What are the KPIs of your e-commerce site?

We need to turn them into useful, meaningful information to help us orient our decision-making process in the best direction. This means that, for managing an e-commerce business, it is key to know and correctly interpret the KPIs that suggest an undertaking’s success.

What are Key Performance Indicators?

KPIs, short for Key Performance Indicators, track the performance of your sales and marketing.

KPIs are quantifiable, measurable values that can be used to monitor an organization’s progress in relation to a set goal. These indicators are the quantifiable part of your goals and are at the heart of your performance management process. They let you see if you’re making progress and if you have the right strategy.

KPIs are useful when:

• They can be clearly defined and exactly measured 
• They are shared and can be understood by everyone in the organization
• They can be applied to the company’s particular business type and products
• They reflect set goals and the company mission

There are two main reasons that it essential to learn how to interpret KPIs:

• They let you realize if your business is going in the right direction. For example, through the KPIs you can monitor how much your offer meets the needs of your target market. If it isn’t up to expectations, you have a chance to improve or recalibrate what you’ve done so far.
• Once you’ve decided what direction to take, interpreting your KPIs lets you use the data you have available to orient your business decisions. For effective monitoring, you should measure KPIs at set intervals, such as days, months, or years.

The 5 most important KPIs for e-commerce

Below are the 5 most important KPIs for managing an e-commerce business. You can boost your online sales by calculating and processing this data.

#1 – Customer Acquisition Cost (CAC)

The CAC is the Customer Acquisition Cost. This KPI is especially important because it tells us the investment cost it takes to acquire one new customer. 

How do you calculate Customer Acquisition Cost (CAC)?

To calculate the Customer Acquisition Cost, the first step is to determine the time period for which you want to evaluate this metric (week, month, quarter, year). This will help you narrow the scope of your data.

Then add the total marketing and sales expenses and divide the total by the number of new customers acquired during that time period. The result should be the total cost that your company bore to acquire one new customer.

The formula for calculating the Customer Acquisition Cost (CAC) is:

Customer Acquisition Cost (CAC) = Total customer acquisition cost ÷ Number of customers acquired

The total cost of customer acquisition should include the costs of the marketing and sales: advertising expenses, personnel costs, technical costs, and creativity and content production for the advertising campaign.

Let’s give an example.

Sy that you have invested €1,000 in marketing for your e-commerce, gaining 50 new customers. Your business’s CAC will be €20.

A low CAC suggests that your marketing and sales team is doing a good job and your investments are correctly proportioned.

The CAC is a critical KPI for letting you identify the most advantageous way to acquire customers and increase profitability and profit margin.

#2 – Lifetime Value (LTV)

Lifetime Value (LTV) is a metric to analyze in relation to the Customer Acquisition Cost. This is a value that measures the expected revenue that one customer would generate throughout their relationship with your e-commerce business. After having calculated the CAC, it is a good practice to calculate this indicator in order to understand the “value” of an individual customer. 

To calculate the Lifetime Value or LTV, you will need several variables to put into the formula:

• Average Purchase Value: This is found by dividing revenue by the number of purchases in a set period.
• Average Purchase Frequency: This is calculated by dividing the number of purchases by the number of unique customers in a set period.
• Customer Value: This is calculated by multiplying the average purchase value by the average purchase frequency.
• Average Customer Lifespan: This is the average number of years in which a customer continues to buy from your e-commerce.

Here is the formula for calculating the Lifetime Value (LTV):

(Average Purchase Value) x (Average Purchase Frequency) x (Average Customer Duration) = Customer Lifetime Value (LTV)

The result is the average revenue a customer will generate by buying from your e-commerce over time. 

The LTV/CAC ratio puts the profit generated by each customer in relation to the cost incurred to acquire the customer.

If the CAC is too high in relation to the LTV, growth will not be sustainable because customer acquisition will cost more than the profit generated from each customer.

What is the ideal ratio between LTV and CAC? The right ratio should be 3:1, i.e., your customers’ value should be three times the cost of acquisition.

If it’s closer to 1:1, it means you’re spending a lot to reach your customers. If it is more than 3:1, this could mean that you are not investing enough in marketing and sales and that you might be missing out on opportunities to acquire new customers. 

#3 – Average Order Value (AOV)

The Average Order Value (AOV), also known as the average receipt, tells you how much each individual customer spends on average for each purchase. For an e-commerce shop, this corresponds to the average value of an order in the cart.

The formula for calculating the Average Order Value (AOV) in a given period of time is simple:

Revenue ÷ Number of Orders = Average Order Value (AOV)

Once you have incurred a cost to acquire a user, your goal should be to increase the amount that this person spends in your online shop. This will raise your profit margin and your investment’s conversion rate.

How to increase your Average Order Value (AOV)? 

• The first tip is to set a free shipping amount above the average order value of your e-commerce shop. Make sure that you can afford this option, that the cost is covered by your products’ prices so that you still make a profit.
• The second suggestion is to offer your customers a discount if they spend more than a certain amount or if they buy a certain number of products. For example, you could offer a 20% or 50% discount if they buy a second product. In the long run, this strategy is to your advantage, because you have already borne the cost to acquire the customer, and this increases the revenue that the client generates for your online business.
• A third way to increase the Average Order Value is to offer customers a gift card to use or to give to a friend, if they spend above a certain spending threshold. This encourages the user to return, increasing their average lifetime value, and to buy other products from your e-commerce shop. Or, if the card is given as a gift, you will have gained another customer.
• Give a gift to those who spend over a certain amount. This is another way to encourage a customer to spend more and so raise the average receipt value.
• You could also upsell or cross-sell. When you upsell, you suggest to the customer related products that are higher performing or newer and more expensive, and when you cross-sell, you suggest products that are complementary to what the user is buying.

#4 – Conversion Rate (CR)

The Conversion Rate is the percentage of visitors to your website who complete the goal you have set, i.e., a conversion, in relation to the total number of visitors. In the case of an e-commerce site, usually the goal is for the user to make a purchase.

The formula for calculating the conversion rate (CR) is:

(Number of conversions/orders) ÷ (Number of unique visitors) x 100

A high conversion rate suggests that your site has an effective marketing strategy and a simple, practical web design that meets the needs of visitors to your web pages. This means that your users appreciate what you offer and can find it easily.

How can you improve your conversion rate?

First, you should make sure that once your user has arrived on your site, it takes them only a few seconds to understand who you are, how to contact you, what you do, and how to move on to the next step, i.e., where to click to find what they are looking for.

The design of your website should be flowing and simple. With just a few phrases, it should highlight your value proposition, what sets you apart and makes your business different from others.

To inspire confidence, let your customers see reviews about your business and make sure they don’t look elsewhere, stay on your site and, most importantly, that they appreciate the quality of your customer service.

Your e-commerce site must have a good sales funnel, meaning a well-designed and hitch-free navigation path that guides the user, through a conversion funnel, towards the cart.

Don’t neglect the mobile version of your site: make sure that it is mobile-friendly and that the experience of a user who navigates from their phone proceeds simply and smoothly to the cart.

#5 – Number of abandoned/emptied carts

The final of the most important KPIs to keep an eye on for an e-commerce shop is the percentage of orders not completed.

According to the statistics, the main reasons the shopping cart of the online store is abandoned, and users do not complete their purchase are:

1. Shipping costs are too high or not specified at the beginning. Many users abandon the cart when shipping costs are added to the cart that were not shown at the beginning of the process, or they were not clear or prominent enough. Sometimes fees and additional costs are added by surprise at checkout, which are almost certain to make customers abandon their plans to complete the order. Some customers give up the purchase immediately, as soon as they find that the expenses are too high. Shipping costs are a psychological barrier to purchase, because many users have become used to free shipping. We suggest making shipping inexpensive or free, at least beyond a certain spending threshold.
2. Long or complex purchase and check-out process. In the age of instant gratification, we are used to doing everything quickly and smoothly. The purchase funnel should be fast and easy. Many users abandon online orders if at the idea of wasting valuable minutes to complete a process that is too long or hard to understand at a glance.
3. Being required to create an account. Many users abandon their cart when the system asks them to create an account. This means entering your username, password and personal data, waiting for the confirmation email, activating your account and logging in, and then often having to repeat the product search and add it to the cart. The idea of dealing with this series of operations often discourages users from completing the order. It’s better to make it optional to make an account. Ask the user only for their name and the data strictly required for shipping, such as their address.
4. Website crash. How many times have you come close to finishing an order when the site suddenly crashed, and you had to start all over again? Or you tried to insert information and go ahead with the order and the site gets stuck, without letting you place the order? Well, this is one of the classic cases when users are forced to abandon their shopping carts.
5. Not enough payment options. Another reason a user might abandon the cart is that there are not enough payment methods. Providing for payment by credit card alone is no longer enough. Many customers want to use their PayPal account and, or more than you might think, prefer to pay by cash on delivery when they receive the goods, even accepting a surcharge for this option.
   We suggest you provide as many payment methods as possible.
6. Unclear return policy or to the customer’s disadvantage. It’s important that customers can return an order if they aren’t satisfied with it. If this option is too expensive or if the return management policy is unclear, they might abandon the cart.

Based on these tips, carefully evaluate the performance of your e-commerce site and put into practice the best strategies to optimize your business’s performance.