June 7, 2023
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There’s a common saying in business that what gets measured, gets managed. By monitoring important ecommerce KPIs that shed light on your business’s performance, you can gain valuable insights into the financial health of your operation and make data-driven decisions regarding your next steps.
But what exactly should your business be measuring?
Your Google Analytics dashboard presents a bewildering array of metrics in real time but doesn’t always highlight which ones you should be paying close attention to. In this blog, we're going to explore a list of the essential ecommerce financial metrics that your business should be tracking, how to calculate them, and how to optimize these metrics to achieve better performance.
Gross profit margin is an important metric used to determine overall business profitability. It’s an expression of how much money has been made once the operational costs of running the business have been taken into account. Monitoring gross margin helps brands to understand whether their resources are being maximized, and if products are being sold at the right price to cover production costs.
Companies can calculate gross profit margin using the following formula:
There are several approaches that businesses can use to improve gross profit margin. Increasing product prices is a viable strategy during periods of high inflation. You should also assess the competitive landscape to understand the impact this may have on your business. Alternatively, businesses can evaluate their production process to identify areas where costs can be streamlined. One area that’s often overlooked? Shipping—but we'll get to that in a bit.
Net profit margin represents what percentage of your revenue translates into net profit. Unlike gross profit margin, which measures profitability via what revenue is earned after taking into account the cost of goods sold (COGS), net profit margin determines what percentage of revenue translates to increased profits for your business.
To calculate your net profit margin, you first need to calculate your net profit. This is done by subtracting all of your operating expenses and the cost of goods sold (COGS) from your total revenue. Net profit margin is then calculated by dividing your net profit by your total revenue and multiplying by 100:
High revenue doesn’t necessarily mean higher profitability, so businesses should always be tracking both gross and net profit margin to determine how well your business is managing costs.
One of the best ways to improve net profit margin is by boosting operational efficiency. Sustaining an ecommerce business is subject to a range of costs including warehousing, labor, storage, order fulfillment, shipping, and more. Optimizing just one of those areas can result in considerable cost savings.
For example, Tusk Logistics’ shipping rate optimization can shave multiple dollars off the cost of shipping each order, which saves thousands every year.
Customer acquisition cost is an ecommerce metric that measures how much it’s costing a business to acquire new customers. Acquisition costs include any and all sales and marketing campaign costs, as well as the labor required to coordinate those efforts.
CAC may also include other initiatives that a business is using to attract website traffic. For example, offering free shipping is a powerful acquisition tactic that helps to foster customer loyalty.
As competition in ecommerce heats up, the cost of acquisition is only becoming more expensive over time. This makes it a key metric to track in order to avoid making a loss on sales.
CAC can be measured by adding up collective expenses across your sales and marketing channels over a defined period. This includes things like social media, paid ad spend, email marketing, and SEO. Next, identify the number of customers that your company has acquired within the same period. Dividing your total marketing/sales expenses by the number of new customers acquired will give you the average cost required to convert a single customer:
Businesses can lower their acquisition costs by investing in better analytics software to track the performance of their marketing efforts. By gaining a better understanding of the effectiveness of different strategies, you can better allocate your marketing budget to initiatives that are bearing fruit.
Average order value (AOV) expresses the average value of each order placed via an ecommerce website. Businesses can use this KPI to determine whether their promotions are effective at influencing customer behavior, or if there are revenue opportunities that are going underutilized.
To calculate the Average Order Value, ecommerce businesses need to take the total revenue made within a specific period and divide it by the total number of orders they received:
It’s worth noting that peak sales events such as the holiday season can distort AOV, due to the high number of transactions taking place within a short time period. To get an accurate view of everyday sales, it’s a good idea to exclude these periods from your calculation.
By making an effort to boost the amount of money earned by each customer, brands can increase profitability and maximize revenue potential. Businesses can increase AOV by adding personalized product recommendations to their online store, optimizing their cross-selling and upselling strategies, or using incentives such as free shipping thresholds to increase order value. A study by Shippo found that 93% of consumers will take action to receive free shipping when they shop online, such as buying additional items.
Customer Lifetime Value (CLV) represents the average amount of revenue a business expects to earn from the average customer over the duration of the relationship. It takes into account all of the revenue a customer generates, rather than only looking at individual transactions.
CLV is strongly linked to your customer retention rate, as it’s an effective way to determine how much revenue returning customers are generating for your business over time. A 5% increase in customer retention results in a profit increase between 25% and 95%, so it’s well worth the effort to improve CLV.
To calculate your customer lifetime value, you first need to calculate customer value, which is the average purchase frequency multiplied by the average purchase value. You can then determine CLV by multiplying customer value by the average customer lifespan:
If your CLV is low, this is an indication that your business is struggling to build a high volume of repeat purchases, which could push up your acquisition costs. By tracking CLV, a company can assess the profitability of acquiring new customers, and make informed decisions regarding their marketing and sales strategies.
To improve customer lifetime value, brands need to invest in initiatives that foster customer loyalty and incentivize customers to come back for future purchases. This can include VIP loyalty programs, collecting customer feedback, and maintaining communication post-purchase.
Your conversion rate refers to what percentage of visitors to your ecommerce platform are undertaking a desired activity. While purchases are the most common goal, conversion rate can be used to measure a variety of actions, including signing up to an email list, referring a customer, or downloading a website resource.
Not surprisingly, your ecommerce conversion rate is one of the most important benchmarks in measuring the success of an online store. No matter whether your objective is to increase sales or lower your bounce rate, conversion rate is a measure of how well you are achieving your business goals.
To calculate your conversion rate, businesses need to divide the total number of conversions during a specified time period (representing sales, new customers, repeat customers, or form submissions) by the overall number of website visitors:
If not enough shoppers are undertaking a desired action, this indicates there is a disconnect between your marketing efforts and customer behavior. You can improve conversion rate by setting accessible goals, analyzing all of your visitor data, and continuing to A/B testing on your landing pages and CTAs to find the best-performing messaging.
Cart abandonment is when a customer chooses to exit an ecommerce site without paying for the goods in their shopping cart. Shopping cart abandonment rate is an important ecommerce metric that tells online businesses what percentage of shopping journeys did not result in a successful sale.
Business owners can determine their cart abandonment rate by dividing the total number of completed transactions by the total number of initiated shopping carts:
Put simply, a high cart abandonment rate equals lost revenue for an ecommerce store. If you have a high number of visitors to your site but few conversions, this indicates there are issues in the customer experience that are preventing shoppers from committing to a purchase.
In ecommerce, the average cart abandonment rate is 69.99%. Cart abandonment happens for a variety of reasons, including unexpected shipping costs, difficulty navigating the checkout process, or a simple change of mind. While it isn’t possible to eliminate cart abandonment altogether, there are steps you can take to increase customer satisfaction with the shopping process. This includes:
Your revenue growth rate expresses how much a company’s revenue has grown over a specific period of time. It’s one of the most basic ways of measuring financial health and if a business is keeping pace with its own revenue projections.
To calculate your revenue growth rate, you need to know how your total revenue from the current period compares with the previous period. This may be month to month or quarter to quarter. Revenue refers to the amount of money made from all lines of business, including sales, subscriptions, and investments.
Next, subtract the total revenue for the previous period from the total revenue for the current period. Divide this figure by the total revenue for the previous period and multiply by 100 to get a percentage.
Revenue growth should always be viewed alongside other key performance indicators such as customer churn and customer acquisition cost (CAC) to understand whether a rise in profits is being offset by other costs. If revenue growth is up, this indicates a healthy cash flow, whereas a decline shows that business growth is at risk of plateauing.
Companies can grow their revenue by focusing on new lines of business, increasing customer acquisition and retention, exploring new market segments, and monitoring customer satisfaction via net promoter scores to identify areas of friction in the shopper process.
Shipping cost percentage refers to the amount of revenue currently being allocated to covering shipping expenses at a business. The cost of shipping includes expenses such as shipping rates, packaging, fuel, and last-mile delivery fees.
Shipping makes up one of the biggest operational expenses footed by ecommerce brands, so it’s important to ensure that shipping costs are optimized as much as possible and don’t negatively impact profitability. Monitoring shipping cost percentage (and other carrier performance metrics) allows businesses to assess their shipping strategy and identify where money is being lost to inefficient shipping routes or expensive nationwide carriers.
Businesses can calculate shipping cost percentage by determining their total shipping costs over a specific period, and dividing total shipping costs by the total revenue over the same period:
Brands can improve shipping cost percentage by streamlining the size of packaging to minimize dimensional weight, which keeps shipping rates down. Free shipping thresholds also help to ensure that your business isn’t paying for shipping on low order values that cut into your bottom line.
Negotiating more favorable carrier rates based on volume is one of the most effective ways to lower shipping cost percentage. Brands using Tusk can take advantage of Tusk’s strategic partnerships with national and regional carriers to find the best real-time rates.
Return on Shipped Orders (ROSO) measures what percentage of ecommerce orders were returned by customers after shipment. As well as helping to measure customer satisfaction with the shopping experience, ROSO also acts as quality control for the order fulfillment and shipping processes.
Calculating ROSO is very simple. It requires businesses to divide the number of returned orders by the total number of orders shipped over a specified time period:
Because customers shopping online are not able to test or try products in advance of purchasing, return rates in ecommerce are generally much higher than for in-person sales. However, there are other reasons for returns including product damage or defects, the wrong item being shipped, or inaccurate product descriptions.
Brands can lower their return rate by:
Return on Investment (ROI) is used to evaluate the financial gain generated from a certain initiative, compared to the initial investment made.
ROI is particularly useful for measuring the effectiveness of marketing efforts, such as social media and paid ad campaigns, where it’s sometimes referred to as Return on Ad Spend (ROAS). A return refers to any kind of financial benefit that a business receives from the investment, including revenue, sales, and cost savings. Businesses can use platforms like Google Analytics to monitor the performance of their marketing investments and identify where to make adjustments.
ROI can be calculated by taking the profit made from the investment and dividing it by the cost of the investment:
A good return on investment demonstrates that an investment is benefitting your business and is worth continuing. Conversely, a bad ROI is a sign that something is costing your business more than it’s making in revenue. It’s critical that businesses keep a close eye on their ROI to avoid wasting budget or resources on initiatives that aren’t benefiting their bottom line.
Managing (and monitoring) an ecommerce business is no easy task. With so many metrics out there, it can be overwhelming to know which ones are worth paying attention to. The 11 financial metrics outlined above provide your business with a real-time snapshot of performance and financial health, so you can make data-driven decisions about your next strategic move and expansion.
If you're looking to streamline your ecommerce operation and optimize your shipping costs, consider partnering with Tusk Logistics. Tusk helps brands large and small to access competitive shipping rates and real-time monitoring of shipments, so you can maximize profitability and performance for your business on all fronts.
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