The world of e-Commerce is hyper-competitive, filled with businesses that are fighting for the fleeting attention of shoppers. In order to catch consumer attention and win their traffic over rivals, marketers commit loads of time and dollars on initiatives that need to be measured and tracked. With so much going on, it can be easy for an online business to get lost in all the numbers and perhaps, end up neglecting their most important metrics. Like Albert Einstein so eloquently put it, “not everything that can be counted counts and not everything that counts can be counted.” Determining the key performance indicators (KPIs), i.e. your most important metrics, will help you to understand the true state of affairs and to readjust strategies as needed in order to generate more revenue.
According to many e-Commerce leaders such as Shopify, useful KPIs need to meet four characteristics:
- They need to have a direct impact on the bottom line
- They should be simple and be easy to calculate
- They need to produce real-time data and results
- They need to provide you with insight on how to take action to make a positive difference in your strategy
So, let’s cut through the noise and highlight five crucial KPIs that will tell you if your strategies are headed towards successfully achieving your e-Commerce business goals.
- Customer Acquisition Cost
Customer Acquisition Cost is how much expenditure your e-Commerce business needs to put out to acquire one customer. As we stated at the beginning of this post, in order to catch the attention of potential customers, marketers initiate various activities (that require time and money) to drive visitors to their sites instead of losing them to the competition. Whether it is ads or the cost of labor to create a killer piece of content for your site, it is important to know what goes out in comparison to what comes in so that you can allocate more budget to the area that actually works. This metric sheds light on your entire plan moving forward. By understanding your CAC, you can determine how many customers you want to get in any given time period and then allocate marketing initiatives and budget accordingly. This helps to keep your cost for every acquired customer-focused and low.
To determine your Customer Acquisition Cost, take the total budget spent on sales and marketing initiatives in a given time period and divide it by the number of customers acquired in that same time period.
$Amount spent on Sales & Marketing ÷ No. of Acquired Customers = Customer Acquisition Cost (CAC)
It doesn’t always work in profit’s favor to increase marketing spend to get more sales. Quite often, though more sales are coming in, the cost of turning a prospect into a paying customer becomes relatively higher, which in turn plummets your profit margins. A great way to extend the impact of your marketing ad spend and improve you CAC is by offering the ability to customize products on your website. This offering is proven to increase web traffic; the ability to create their own products incentivizes shoppers to come to your website rather than shop at traditional stores, or even other online shops. A product personalization offering also entices customers to spend more time on your site while they create their merchandise. As your web traffic increases and visitors spend more time on your pages, your SEO rankings begin to soar for related product searches. This, in turn, helps raise brand visibility, thus driving more traffic to your site organically.
- Conversion Rate
Your business’ conversion rate is the percentage of web traffic that takes an action on your site. These could be micro-conversions, like signing up for special offers, or macro-conversions, like purchasing a product. Why does this percentage matter? It gives you a realistic idea of how effective your website is in encouraging visitors to engage or take action. From watching trends on various pages of your website, you’ll be able to determine where people drop off, or where people are particularly engaged so that your strategy can be continually adjusted and improved. It is equally as important to track micro-conversions, as it is to track the macros because it is often those smaller conversions that nurture a visitor and lead to the all-mighty conversion…a sale.
To get your current Conversion Rate, take the number of actions taken (e.g. completed sales transactions) divided by the number of site visitors/leads, and multiply that by 100.
(No. of Sales ÷ No. of Leads) x 100 = Conversion Rate
On average, good conversion rates for online shoppers are between 2.6 and 3 percent, so you should expect that out of every one hundred visitors, 2 or 3 of them will convert. However, you can certainly aim to surpass the average. With the addition of a product personalization offering, sales conversion rates are known to skyrocket due to the time commitment consumers put towards co-creating their unique product and because a personalized product, in essence, exactly meets the consumers’ expectations since they personally produced it.
- Cart Abandonment Rate
Cart Abandonment Rate is the percentage of shoppers on your site that place items in their shopping cart, but leave the site without checking out. In e-Commerce, unfortunately, this is part of the industry landscape due to the nature in which people shop online. The Baymard Institute contends that a majority of cart abandonments happen because shoppers were simply browsing, comparing prices or even saving items for later. However, by isolating that reason and exploring the other more telling reasons, it was found that carts get abandoned due to reasons like unexpected extra costs, long/complex checkout processes, slow delivery, unsatisfactory return policies, insufficient payment options, and more. Whatever the reason may be, the effect to your bottom line remains grave. In fact, Forrester Research reports that online retailers could be facing $18 billion worth of lost revenues a year from cart abandonment, and that is why tracking this metric is extremely important to e-Commerce success.
To get your current Cart Abandonment Rate, simply take the number of sales and divide it by the number of shopping carts created, then subtract that number from 1 and multiply by 100.
1 – [(No. of sales) ÷ (No. of shopping carts created)] x 100 = Cart Abandonment Rate
The good news is that a large portion of that lost revenue can be recovered if retailers are measuring their rate and can formulate their findings to address common issues and establish a post-abandonment strategy to re-engage shoppers. Even more impactful than a reactive strategy like a post-abandonment one, providing customers with an option to personalize the products you offer can actually pre-emptively decrease cart abandonment rates. This can be attributed, again, to the involvement and connection that consumers feel when co-creating the merchandise they order. The more linked shoppers feel to the products they create, the more likely they are to complete the journey through to checkout and payment. And, by providing an extra confidence boost to complete a transaction through in-context photorealistic previews of the merchandise created on your site, cart abandonment rates tend to decline even faster.
- Average Order Value
This metric will show you how much customers are spending on your site per order in a specific time period. Tracking and improving this is a great way to boost profits because getting more money from each customer order helps generate higher revenues and even absorbs some of those customer acquisition costs.
You can find your Average Order Value for any given time frame (month, year, etc.) take your total revenue and divide it by the total number of orders from the same time frame.
Total Revenue ÷ Total No. of Orders = Average Order Value
Knowing this number can even help you in determining a threshold for offering free shipping. For example, if you determine that your Average Order Value is $50, you can offer a free shipping incentive on all orders of $50+. Fifty-eight percent of shoppers are more likely to add extra products to cart to qualify for free shipping. Small tweaks to your website’s strategies such as this can have a colossal effect on the size of customers’ orders. What’s more, offering product personalization is a powerful method for boosting the average order value because it allows you to apply a premium to your products’ price tag. In fact, you can markup the price of your products by approximately 20% if you enable customization on them. Since a product personalization offering is also linked to lower cart abandonment rates and higher conversion rates, this is a win-win strategy all around.
- Customer Lifetime Value
As acquiring new customers can be costly, tracking and understanding this metric is a necessary chore because it sheds light on how well your organization retains its customers. This value is the approximate net profit that each customer is expected to bring to your business over the entire span of your relationship with them. Rarely is this value precise, but it does provide a panoramic view of all of your tactics’ effectiveness and proves to be useful in future goal planning.
To figure out the Customer Lifetime Value, first you need to track some other metrics: 1) the Average Order Value; 2) the Average Purchase Frequency Rate; 3) the Average Customer Lifespan. Once you have these three averages to feed your calculation, you simply multiply them to understand the revenue you can reasonably expect from an average customer over time.
[(Total Revenue ÷ Total No. of Orders) x (Total No. of Sales ÷ Total No. of Unique Customers)] x [Average Amount of Time a Customer Continues to Purchase from You] = Customer Lifetime Value (CLV)
This is definitely not as simple a metric to calculate as others, and that’s part of the reason why it is so insightful…it forces you to track other metrics to get the value! Compare the Customer Lifetime Value to your Customer Acquisition Cost; if this number is higher, you’re doing well and you’re on your way towards growth, but if your CAC is actually higher it means you’re not cutting a profit and need to take strides to combat the issue. You can cut advertising costs or find cheaper ways to generate leads and produce content, but the most beneficial method might be to concentrate on customer retention, especially when you consider that having just a +5% shift in customer retention can escalate profits anywhere from 25% to 95%. Allowing customers to personalize the products they purchase from you can have a hand in improving your customer retention and loyalty rates. By creating it themselves, customers are able to get exactly what they want without your business having to incur more overhead costs. When your store has the ability to meet each customer’s unique needs over the competition who only serves generic options, they’re much more likely to stick with your brand and even advocate for it.
Finding the time to track KPIs can seem daunting, and once you get down to it, they can be frustrating to analyze. However, putting that effort in will surely pay off in driving your business toward the best path to continued growth and success. Remember, it is only the things that get measured that can be improved upon.
Employing the power of product personalization can have a positive impact on all the major KPIs of an e-Commerce site. With minimal tweaks to your current go-to-market strategy and a small upfront investment on the right technology to support this venture, your website can enjoy lower customer acquisition costs, higher conversion rates, lower cart abandonment rates, more profitable average orders, better customer lifetime values, and so much more. Contact us for more information on how to add product personalization to your offerings.