Key performance indicators (also known as KPIs) is a way to measure just how well your business is performing and whether you are headed in the right direction to meet your future goals.
The list of KPIs that you could evaluate are endless, and not all of them will provide you with the same quality of information. Therefore, it is imperative that you know exactly what to look for when determining which KPIs to track to best measure your eCommerce business's growth.
The four most important characteristics to look at when evaluating KPIs are:
- Impact on Goals – How much do they impact your bottom line, and how important are they to achieving your goal?
- Easily measurable – How easily can they be measured, and how accurate is the data that they provide?
- Timely – Do you have access to real-time data for these KPIs?
- Actionable – Do they give you a clear understanding of what specific actions you need to take to improve your business?
Once you know the exact characteristics and the information you require from the KPIs to receive the most value, you are ready to analyze some of the most popular KPIs.
1. Average Order Value (AOV)
In order to fully understand a customer's purchasing habits, you must have a good grasp of their average order value. This figure lets you know the average amount that each customer spends per order.
To determine what your AOV is, divide your company’s revenue by the number of orders placed. The result will be the average dollar amount of each individual order.
AOV is a valuable metric as it will help your business determine a better pricing strategy and help increase overall revenue figures.
2. Website Conversion Rate
The number of people who visit your website and actually take action by using your service or buying your product is known as your website conversion rate.
Website conversion rate is calculated by taking the number of people who made a purchase from your site during a specified period and dividing it by the number of people who visited your site during that same period.
Website conversion rate statistics can give your business valuable insight into how well your website converts visitors into actual customers. It also gives you a better understanding of your customers and can give you pertinent information on how to better target your desired market.
3. Customer Acquisition Cost (CAC)
This metric measures how much it costs to convince one customer to buy your product or service. It is made up of a wide variety of different costs such as advertising, marketing, inventory management, and creative costs, to name a few.
CAC is calculated by adding up all of the costs associated with obtaining new customers (such as advertising and marketing costs of a specific campaign) and dividing this by the number of new customers acquired through that campaign.
Customer acquisition cost is significant because it shows just how much money is being spent on advertising per customer. If this amount can be optimized, costs can be cut, and profit margins can be improved.
4. Customer Lifetime Value (LTV)
Customer lifetime value takes a detailed look at how important a customer is to your business throughout your relationship.
To calculate LTV, you must add the average purchase value per customer within a specified time period, multiplied by the average number of purchases within that time period. This figure is then multiplied by the length of time that that customer remains one of your customers. This will give you the average amount of money that you can expect each customer to spend.
LTV is important because it lets you know exactly how much each customer is costing you and gives you insight into how to retain old customers and gain new ones.
5. Return on Ad Spend (ROAS)
Return on ad spend is a way of measuring just how much money your company has earned for every dollar you have spent on advertising.
This metric is calculated by taking the total sales generated for a specific campaign and dividing it by the total advertising expenditure during that campaign period. This will give you the ROAS percentage.
Calculating return on ad spend is extremely important when creating your advertising budgets and lets you know just how far each advertising dollar is going in generating new sales.
6. Gross Profit Margin
Being familiar with your gross profit margins is imperative to the success of your business. You are probably already aware that your gross profit margin is the total of your net sales minus the cost of goods sold.
Gross profit does not take into account any other expenses, such as overhead, administrative, or marketing costs. While having a high gross profit margin does not necessarily mean financial stability, the higher this margin, the better off your company will be.
Having a solid understanding of your gross profit margins will allow you to make the best decisions regarding budgeting and pricing strategies for your business.
Tracking these key performance indicators will give you the upper hand in making sound decisions for your business. They give you valuable insight into your customers, advertising campaigns, pricing strategy, and overall business goals.
However, in order for you to generate accurate and reliable KPI data, you must have good bookkeeping practices in place. Being well organized and thorough when it comes to collecting and managing your business data will ensure that the information you have to work with when tracking KPIs is up-to-date and precise.
One of the best ways to ensure that your bookkeeping is being skillfully executed is to hire a professional. Our team of experts at Enkel is here to help. With just the click of your mouse, our team of experts can assist you with all of your accounting and bookkeeping needs, helping your business grow to new heights.