eCommerce business metrics illustrated
eCommerce is unlike any industry, moving way faster than anybody expected. With the 2020 pandemic, the eCommerce growth has received at least 10 years boost. With that said, it's very important to anyone in the eCommerce industry to understand how to measure eCommerce business performance, hence, the eCommerce metrics.
before diving into the topic, it's very important to understand the customer to eCommerce business relationship:
The primary target for any eCommerce business (and any website) is to drive traffic to its online store, this traffic can vary in sources from organic search traffic, social media-driven traffic, or ads-based traffic.
Once the traffic arrives at the online store, it's the ultimate job for any eCommerce store to convert visitors into buying customers, this stage is called Conversion Rate Optimization (CRO)
Next, the very logical stage would be to convert again, however, this time is from customers to repeat customers, this can be in the form of subscriptions (highly recommended) or simply by getting the same customer to buy more.
Now moving forward to the actual metrics, in order to follow the above flow, let's break the list down to the following groups:
Store visits refer to the total number of visits of the store whether it's organic or paid traffic, it gives a very good ballpark view of how much traffic the store is attracting through all channels. Google Analytics is the most commonly used tool to get a good understanding of store visits and dive deeper into each traffic source, understand visitor's location, devices, and so on. However, Google analytics shows only the store visits and in most part can't link the store visits to the actual sales of each of the store's products.
Session duration is another key traffic metric, Simply the more time people spent on a store, the more likely they will buy products from this store, or at least they will be more familiar with the store products.
Bounce rate is usually used in the Search Engine Optimization (SEO) space and it shows how quickly people drop off a store. For eCommerce, this is critically important for eCommerce as usually a portion of the traffic coming to a store comes through paid ads and if visitors are jumping off quickly after clicking on the ad, this would have a costly impact on the business.
Traffic: Paid traffic
Impressions / Reach
Impressions or Reach refers to the number of times an ad has been viewed regardless if it was clicked or no. Most marketing platforms like, Facebook, Google, and Ping charge advertisers per click, which means that no matter how many times an ad has been viewed, they will charge only when the ad has been clicked. While this seems like a piece of good news, however, the bigger the delta between the impressions count and clicks count indicates low interest in the ad, which translates to a lower Click-through rate.
Clicks are one of the most straight forward metrics which is the number of clicks an ad has received within a given time frame, however, it's very important to correlate Clicks with Cost Per Click (CPC) because more clicks with higher CPC means a bigger bill, also it should be linked to Customer Acquisition Cost (CAC) to make sure that the cost to get 1 customer is lower than the profit margin for this product.
Click-through rate (CTR)
Click-through rate simply is the percentage between the total number of views and the total number of clicks to an ad. One key factor here that most marketing platforms favor ads with higher CTR, this is because higher CTR means more clicks and more revenue to these marketing platforms. mostly ads with higher CTR get lower Cost Per Click (CPC).
Cost Per Click (CPC)
The Cost Per Click (CPC) refers to how much does an ad costs when someone clicks on the ad. This is determined mostly based on the competition to advertise in the same space. For example with Google ads, the more advertisers try to advertise for a specific keyword, the more costly it would be, same concept applies for Facebook, when many advertisers try to advertise a specific product, this pushes the CPC up. Other factors that affect CPC are the country that the ad is being run in and the target demographic (age, gender, interests, ...)
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the cost to acquire one customer which is the total cost of clicks / total number of conversions (Simply put, Orders). Let's say that an Ad is got 100 clicks, each click costs $1 and out of these 10 clicks there were 2 orders this means that the cost to acquire 1 customer is (100 * $1) = $100 / 2 = $50.
Return On Ad Spend (ROAS)
Return on Ad Spend (ROAS) is the total conversion value (Total $ amount of orders) that came from an ad divided by the cost of an ad within a given period divided by the cost of this ad within the same period.
Revenue by Traffic Source (RTS)
Revenue by traffic source is the list of traffic sources coming to a given store with the revenue generated by this source. It's very important to associate this metric with the cost of this amount of Traffic for this source. Imagine the following:
- Source 1: Revenue: $1000 - Cost: $9000 -> Margin = $1000
- Source 2: Revenue $5000 - Cost: $1000 -> Margin = $4000
Conversion rate is the percentage between the total number of store visits and the number of orders that came from these visits, which means how much percent of the visitors have been converted to customers. There is a whole separate track for any eCommerce Business called Conversion Rate Optimization which aims to increase this metric.
Average Order Value (AOV)
The average order value is the total dollar value of orders within a given period / the number of orders. This is one of the most important conversion metrics simply because getting the same customer to buy more items is way easier than acquiring new customers because this customer is already `In the mood` to buy and more familiar with the store and products.
Customer Lifetime Value (LTV)
After working on increasing the Average Order Value (AOV), it's very important for an eCommerce business to measure the Customer Lifetime Value (LTV) which is how much in dollar amount a store generates from a single customer. Averaging this number within the given period would give a very good indication of the store effort effectiveness on the Conversion Rate Optimization (CRO) track.
Cart Abandonment Rate (CAR)
Cart Abandonment Rate is the percent of shopping cart holders who don't complete their order compared to total shopping carts. Cart Abandonment is a great area to optimize as cart recovery is much easier than acquiring new customers because customers who abandon their cart are already interested in the product and usually much easier to convince to complete the purchase, also in many cases, customers abandon their cart because of external interruption and they just need a reminder.
Repeat Customer Rate (RCR)
Repeat Customers Rate is the percentage between the number of customers who have more than 1 order to the total number of customers.
The refund rate is the percentage of orders who have been refunded to the total number of orders. Refunds can obviously hurt business and it's one of the most important areas to improve in eCommerce in specific because it's very easy for customers to change their mind and request a refund since it's being done online. Refunds can be managed through good product quality and especially good customer service.
Churn rate means how quickly customers leave a business. it's highly related to customers lifetime value (LTV), stores with lower churn rate usually have higher customer LTV
Subscription is a business model that every eCommerce store should aim for. By converting customers into subscribers with a time commitment for ex: 6 months or 1 year the store would have a more predictable revenue which is very valuable when it comes to scaling a business. It's even better to have open-ended subscriptions where there is no end date and customers can cancel anytime.
Retention rate is how much time on average a customer stays with a business. For example, within the last 2 years if the average subscription customer stays with the business for 1.5 years that's a very good retention rate.