Decoding E-Commerce KPIs: Your Guide to Measuring Online Business Success

A key performance indicator (KPI) is a headline indicator that shows how well an ecommerce business or other organization performs against its primary business goals. Ecommerce KPIs ensure the business keeps an eye on the metrics that matter.

Without KPIs, entrepreneurs and business leaders would have to resort to personal preferences, gut feelings, guesstimates, good luck and other unreliable hypotheses. When things go right or wrong, they won’t know why.

Ecommerce Metrics vs Ecommerce KPIs

Ecommerce metrics assess the performance of specific processes while ecommerce KPIs monitor progress toward the company’s most important goals.

An online store may have thousands of metrics it could potentially track – no online business has the financial, operational and human resources that would be needed to monitor all possible metrics.

Ecommerce KPIs are the metrics that best underscore the store’s performance and overarching goals. KPIs are often created from combining two or more metrics (the metrics could be ecommerce KPIs in their own right).

For example, the conversion rate is the number of online sales divided by the number of unique website visitors.

The following are some of the most important KPIs in three major aspects of ecommerce business operations:

Sales

• Overall sales (also total sales, total revenue or top line) – The money the business has received from sales. This is usually by day, week, month, quarter and/or year.
• Cost of goods sold (COGS) – Also known as cost of sales, it is the totality of the ecommerce business’ costs. This encompasses production, marketing, operations, salaries etc.
• Gross profit – To calculate the gross profit for a specific period, deduct the total cost of goods sold from total sales.
• Net profit margin – How much profit the store earns from the revenue it generates. Net profit (also referred to as the bottom line) is calculated by deducting COGS and taxes from total revenue. The net profit margin is the net profit divided by total revenue.
• Average profit margin (also average margin) – The average margin over a specific period of time.
• Average order value (AOV) – Average value of a customer’s order. To calculate average order value, divide total sales revenue from the total number of orders. It can be tracked for any time period but most companies will monitor the average order value on a monthly basis.
• Average order size (also average market basket) – Sometimes used interchangeably with AOV but doesn’t mean the same thing. The average order size is the average number of items in a customer order. To determine average order size, divide the total number of items sold by the total number of orders.
• Add to cart rate – Percentage of store visitors that place items in their shopping cart. It is calculated by dividing the number of sessions where items were added to cart by the total number of sessions.
• Cart abandonment rate (or shopping cart abandonment rate) – Determines the number of visitors that place items in the shopping cart but leave before completing the transaction. Cart abandonment rate is calculated by dividing the number of completed transactions by the number of shopping carts created. A high abandonment rate could signal a problematic checkout process.
• Conversion rate – The percentage of store visitors that buy or take other recommended actions such as subscriptions, signing up for a newsletter, joining a loyalty program, pressing a button, clicking on a link or following a social media page. To calculate the conversion rate, divide the number of conversions by the number of visitors to the store. What qualifies as a good conversion rate varies depending on the type of products the store deals in. That said, ecommerce conversion rates are usually between 2-3%. Anything below 2% could be cause for concern and should warrant investigation to establish the root cause and what remedial actions could potentially improve the low conversion rate.
• Customer lifetime value (CLTV, CLV or LTV) – Average net profit a customer is expected to contribute to the store over the entire duration of the relationship. It is effectively the total worth of a customer to the business. Customer lifetime value is determined by multiplying average order value by average number of times a customer buys each year by the average customer retention period in years or months.
• Customer retention rate – Percentage of customers that continue to buy from the store over time. This could be measured by quarter, year or longer. To calculate it, subtract the total number of new customers acquired from the total number of customers and divide by the total number of customers at the start of the period.
• Customer churn rate – The rate at which customers stop subscribing to a service or plan. To calculate churn rate, divide the number of subscribers lost by the number of subscribers at the start of the period.
• Repeat purchase rate (RPR) – The number of customers that buy from the store more than once. Repeat customers are an important indicator of product value as well as customer satisfaction and loyalty.

Marketing

• Customer acquisition cost (CAC) – The cost of ‘buying’ a customer. Customer acquisition cost is calculated by dividing the total money spent on acquiring new customers by the total number of new customers acquired. CAC in combination with CLV is one of the more widely used techniques in determining if a store is running efficiently.
• Return on advertising spend (ROAS) – A measure of advertising’s return on investment. It is how much the store has made back from the money it spent on advertising. The advertising cost would cover everything from social media ads to search engine ads. To establish ROAS, divide sales revenue generated from the advertising and marketing campaigns by the cost of the campaigns.
• Website traffic – The number of visitors to the store. This is usually tracked per month. Google Analytics is arguably the most accurate means of tracking ecommerce site traffic. Website traffic can be further broken down into new visitors, returning visitors and total visitors.
• Traffic source – The different channels website traffic is coming from. Default groupings include organic search (mostly as a result of search engine optimization (SEO)), paid search, social media, email marketing, referrals, direct and other. This data is available in Google Analytics. If the store invests a lot of ad spend on a channel but gets little traffic from it, there may be a need to redistribute spending.
• Click-through rate (CTR) – The number of individuals that clicked an ad leading to a landing page or website as a percentage of the total number of people that saw the ad. CTR is a measure of the success of a store’s digital marketing campaigns including ads and calls-to-action (CTAs).
• Average time on site (or average session duration) – Average amount of time users spend on the ecommerce website on a single visit before they leave. This statistic is available on Google Analytics. The longer visitors spend on the store, the deeper the engagement with the brand is likely to be. Average time on site as well as page views per visit and bounce rate are a popular way to determine a website’s functionality, usability, navigability and stability.
• Page views per visit – The average number of pages a user will view on each visit to the store. While more page views ordinarily mean more interest and engagement, it may also imply site visitors are having a difficult time finding the items they are looking for.
• Bounce rate – The number of users that visit one page but leave without taking any action. Ecommerce stores do not need to calculate the bounce rate manually as it is readily available on Google Analytics.

Customer Service

• Customer satisfaction rate (or CSAT rate) – Indicates how happy an online retailer’s customers are with their shopping experience. This information could be obtained immediately after a purchase by allowing buyers to rate their user experience on a scale of 1 to 5. The customer satisfaction rate can be calculated in two ways. One would be to add up all the ratings and divide by the total number of respondents. Another is to divide the total number of ‘positive’ scores by the total number of respondents. Positive scores used depend on the scale used. On a scale of 1 to 5, positive scores are ratings of 4 or 5. In other settings, it could encompass all ‘Yes’ responses or ‘Satisfied’ and Very Satisfied’ answers.
• Net Promoter Score (NPS) – Indicates the willingness of a customer to recommend the ecommerce store to people in their social circle. A measure of customer loyalty, NPS usually ranges from -100 (indicating extreme reluctance to recommend) to 100 (extreme willingness to recommend). Depending on their willingness, customers are classified as promoters (loyal and enthusiastic), passive (comfortable with the service but could switch to a different store) and detractors (unhappy with the service).
• Hit rate – The number of customers that contact support about one product. This helps highlight products that are difficult to understand or use. Calculate hit rate by dividing the total number of product sales by the number of customers that have contact customer support about the product.
• First response time (FRT) – How long it takes a customer to receive a response from the customer service team after lodging an enquiry. A quicker FRT improves customer satisfaction, boosts sales and increases the likelihood of repeat purchases.
• Average resolution time – The average time it takes the customer service team to resolve a customer issue.
• Active issues – The number of outstanding customer issues that have not been resolved at any given time.

Wrapping Up

If an ecommerce store does not understand the outcomes of its strategies, tactics and actions, it cannot develop and steer the business effectively. Key performance indicators introduce fact, objectivity and benchmarks.

Managers have an accurate picture of the state and trajectory of the. That way, they can make informed decisions accordingly. Whether that means changing pricing, marketing strategies or even the ecommerce platform.

That said, metrics including the right ecommerce KPIs do not have transformative power on their own. That lies in managers’ ability to interpret the data and extract actionable insights to better the ecommerce business’ prospects.

By leveraging KPIs, ecommerce businesses can perform the consistent actions required to underpin long term success.