inventory: $7,000
COGS = ($15,000 + $25,000) - $7,000 = $33,000
Cost of goods sold is an important metric to track because it’s directly tied to how much profit your eCommerce store is making.
#4. Average order value (AOV)
Average order value measures the average dollar amount spent on every order placed on an eCommerce store. It’s an essential metric to keep an eye on because it offers valuable insight into how much you’re getting out of every customer and, in turn, out of every dollar you spend to acquire a new customer.
Among other things, AOV helps with pricing decisions, understanding customers’ buying habits, and determining which marketing channels to focus your customer acquisition efforts on.
AOV is calculated as follows:
Average Order Value = Revenue / # of Orders
- Total revenue for the month of October: $25,000
- Total number of orders: 1,000
AOV = $25,000 / 1,000 = $25
It’s important to note that the average order value is tracked per order, not per customer. Meaning, each order a customer places on your eCommerce store (no matter how many times they purchase on any given day) is factored into AOV as a separate entity.
#5. Cart abandonment rate
Based on statistics compiled by Baymard Institute, the average shopping cart abandonment rate for eCommerce sites is 69.23%, the reasons ranging from high shipping costs, a complicated checkout process, website errors, a declined credit card, and, of course, some visitors are not ready to buy and are simply browsing around.
Cart abandonment is an eCommerce term that refers to visitors placing items in their cart but leaving the site without making any purchase. All those marketing dollars and time you spend to entice customers to your site, and all of a sudden, the customer is gone and the order incomplete.
It’s a frustrating occurrence but an eCommerce fact of life. Which makes cart abandonment rate an essential eCommerce metric to track because it allows you to understand what’s going on and implement the necessary changes to your website, especially since 63% of abandoned carts are potentially recoverable, says BI Intelligence, Business Insider’s research arm.
To measure cart abandonment rate, use the following formula:
Cart Abandonment Rate = 1 - (# of Completed Transactions / # of Initiated Transactions)
- Completed transactions = 100
- Initiated transactions = 500
Cart Abandonment Rate = 1 - (100 / 500) = 1 - 0.2 = 0.8 = 80%
So you don’t have to manually calculate your site’s cart abandonment rate, enable Google Analytics on your eCommerce site and let it do the work for you. Here’s a tutorial from LemonStand to help you automatically track shopping cart abandonment with Google Analytics.
#6. Website traffic
Website traffic used to be the most critical metric that determines the success of a website, but as marketers grew savvier and more ways to measure website performance became industry standards, analyzing website traffic took a more in-depth approach.
Instead of just the number of visits to a website within a specific timeframe, other eCommerce metrics valuable enough to track through Google Analytics or a similar tool are:
Page views per visit
This is typically calculated as an average and gives you an idea of the number of pages a visitor or group of visitors consume on your website. Higher page views per visit indicate that your content resonates with your target audience and that your site is easily navigable.
Referring traffic source
Referral traffic sources are channels outside of the Google search engine that direct traffic to your eCommerce site. These include social media, email newsletters, and display/banner ads. Keeping track of your traffic referrers allows you insight into the sources that contribute the most to your goals, helping you pinpoint which channels to spend more ad dollars on and where your efforts aren’t making an impact.
Time on site
In general, the higher the time on site or average session duration, the better for your eCommerce business. Time on site is not necessarily easy to measure, and some factors can skew the results, such as a page that has been sitting on an open browser for a while, but in most cases, it’s an indication that visitors like what they see on your website.
Unique visitors vs. returning visitors
Unique visitors are the visitors viewing your website for the first time on a new device while returning visitors are those visiting the same website from the same device. If your site attracts far more new visitors than returning ones, naturally, you’ll want your site to be user-friendly and easy to navigate to boost conversion.
Bounces are single-page sessions on your website. They’re not necessarily bad, and they can only negatively affect your site’s effectiveness if multiple page visits are needed for users to convert. Otherwise, a high bounce rate is perfectly normal, says Google Analytics.
#7. List growth rate
If you’re a merchant that uses email marketing to send promo offers to your target audience or alert them to new specials and product updates, list growth rate is a metric you shouldn’t forget about. Aside from helping you expand your lead pipeline, email lists can also go stale over time, so you want your list to keep on growing.
According to HubSpot, email marketing lists naturally decay by about 22.5% every year.
List growth rate is calculated as follows:
List Growth Rate = [New Subscribers - (Unsubscribes + Email Complaints)] / Email List Size
- New subscribers: 100
- Unsubscribes: 25
- Email complaints: 25
- List size: 1,000 email addresses
List Growth Rate = [100 - (25 + 25)] / 1,000 = 50 / 1,000 = 0.05 = 5%
Depending on your site’s end goals, there is a myriad of eCommerce metrics and KPIs to measure and analyze. The above are just a few of them, so make sure to pick the numbers and indicators that mirror your site’s objectives.