E-commerce: What data should you use to measure performance?
Do you run an online business? Don’t be left in the dark when it comes to measuring the performance of your enterprise.
The main advantage of running an online business as compared to brick & mortar is every single piece of data can be measured, yet not many online retailers are profiting from this advantage. It is not by just having your web analytics tool installed, but you also need to understand the data and execute actionable items to grow your online business.
Before we start, the most important data you need to have in mind is this: What is your own business goal? How much online sales do you want to achieve for this year, the next year, the next three years and so forth. If you have no clue at all, you can start with projecting your business growth over at least the next 12 months. For example: is it 20 percent MoM (Month-over-Month), or 25 percent YoY (Year-over-Year)?
Once you have set the business target and understanding how much budget you have, then you can look into the main areas of your data and work on it to achieve your business goal, and of course generating profit!
It is not difficult at all to measure the data of your online business, and everything starts with this golden formula on how the online sales or revenue is being derived:
Online Sales = Unique Visitors (UV) X Conversion Rate (CVR) x Average Order Volume (AOV)
From the formula above, it’s obvious that you need to increase the traffic, conversion rate, and / or the average order volume in order to increase your online sales. If you accept offline payment, you should also include Paid Rate (PR) to the formula above.
Our recommendation is to breakdown the formula by marketing channels, like this one:
Above is just a sample and you should include all the marketing channels that you leverage for your business, such as affiliates, referrals etc. Feel free to breakdown the marketing channels further if necessary, for example instead of just Social Media, measure specific channels like Facebook, Pinterest, Twitter and so on.
This is an especially important metrics if your Conversion Rate (CVR) is not kicking ass.
We are not talking only about shopping cart abandonment here, but you need to start measuring from the landing page itself, be it your home page, campaign page or anything other pages that the customers would land at your online store.
Therefore, start measuring the bounce rate of your landing pages. Do people leave your site after they arrive, without visiting other pages? That is even without adding product to the shopping cart, and you need to understand why it is happening. Could it be that your marketing channels that land visitors at the wrong places? Do you need to optimize your landing pages?
Of course, measuring shopping cart abandonment rate is equally important. If nine out of 10 visitors leave without paying for what they have in the carts, that’s bad especially if you invest into getting them to your site in the first place.
Not only you need to optimize your shopping cart technically by looking at the cart checkout funnel, it is also good to understand what kind of products are having high abandonment rates. Better still, call your customers to understand why they leave!
Customer Acquisition Cost
Unless you have an established website that relies on SEO (organic, non-paid search) traffic, you need to make necessary investments to acquire traffic to your online store.
Of course, you need to differentiate new users vs returning users using your favourite analytics tool.
For new users, how much does it cost to convert them into your customers? This is where we measure Customer Acquisition Cost (CAC), which in short means how much money do you spend to get one customer. If you spend US$100 to get 5 customers buying from your online store, your CAC is US$40.
In fact, it is not difficult to understand why so many online retailers are offering US$20 coupon for first-time customers. That’s generally (part of) their CAC (plus the cost of getting users to land at their online store in the first place).
Besides new customers, the next step is to measure your average retention rate of your returning customers. You need to know whether customers are making repeat purchase, how often they are returning and what is the general behaviour of repeat purchases.
Never neglect the later part as convincing the existing customers to place order is much easier than converting the new ones.
Customer Lifetime Value
In fact, this has already been touched upon in the previous metrics on retention. This is no doubt the most important metrics of all – the Customer Lifetime Value (LTV).
|See more e-commerce quotes at the e-commerce.milo Pinterest board|
Yes, as quoted by Jeremy Liew, you shouldn’t be doing e-commerce business if you don’t know this simple yet important formula:
At its core, e-commerce is a simple business. If Lifetime Value (LTV) > Customer Acquisition Cost (CAC), then you have a business. If not, you don’t. Simple!
Now, how do we measure LTV? Simple, it is the net profit (projection) that you are getting from the customers. If the total net profit that you will be getting back from your customers (LTV) is lower than the acquisition cost (CAC), you are in trouble!
Let’s do some calculations here, imagine a customer spends US$500 over 4 purchases, and your net profit is US$100 (20 percent of US$500), which is also the LTV of this customer. If the cost of acquiring this customer (CAC) is US$40, you are in a good shape as LTV (US$100) is more than the CAC (US$40).
In short, your net profit (by LTV) should be more than the customer acquisition cost, at least in the long run.
Avinash Kaushik provides some very good tips on calculating customer lifetime value, find out more here If you are interested!
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