This is the second post in our series on bookkeeping for e-commerce businesses. The first post is a comprehensive bookkeeping guide for e-commerce businesses. The next post in our series on e-commerce businesses offers guidance on how to reduce operating expenses.
Key performance indicators (also known as KPIs) measure how well your business performs and whether you are heading in the right direction to meet your future goals.
The list of KPIs that you could evaluate is 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 clearly explain 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)
To fully understand a customer's purchasing habits, you must have a good grasp of their average order value. This data shows the average amount that each customer spends per order.
To determine your AOV, 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 that can help your business determine a better pricing strategy and increase overall revenue. Specifically, this metric helps businesses understand their customers' purchasing behaviours and assess the effectiveness of their pricing strategies. By tracking AOV, businesses can tailor marketing strategies to boost this value, perhaps by upselling or cross-selling products. Essentially, increasing the AOV can lead to higher overall revenue without necessarily increasing the number of customers, making it a strategic focus for growth.
2. Website Conversion Rate
A website’s conversion rate measures the percentage of visitors who complete a desired action on a website, like making a purchase or signing up for a newsletter. Basically, it is the number of people who visit your website and actually take action.
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. Vital to the accuracy of this metric is the definition of a visit. For instance, a visitor who comes to the property twice in a very short period could count as a single visit. A visitor who bounces out in less than 30 seconds could be removed from the visitor count.
Website conversion rate statistics can give your business valuable insight into how well your website converts visitors into actual customers. They can also help you better understand your customers and provide relevant information on how to better target your desired market. This rate is key for evaluating the effectiveness of a website’s design and marketing efforts. A higher conversion rate means the website successfully persuades visitors to take action, which is essential for achieving business goals. Focusing on improving this rate can help maximize the return on every visitor, making a website more profitable.
3. Customer Acquisition Cost (CAC)
This metric measures how much it costs to convince one customer to buy your product or service. It includes a wide variety of costs, such as advertising, marketing, inventory management, and creative costs.
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 looks 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 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 costs your business 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 how much money your company has earned for every dollar 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
Knowing your gross profit margins is imperative to your business' success. Your gross profit margin is the total of your net sales minus the cost of goods sold.
Gross profit does not consider 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 your business's budgeting and pricing strategies.
Final Thoughts
Tracking these key performance indicators will give you the upper hand in making sound decisions for your retail business. They give you valuable insight into your customers, advertising campaigns, pricing strategy, and overall business goals.
However, to generate accurate and reliable KPI data, you must have good bookkeeping practices in place. Being well-organized and thorough in 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.
