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The past two years have had a huge impact on the retail sector. As the global pandemic forced brick & mortar stores to shutter their doors, sales shifted online. What is more, lockdowns and the rising demand online has caused a huge shift and disruption in the supply chain.
And these new challenges are not only affecting physical retail, but putting a strain also on online companies - Mckinsey found that 10 years of growth has been packed into just 3 months, causing a high increase in competition.
Platforms like Shopify have made opening online shops easier than ever - a recent analysis by Help Center found that Shopify’s market cap is now surpassing corporate companies like Wells Fargo, UPS, McDonalds, and Accenture, valued at over $180 billion.
Changed consumer sentiment, unpredictable buying behavior, and supply chain disruptions - all of these changes have had an effect on how to grow online sales - making marketing and product assortment management even harder.
However, a survey by Deloitte, found that it also poses some significant opportunities, such as the rise in social commerce, hyper-personalization, omni-, and multi-channel approach, customer service automation and D2C strategy.
To overcome these hurdles and to figure out which opportunities are right for your online business, it is helpful to track and monitor the most important E-Commerce performance metrics. In this article, we will explain the meaning of KPI, what KPI reporting is, and discuss the importance of each of these KPIs.
A KPI - Key Performance Indicator - is a metric to help a business to define and track their performance against their targets. For example, to measure the success of a marketing campaign, profitability of the product assortment, or to ideate on how to promote your online store. It helps a business to follow up on the progress made, or improve performance where E-Commerce performance metrics are behind targets.
E-Commerce KPIs can indicate how well your online business is doing in terms of profitability and growth. KPIs tracking and analysis shows in which area improvement is needed, or where the new business opportunities are in order to effectively promote your online store.
Whether it is in customer service, product assortment, or marketing - there are several important KPIs that every E-Commerce business should measure and track. Instead of making decisions based on your gut feeling, tracking the most important KPIs will enable your online business to make the right, well-informed judgments.
There are areas where KPIs overlap, e.g. marketing is closely related to sales. and customer experience is closely related to product assortment. However, to make things clearer, I have provided the most important KPIs across marketing, customer, and product.
1. CVR - Conversion Rate
Is probably one of the most important E-Commerce metrics to track the visitors who “take action” on your site. It measures the success of your sales, marketing campaigns, etc. to indicate how well they are performing.
How is it used? It indicates the success of a campaign or a product on the website. CVR is calculated as a % - customers who either purchase something, click on the ad, sign up or create an account.
The higher the conversion, the better the result. The benchmark really depends on the industry, but in E-Commerce, the average conversion rate is somewhere around 1.9%, so a good conversion rate is anything above that.
2. CPA - Cost Per Acquisition
Is also often described as one of the most important KPIs in E-Commerce, this metric in $ would show the marketing costs per customer acquisition - how much investment is needed to acquire each new customer.
How is it used? Even if your other E-Commerce metrics are in line, looking at the CPA would determine how high the ROI is. For example, if your store’s CVR is an above-average 5%, but CPA costs are extremely high; it leaves no room for profitability.
3. Cart Abandonment Rate
Reflects how quickly your customers get tired of the long check-out process and drop the purchase. It is usually presented as a %, lowering this rate can have a direct positive impact on your revenue increase.
Cart Abandonment Rate = 1 - transactions completed / transactions initiated * 100
How is it used? Cart abandonment rate differs between online retailers, but the average is around 71%; the range is usually around 60% - 80%. It all comes down to how optimized your check-out process is. For example, Amazon implemented the “buy button” to reduce clicks that customers have to make before finalizing the purchase.
4. ROAS - Return on Ad Spend
ROAS is a marketing KPI that measures how much you are spending on your ads. For example, you have a $1000 budget for a PPC campaign. You then measure how many times a customer clicks on the ad lead to a purchase. After that, you can determine sales generated through that specific campaign.
Say you made $4000 in sales, meaning your ROAS is - $3000 / $1000 = $4 - every $1 spend on advertising you made $4.
How is it used? This E-Commerce metric is essential to track if you want to drive higher profitability and sales for your business - to make sure you aren’t overspending in marketing vs how much you earn in sales.
5. ROI - Return On Investment
This metric in % describes the ratio between the budget invested and the sales generated. It indicates the efficiency of a campaign in terms of profitability. For one it looks at the ROS (return on sales) and the other from the investment turnover.
ROI = profit ($4000 - $1000) / $1000 * 100
How is it used? It can be used as a figure to measure profitability and performance, to check whether the profitability targets of a marketing campaign were achieved.
6. CAC - Customer Acquisition Cost
CAC is a metric in $ that shows what you have to pay to win over each new customer? If your business spent a total of $10,000 a month on all marketing costs, including any overheads linked to winning new leads like commission or salaries, and gained 1000 new customers - the CAC would be $10.
How is it used? Commonly analysed with Customer Lifetime Value metric to see how much value is generated by new customers. It can help to improve your marketing ROI and profitability. The average is $47 but varies largely across industries - with retail and consumer goods companies being one of the lowest: $10 and $22 respectively.
7. Bounce Rate
This E-Commerce metric measures the success of your web store by tracking the % of visitors who viewed a single page on your site and left the site without visiting any other pages. Meaning: the customer landed on your webshop, failing to convince the buyer to make a purchase.
How is it used? A high bounce rate can indicate that your site is not engaging enough to keep customers on the site, or there is something wrong with the page. The average bounce rate in E-Commerce is between 20% - 45%, anything above that, it would be wise to check why that could be.
8. Time On-Site
Time on site shows how long on average a customer spends on the site. For example, your page had 1000 views, 500 exits and 100 minutes of time spent on site, the average time spent would be 100 / (1000-500), and then 100 / 500 = 0.2 min.
How is it used? This indicates that customers haven’t properly engaged or found the site engaging enough to lead to a purchase or any further activity. The average is around 2 - 3 minutes for any site, and in E-Commerce, it should be longer, as it takes longer to make a purchase.
1. Customer Lifetime Value
Combines conversion rate, average order value, and returning customer rate KPIs all in one metric in $. It shows how much money a single customer brings to the business during their customer lifecycle.
Customer Lifetime Value = average sales amount * number of purchases per year * customer retention time
How is it used? This KPI can very well indicate the overall health of your E-Commerce business, as it combines all of the most important KPIs in one.
2. Customer Retention Rate
Customer retention rate is calculated as a % and shows the share of the visitors or customers that the business has retained over a given period, to measure customer loyalty.
Customer Retention Rate = number of active users / the number of active users across a given time period * 100
How is it used? A high customer retention rate ensures continuous revenue from existing customers, who generally spend more than average and also recommend your brand to others. According to research by Bain & Company, increasing customer retention rates by only 5% can increase revenues by between 25% - 95%.
3. New Customer Share
Shows the number of customers as a % that are completely new to your site compared to the share of the returning customers. For example, 32% of your customers are new to your site and 68% are returning customers.
How is it used? Tracking how many new customers your business is gaining is an important metric to see if your business is also attracting new customers. Returning customers are great as they bring in most of the money, however, you can’t keep relying on them. This could lead to stagnation of the business.
4. Churn Rate
Shows, as a %, how long are customers staying with your brand before leaving or canceling your services over a certain time period. It is the opposite of new customer acquisition, showing how many people rather than join or are gained.
Churn Rate = customers who left over a given time period/customers at the beginning of that given time period * 100
How is it used? How important this is for your business really depends, for example, for a subscription-based business model this would be critical, as it determines the profitability of that business. If this is a concern, the focus should be on how to increase customer retention rates and how to win new customers.
5. AOV - Average Order Value
This metric shows the average spend or the average basket size in $ when the customer places an order and is extremely important to track.
How is it used? This KPI is a very useful indication of how to optimize your assortment’s pricing and marketing strategy.
By increasing the AOV, it will have a direct impact on the revenue and profitability. It goes hand-in-hand with the product assortment strategy. The higher your AOV, say $45, the more space you will have to play around with the marketing spend in order to acquire new customers.
6. NPS - Net Promoter Score
Net Promoter Score measures how much are existing customers willing to promote your products or services to others.
It is a customer loyalty metric measured by asking just one question: “On a scale of 1-10, how likely are you to recommend XXX company to your friends?”. It is evaluated from scale 1-10, the results are clustered to either promoters (scale 9-10), passives (scale 7-8), or detractors (scale 0-6).
How is it used? NPS is a popular metric for evaluating how a company is perceived by customers. Active listening and good feedback allow higher customer loyalty rates that lead to higher organic sales growth through by-word-of-mouth marketing.
7. CSAT - Customer Satisfaction Score
Is usually also measured by asking one question: “On a scale of 1–5, how satisfied were you with our service/product today?” This can be asked after each purchase to gather detailed feedback.
CSAT = number of satisfied customers / total number of responders * 100
How is it used? CSAT is a metric that, similarly to the NPS score, indicates how satisfied your customers are. But this time, not just overall satisfaction with the company, but with your products or services, often asked after each purchase. This data can be then used for improvements.
8. First Response Time
Measures how long it takes for a customer service team to respond to a customer query in either minutes, hours, or days, depending on the efficiency.
A study by Salesforce found that a third of respondents felt more positive towards companies that offered a quick first response time in customer service.
Average First Response Time = time spent sending the first response/number of tickets sent as a first response
How is it used? If your average response time is 3 days, you may want to look into why that is and how to improve the speed. A slow response can result in a decline in customers and in turn decline in revenues. To improve this, think about automation - chat-bots, live-chat, knowledge bases, or thorough FAQ pages for customer self-service.
1. GMV & NMV - Gross & Net Merchandise Value
GMV is the total value of your webshop sales, it measures the value of your products sold times the number of transactions.
Simply put - a pair of jeans selling on your site at $100 was sold on the site 100 times - $100 * 100 = $10,000. NMV has all the operational costs deducted.
How is it used? GMV and NMV are two essential e-shop KPIs - if you are an E-Commerce business selling t-shirts, this KPI shows if your sales are growing or decreasing. It is usually measured by looking at either week-over-week, month-over-month, or year-over-year figures to see growth or decline in sales.
2. Net Profit ($) and Net Profit Margin (%)
Net Profit in $ is the profit of your business made after you deduct all operating expenses, including taxes and interest. Net Profit Margin measures the profitability of your business as a %. Net Margin shows how much profit was generated from every $1 in sales.
How is it used? It is really the most important KPI along with EBITDA to show how profitable and healthy your business is financially.
Or Earning Before Interest, Taxes, Depreciation and Amortization measures the overall profitability of the business. EBITDA - sales minus all operational costs, however, doesn’t take away the cost of tax or debt (unlike Net Margin).
EBITDA = Net Profit + Taxes + Interest Expense + Depreciation & Amortization
How is it used? This e-shop KPI is used to measure profitability, it is useful when comparing the profitability of one company against another, as it excludes external differentiating factors. It shows the health of a company's operations and available cash flow.
4. STO - Stock Turnover Rate
Is a KPI that indicates how fast your products are selling, whether and when you need to restock them. It shows how many times your business has sold and replaced the total inventory in your warehouse over a given period.
How is it used? Monitoring your stock turn will help estimate when you need to place reorders and in which quantities. The average ratio for E-Commerce shops is anywhere between 4 - 10 but totally depends on the product.
Keeping your stock at these levels, you can make sure you have enough not to run out of stock, but at the same time not to run into any overstock in the warehouse.
5. Return Rate
Especially important e-shop KPI to track, as shipping costs are much higher than for traditional brick & mortar shops. Each item has to be shipped and then returned separately. Return rates are also higher online, as customers can’t physically see or try the items, and order several items.
How is it used? It really depends on the business model and product, however in E-Commerce, for clothing, anything around 30% - 40% is ok. For cheaper items, it is lower and for more expensive it gets higher. For items like jeans, for example, that are difficult to fit, it can be over 60%. In order to track this by-product, gather reviews and customer feedback to then analyze.
All in all, being aware of all of these KPIs may seem like a lot, and if you are just starting out, it doesn’t make sense to focus on all of them. Some KPIs are essential, but for some, there is a need to narrow it down and make sure you are tracking the right KPIs, and first define where your focus is.
It is also important to make sure your employees are properly trained to monitor and analyse the most KPIs important in their area of expertise, to maximize the overall performance of the company.
The past years have placed a lot of pressure on the retail sector, increasing the competition online. And extremely rapid growth comes with further challenges and opportunities, so it is important not to lose focus on which operational areas your business should focus on and drill down to the most important KPIs to take timely action.