I talk to a ton of e-commerce businesses every month. As part of our discovery process, we work together to uncover critical metrics to understand how the business is performing and if certain digital marketing channels like SEO or Facebook ads are going to be a good fit for them. I honestly can’t believe how many of them don’t know their numbers. I get it, calculating the numbers and knowing them like your birthday or social security number can be stressful and overwhelming, but they are absolutely necessary to growing and scaling a healthy e-commerce business.
In today’s post, I’m going to break down the ten metrics that you need to know and understand so you can make the best decisions as you grow your company. Some of these numbers can be pulled out of your ecommerce tech stack (Shopify, Klaviyo, Triple Whale, etc.), others need to be calculated on your own. Let’s dive in.
1. Customer Acquisition Cost (& Target CPA)
Your customer acquisition cost put simply is how much it cost you to get a new customer. So, that’s what you spent on emails, promotions, and more to get someone to buy your product. Ideally, you want this number to be much lower than what you’re selling, however, understanding your customer’s lifetime value (addressed in section 3) can push this number higher.
The Target CPA is tied closely to your customer acquisition cost. To calculate your target CPA, you’ll want to find out your average transaction value and subtract your cost to produce that product. Then subtract the fixed cost it takes you to produce that product. This will show you your gross profit. Take that number and subtract your desired net profit. This will give you your target CPA. To be successful, you’ll want your target CPA to be 10-20% higher than your actual target. There is also a google bidding CPA tool to help you with this if needed.
2. Return on Ad Spend
Return on Ad Spend, or as it is commonly referred to ROAS is how much money you make based on how much you’ve spent on advertising. So, it really measures the power of your advertisements.
To calculate it, it’s pretty simple. Simply add up your ad revenue and then divide that revenue by the money you’ve already spent on ads. This will give you your ROAS, It might sound super simple, but a lot of factors can affect it. So, you have to keep a close eye on it. If you’re looking for a more in-depth look at ROAS, check out our blog post here. It will outline more about what can affect ROAS, why it’s important, and more.
3. Customer Lifetime Value
Customer lifetime value is an often overlooked metric, and it is hard to quantify (unless you are using Triple Whale). The easiest way to calculate it is to take your average value of sale and multiply that by the number of transactions and multiply that by the retention rate. This will give you the lifetime value. Then take that number and multiply it by your profit margin to get your customer’s lifetime value. This number will tell you how much money you can make from a customer over their lifetime of shopping with you. You might initially lose money on your first sale or two to the customer, but you’ll make more money over time.
This might sound a bit complicated so here’s an example. A car dealership might sell you a car at a loss hoping that you’ll sign up for a warranty or services for your car. That’s how they’ll make their money back. Repeatable purchases increase your customer’s lifetime value.
This is why you might run across companies that start with one basic product, then start selling accessories, subscriptions, and upgrades. In order to continue making money, you have to tap into your existing customer base and make them return customers. It’s cheaper and easier to bring back existing customers than to acquire new ones.
4. Average Order Value
Average order value is exactly what it sounds like! It’s the average of all of your orders, and it’s very important. Average order value takes the pressure off your conversion rate and cost per click which can really help your bottom line.
The way to calculate it is to take your total revenue and divide it by the number of transactions. It’s that simple. What is interesting to note about average order value is that it’s difficult to see the success of customers who have less than a $50 average order value. Having anything below $50 makes your cost per click or conversion rate super, super high. So, you need to keep that in mind and get your order value up over $50, if that’s an issue for you.
5. Returning Customer Rate
So, your returning customer rate ties into customer lifetime value. This metric measures how many customers buy a product from you, and then return for more products in the future/how many times they come back. While it can be hard to calculate, if you know how many return customers you have, simply divide that by your total number of customers. If you want to convert that to a percentage, just multiply it by 100.
So you might be wondering what a good returning customer rate is–and that’s a bit complicated. It really depends on your industry. Everyone ideally wants a 100% returning customer rate, but it’ll probably be lower than that. Be sure to look at your industry standard for this metric.
6. Website Conversion Rate
Your website conversion rate is extremely important. You calculate it by taking your transactions and dividing that by the number of sessions. However, this metric is finicky because people’s behavior can vary greatly. This makes it hard to create a baseline for it. For example, even if you don’t change your website or pricing, your website conversion rate might drop or go up without warning. It’s much like the stock market and can be a bit volatile.
Another example of a way it can be affected is if you don’t have a great top funnel strategy at the start of your business. Later on, when you fix your top funnel strategy, you’ll get more traffic to the site from people just looking not buying. The rate going up and down is a natural thing that happens when you post new blog posts, products, have sales, etc.
7. Shopping Cart Abandonment Rate
Shopping cart abandonment is when someone puts items in their cart and decides not to buy. Sometimes this is due to sticker shock. Another reason is the ability to research pricing online. People will often shop around before buying. You calculate this by taking the total number of successfully purchased items and dividing that by the total number of items added to the shopping cart.
8. Email/SMS Opt-In Rate
When it comes to the online world that we live in, being able to get your products and sales in front of consumers is your lifeline. So, making sure that your emails are being opted into is critical. The email and SMS opt in rate is how many people you get to agree to receive your emails and texts. You have to have this permission, or you risk alienating consumers.
One great way to get people to sign up for your email list and texts is a percentage off a first-time purchase. In fact, the percentage off in email really helps and is almost standard now. Who hasn’t been tempted by an extra 10% off?
9. Email Open Rate
An email open rate is an entirely different metric. You might be able to get your emails into consumers boxes, but do they send them straight to the trash? The email open rate illustrates how many people actually opened and read your email.
Some tracking is so good that it tells you where the email goes, who opens it, and when they opened it. If you have a 30-40% email open rate that’s excellent. This is also dependent on how many people you have on your email list. As far as calculating this metric, you’ll need an email tracking system to tell you what happened to all of the emails sent out. Adobe Campaign is a great option.
10. Email/SMS Click-Through Rate
The last metric we’ll be discussing is another email and texting metric. It’s your email/sms click-through rate. This is a measurement of how attractive your email offer was to the reader. So, you got them to subscribe to your email list, got them to open the email, and then they clicked on a link in your email. Again, this number comes from a tracking system. It’s usually low for product announcements and much higher for promotions. So, keep this in mind as you draft emails and texts.
The important thing to remember about metrics is that while they give you insight and value, they are just leading indicators to give you information within the context of all metrics (aka the big picture.) They shouldn’t be used in isolation. This is reminiscent of a Malcom Gladwell article that was published in the New Yorker. Consider your metrics more like a mystery than a puzzle. You might know that mysteries require judgment of uncertainty. Your metrics are there to help you realize that you don’t have too little information, you might, in fact, have too much–and you need to break it down to make it easier to understand.