what-kpis-to-measure-in-e-commerce

What KPIs to measure in e-Commerce?

20.02.2019 / / E-Commerce

One of the most popular sayings in business is “if you can’t measure it, you can’t manage it”. To tell the truth, I can’t fully agree with it – there are a lot of things that you manage in your company every day, without any specific indicators. However, it is much easier to manage something that can be measured. If you are able to build indicators whose values will tell you more about your business – you absolutely should do it.

What is a KPI and why is it worth to measure it?

E-Commerce is a rewarding sector when it comes to all kinds of measurements. We have so many tools that with the right use we can analyze practically everything. If you like numbers and dashboards – you will be in heaven ?? If not – it’s time to befriend them.

What actually to measure? In the beginning, focus on what you definitely should. I mean KPIs.

KPIs (Key Performance Indicator) are key indicators (not necessarily financial), which allow measuring the degree of achievement of the assumed goals.

Companies eagerly use KPIs because they can be used for both strategic operational activities and smaller processes. Moreover, since they are measurable indicators, they can be compared in time units (e.g. monthly, quarterly, annual etc.), as well as to set critical values, which should be alarming.

KPIs in e-Commerce should be concerned on:

  • revenues from sales,
  • return on investment,
  • quality of customer service,
  • % of satisfied customers,
  • the effectiveness of employees
  • etc,

which are elements that really tell you how you are doing in business.

Why are KPIs important?

KPI gives a measurable picture of success. You may feel that things are going well, but without a benchmark, you will not be able to tell yourself how well and what the future is probably going to bring. This is a very important issue. If you will not be meticulous, you may be actually successful, but you don’t know why and by that you don’t develop as fast as you can.

In the other hand, if you are responsible for the results, for example before the Board, you are probably also appraised by basing on the KPIs. If not, it’s time to change it. Measuring Key Performance Indicators will show you clearly how you’re performing, what to spend more time on, and what’s already going on great. This is a good starting point for a discussion with your superiors. It’s much easier to convince superiors to invest in specific tools, hiring another person to the team, etc. if you are able to support your need with concrete data.

Whether you control the results of someone else’s work or someone controls yours – the KPI provides solid support for your actions.

KPI vs indicator

The simplest way to say that the situation with KPIs and indicators is similar to squares and rectangles – not every indicator is a KPI, but all KPIs are indicators.

What are the differences? As a reminder: the shortcut KPI means Key Performance Indicators. The most important is the word “key”. Each activity, action, and process can be measured in a hundred different ways, but if the result is only a number that does not necessarily correspond to your business goals, you should not think of this as a KPI.

This is where the question should actually arise – why measure other things then?

There are many reasons for this:

Once these numbers may be useful to you in the future, You can deepen your analysis and draw conclusions that will improve your KPIs, if you don’t know what you can measure and is it important – how do you know that you haven’t missed some KPI?

If you don’t know if something is worth to be measured – measure. In my opinion, this will never harm you. It’s better to have data you don’t use than to wake up with no history of some very important indicator.

Indicators and KPIs difference

Which indicators are KPIs in e-Commerce?

We move on to e-Commerce. As I mentioned, the only being online with your offer, allows you to measure very, very much. You can track customers’ shopping journey, check the clickability of individual elements on the website, try to compare the data with the decision to abandon the shopping cart, measure the time spent on specific pages, and more. The list is endless and if you look at the sales funnel, you will see attractive indicators at every stage.

This is very good information because, with the right analytics and conclusions, you can significantly improve your situation. I have chosen a few indicators which in my opinion are absolutely crucial and around them should revolve your e-Commerce world.

ROI (Return Of Investment)

Development of e-Commerce is a permanent investment. Optimization, integration, bringing traffic to the website – it all costs money. Not even mention the implementation of the platform itself. In order not to blow the budget, it is good to know what revenue is generated by individual investments. Without this, it is difficult to say whether they are really profitable. The indicator that shows the return on investment is ROI.

ROI = revenue (netto) / cost * 100%

The most important ROI is related to the implementation of the platform. It’s a big investment and it’s good to calculate if it’s worth it. Let’s assume that the new platform will cost you about 140 000 USD and the monthly profit in the store is 140 USD. On an annual basis, your ROI will be:

(140 x 12) / 140 000 * 100% = 1,2%

This is a very low value. The total return on investment in the implementation of a new platform will be achieved after 10 years, and this, in turn, is a lot. After that time, trends will change and technologies will become outdated, so you will have to spend even more money. Does such an expensive implementation make sense? The answer comes from itself.

Return on investment is also worth calculating in the context of marketing activities focused on generating sales in e-Commerce:

  • Google AdWords ads,
  • advertising of products in social media,
  • sponsored articles and ads with the collaboration with Influencers

Of course, not in every case, your result will be credible. For example, someone who saw a product review on the influencer’s blog may not currently have the money to buy, but return to your shop after some time, when it will have it. The higher the purchase cost, the longer the customer journey. All this can falsify the ROI. Does this mean that it is not worth measuring the Return Of Investment? Absolutely not! However, it is worth doing it wisely, keeping in mind what I mentioned above.

CLV (Customer Lifetime Value)

The average value per customer gives you an idea of how much revenue a new customer will bring to your store over the entire period of your relationship.

Let’s say you’re selling schoolbooks. On average, customers order from you once a year, before the start of the school year. They spend on average 80 USD at a time and buy for 3 years – that’s roughly what the publishing cycle is like. The simplest way to calculate the CLV is to use a formula:

CLV = (average order value) x (average number of orders) x (average lifetime of the customer)

In your case, it is easy to calculate that the CLV is:

CLV = 80 * 1 * 3 = 240 USD

So every new customer is for you (on average) an extra 240 USD in your wallet.

Note that I don’t take into account the average cost of acquiring a user here. Consider whether this variable should not be relevant to your business.

Measuring the frequency of purchases will bring you similar data. In both cases, the aim is to predict how much profit you can expect at a given time. This is a good starting point for calculating the ROI.

AOV (Average Order Value)

I don’t think there’s much to explain. Of course, it’s all about:

AOV = (value of orders in the period) / (number of orders in the period)

This KPI is quite simple to understand – usually the higher the AOV, the better.

Despite its simplicity, AOV brings a different, fresh perspective on business development.

Until now, the struggle for revenue growth in the online store has focused on acquiring newer and newer customers. If this also applies to your company, and campaigns addressed to new customers blow the budget for advertising, it is time to change the way of thinking and focus on increasing AOV. Cross-selling and up-selling come to your aid. The first term means offering the customer additional products, supplementing his current order. For example, if the customer adds winter gloves to the basket, you can also successfully offer him a hat and scarf. Up-selling means offering the same product in a premium version, e.g. made of higher quality materials or enriched with additional functionality. Both of these tactics will allow you to increase the average order value without spending your budget on acquiring new customers.

cross-selling up-selling difference

Conversion Rate

The Conversion Rate is calculated as the total number of orders divided by the number of sessions in your shop. This allows you to see the connection between the traffic on the website and the realization of the goal, i.e. in practice how much traffic you should generate in order to increase sales by X%.

Conversion Rate = purchase / visits * 100%

As AOV, calculating this indicator we also try to make sure that the result is as high as possible. Low Conversion Rate may indicate problems with UX, lack of preferred payment methods, errors and breakdowns on the website, too complicated order form, too long time to load the website, etc. In order to find out the exact reason, it is useful to track the behavior of users when they visit the website.

Cart Abandonment Rate

If I had to choose one of the most important indicators that you should definitely measure, it would be the abandonment cart rate. An abandoned cart means exactly that someone has taken the trouble to check your offer and go through the shopping process to leave you with nothing. This is not a good sign and it is always worth considering what factors caused this decision.

The Abandonment Cart Rate can be calculated from the formula:

Abandon Cart Rate (%) = purchase / carts in total * 100%

You should always keep this factor low and deeply analyze what’s the reason of cart abandonment:

  • system errors,
  • hidden costs,
  • too high price,
  • unclear conditions of returns,
  • etc.

Here again, it is helpful to track the behavior of users on the website. Try to find the moment when your potential customer leaves the shopping cart. Perhaps she/he decides to make this move by filling in the third part of an annoyingly long order form? Or maybe she/he is discouraged by the information about the short time to return the product or gives up seeing that lacks her/his preferred payment method? This is valuable information that will allow you to turn abandoners into buyers.

Cart Abandonment reasons

Mobile traffic

In this case, I will not even use a formula. You should just measure how much traffic and orders come from mobile devices.

This is a very important indicator because in general, mobile traffic in the network is growing. The reasons are clear, we are more and more “on the road” and we are changing our habits, including shopping habits. If, on the one hand, you observe an increasing number of entries from smartphones, and on the other hand, it does not result in conversion or the number of conversions is far from the desktop version, it may mean that the mobile version of your store is not intuitive and it’s time to work on it.

NPS (Net Promoter Score)

NPS (Net Promoter Score) is simple to understand but an important indicator. In order to determine it, it is necessary to conduct a simple survey, which will divide the audience of the brand into three groups: Promoters, Detractors, and Passives. The basic version of the survey consists of just two questions:

“Would you recommend our services/products to your friends? The client has the possibility to answer on a 10-point scale, where 0 means “Certainly not” and 10 means “Certainly yes”; Requests for justification of the answer. If the customer would not recommend the product, ask him why. If he would definitely recommend – why you deserve such a high note?

Those who responded on a scale of 1-6 are the Detractors who can potentially harm your brand, 7-8 Passives, and 9-10 Promoters, huge fans of the brand. From the statements of the latter you will find out what your strengths are, and the first ones – what is worth working on. Also, count the whole NPS indicator:

NPS = percentage of Promoters – percentage of Detractors

Of course, the higher your score, the better. Why is it so important? The advantage of the Detractors can significantly damage your e-commerce. Most people are more inclined to express a negative than positive opinion about the brand, according to the rule that when everything works well, it is a standard that does not need to be glorified, but when a problem arises – it is worth informing other potential customers about it. So it’s worth knowing how many of them are, why they have a negative attitude to your brand and how you can change it.

How to work on NPS to make it as high as possible? Analyze your survey results and pay particular attention to repeat answers. Consider how to improve the company’s performance in areas criticized by the Detractors and make your asset out of what the promoters praised.

Engagement Rate

Many companies at the beginning of their social media activity tend to focus on the number of likes and other reactions. If this also applies to you, of course, you should not omit this data. Well, the will to measure anything is promising. It’s surprising how many companies don’t measure anything. If you don’t belong to this group, you are already on the right track.

However, there is another indicator beside the number of likes that you should focus on when it comes to social media. This is the Engagement Rate.

Many companies at the beginning of their social media activity tend to focus on the number of likes and other reactions. If this also applies to you, of course, you should not omit this data. Well, the will to measure anything is promising. It’s surprising how many companies don’t measure anything. If you don’t belong to this group, you are already on the right track.

However, there is another indicator beside the number of likes that you should focus on when it comes to social media. This is the Engagement Rate.

Engagement Rate = number of people involved/reach of post * 100

Why is it worth to focus mostly on the Engagement Rate? Even an impressive amount of fans will not be reflected in sales in your e-Commerce if the content you publish is not interesting for them. The fact that your posts reach a large audience, but they ignore them (they do not comment, like or share them) should be a cause for concern rather than happiness. On the other hand, the mass of positive reactions under the photo of the product is a dream of every seller. Not only do they show that your assortment meets the customer’s needs, but they are also social proof that encourages potential customers to buy.

social media

There is no clear answer to the question of how to improve Engagement Rate in social media. If your Engagement Rate is low or not completely reflected in conversions (entering the website, making a purchase), consider whether:

  • You create content with your target group in mind. Maybe your communication is good, but not matched to the profile of your customers? Your publications should appeal to your customers, not yours;
  • You publish at the right time. If your target group has a habit of turning off the computer and spending time with family after work, and you publish in the evenings, the chances of reaching them are low;
  • You publish in the right form. Consider if your group prefers longer or shorter posts, don’t you put too many hashtags, and they interfere with the reception of posts, what works better: photos or videos etc.

CPA (Cost Per Acquisition)

The money that customers bring to the company is one thing, but how much you have to invest first in order to be able to count on profits afterward is the other. If your marketing expenses exceed your sales revenue, it’s not good. That’s why you should not only keep track of your sales results but also how much you spend on acquiring these customers.

CPA = sum of money spent on marketing activities/amount of conversions

You can improve your CPA by optimizing your marketing activities. There is no clear advice on what you should do. It depends only on your marketing plan and the effectiveness of individual actions.

However, it is worthwhile to look at different communication channels. If some of them work much better than others, maybe it is worth redirecting more resources there?

Is that all?

Of course, these are not the only KPIs you can take into account. I’ll tell you more, you should definitely define your business goals (if you haven’t done so yet!) and adopt some measure of success for each one. There are many examples:

  • number of complaints,
  • average lead time,
  • number of wrong shipments,
  • etc.

What you measure depends on you and what is most important to you at the moment. I personally recommend that you take the time to find reliable indicators of success for each of your larger goals. It’s a sensible investment that will give you a clear picture of how you’re doing in every area important to you, indicate what needs to be improved, and alert you when something bad starts to happen.

If there is anything else you would like to know about measuring KPIs in e-Commerce, please contact me on LinkedIn or by email. I will be happy to answer your questions.