As an eCommerce entrepreneur, you are juggling a ton of responsibilities from sales and marketing to customer service and supply chain logistics.
Unfortunately, many make their jobs so much harder by not having a firm grasp of their key metrics. When you don’t define and track key metrics, it is essentially the equivalent of playing the slot machines in Las Vegas. You might win big. Or, you might walk out in debt.
If you don’t want to gamble with your business success, that’s where tracking metrics and establishing metrics and benchmarks come in.
Benchmarks provide directional guidance. In this post, we’re sharing some eCommerce financial and operational benchmarks along with how to gauge success.
Why are eCommerce financial benchmarks important?
Every eCommerce business generates data, but not every business understands how to interpret it. This is why eCommerce financial benchmarks are so important. On paper, a benchmark acts as a point of reference against which financial and operational performance can be evaluated or compared.
eCommerce financial benchmarks provide context for various other KPIs, such as customer conversion rate and cart abandonment rate. Without financial benchmarks, these areas of business performance can be interpreted erroneously or understood incorrectly, creating significant gaps between eCommerce business goals and the realistic trajectory of the business.
Business owners who monitor their financial benchmarks have the ability to take immediate action to course correct over time and gauge current performance against broader industry trends.
16 eCommerce financial benchmarks
Here are the top eCommerce financial metrics you should be tracking along with benchmark ranges.
(Note: These benchmarks can vary, so it is best to consult with a fractional CFO or an eCommerce accounting firm, like Bean Ninjas, to get realistic targets for your business.)
1. Gross Margin
Gross margin is one of the most tracked eCommerce financial benchmarks, and for good reason. It refers to net sales minus the cost of goods sold (COGS), or the amount of profit made before deducting selling, general, and administrative (SG&A) costs, divided by revenue. It’s calculated using the selling price of an item and expressed as a percentage.
Generally speaking, a gross margin ratio of 50% to 75% is considered healthy, with 60% weighing in at above-average and 75% considered excellent. The average gross margin for eCommerce varies by business model, with eCommerce manufacturers experiencing higher gross margins than eCommerce dropshippers and resellers.
2. Profit Margin
Profit margin is a financial benchmark used to measure eCommerce profitability. It’s determined by dividing net profits by net sales over a given time period. This is often referred to as your bottom line, as it’s the percentage that’s left after you’ve calculated all revenues and all costs required to support them.
Net profit is calculated by subtracting all COGS, including labor, operations, and raw material, from the total revenue generated. Like gross margin, profit margin is also expressed as a percentage.
Because profit margin considers far more expenses than gross margin, it’s typically a smaller percentage. A profit margin of 10% to 25% is deemed healthy, with 20% weighing in at above-average. Generally speaking, a profit margin of 8% or less is low.
3. Lifetime Value (LTV)
Customer lifetime value (LTV) is the total worth of a customer to an eCommerce business over the entirety of their relationship. This key metric is directly linked to anticipated revenue and can ultimately drive expense savings, as it costs dramatically less to retain current customers than it does to acquire new ones. The more you increase LTV, the more you drive business growth.
LTV is calculated by multiplying customer value (average purchase frequency multiplied by average purchase value) by the average customer lifespan (average amount of time a customer makes continuous purchases). A healthy eCommerce LTV should be at least three times greater than your customer acquisition cost to remain sustainable over time.
4. Average Order Value (AOV)
As the name might suggest, average order value (AOV) refers to the dollar amount spent each time a customer makes a purchase on your eCommerce website. AOV can be determined by dividing the total revenue for a given period by the number of orders in that time period.
Though AOV heavily relies on the type of products you sell, a healthy range to anticipate is between $80 and $100. Orders made through direct traffic to your eCommerce website are typically higher than orders made through third-party traffic sources, such as social media.
5. Conversion Rate
Conversion rate refers to the percentage of users who take the desired action on an eCommerce website, namely making a purchase. It is calculated by dividing the number of conversions by the number of leads — in some instances, leads could be the total number of ad interactions directing traffic to your eCommerce website or they could be the total number of product page visits.
The average direct conversion rate for eCommerce websites ranges between 2% and 4%. However, depending on the traffic source (such as email marketing or referrals) eCommerce conversion rates are considered above-average at 10% to 14% and below-average at 0.5% to 2%.
6. Contribution Margin
An eCommerce contribution margin describes the selling price per unit minus the variable cost of sales. Variable costs refer to expenses that are influenced by the number of cost of fulfillment, shipping, and taxes and increase along with sales volume to account for raw materials and labor. The money remaining after variable costs contributes to the payment of an eCommerce business’s fixed costs.
Also referred to as ‘dollar contribution per unit,’ a higher contribution margin contributes more to the overall profit of the eCommerce business. A healthy contribution margin for eCommerce is likely to fall within the 35% to 75% range. The closer a contribution margin is to 100%, the better to cover the business’s fixed costs.
7. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) refers to the amount of money a company spends to obtain one new customer. It’s a financial benchmark that speaks to the effectiveness of eCommerce marketing and includes the resources that enable eCommerce retailers to connect with new leads. It’s important to keep CAC low, as it’s unsustainable to pay more than what customers spend in LTV.
Generally speaking, eCommerce CAC is driven by channels such as paid search and display ads and social media. Most eCommerce businesses should strive to keep CAC between $40 and $70 to maintain proper advertising but still remain profitable, lowering CAC whenever possible.
8. Cart and Checkout Abandonment Rate
Cart and checkout abandonment rates are eCommerce benchmarks that can have a big impact on your profit margin. These metrics refer to the number of users who have navigated through an eCommerce website, added specific items to cart, and then either left before heading to checkout (cart abandonment) or before completing the checkout process (checkout abandonment).
These are essential benchmarks to identify problem areas on your eCommerce website as well as potential gaps in your sales funnel that do not accommodate certain buyers. The average abandonment rate for eCommerce retailers is 69.8%, though it’s best to strive for 60% and below.
9. Customer Refund Rate
Customer refund rate is another eCommerce financial benchmark that has significant influence over profitability. It measures how many units were returned (or funds returned to customers) within a specific period versus the total number of units sold.
The rate of eCommerce returns varies across all industries, though auto parts, apparel, and houseware retailers experience the highest rates. Average customer refund rates range from 3% on the low-end to 22% on the high-end, with retailers striving to remain at or below 12%.
10. Return on Ad Spend (ROAS)
Return on ad spend (ROAS) is a key operational benchmark for eCommerce retailers. It describes the amount of revenue that is earned for every dollar spent on a marketing campaign. As it pertains to eCommerce, ROAS refers to profit derived from paid advertisements and email marketing.
The easiest way to calculate ROAS is to divide the revenue attributable to advertisements by the cost of the advertisements themselves and multiply the quotient by 100. The average ROAS across all industries is 2.87:1 or a profit of $2.87 for each $1 spent; however, the ROAS for eCommerce is slightly higher at 4:1. Online retailers should aim to earn a minimum of $2 per each $1 spent.
11. Customer Satisfaction Score (CSAT)
Customer satisfaction score, better known as CSAT to eCommerce businesses, is a metric used to indicate the effectiveness of customer service and product quality. This score can be determined using recent reviews or customer satisfaction surveys.
To calculate CSAT, divide the number of satisfied customers (those who have rated customer service or product quality a 4 or 5 out of 5) by the total number of responses. The CSAT benchmark for eCommerce is 81%, though retailers should strive for 70% and higher.
12. Net Promoter Score (NPS)
A net promoter score (NPS) quantifies customer loyalty to a specific company and measures the likelihood that a customer would recommend an eCommerce business or product to a friend or colleague. A higher NPS score is associated with a higher CSAT score, as satisfied customers are more likely to tell others about their shopping experience.
An NPS score can range from -100 to +100. Negative scores indicate customers would not recommend your company and are likely to leave poor reviews, whereas positive scores are more likely to be promoters of your company. The average NPS score for eCommerce retailers is 45. The closer your NPS score is to 100, the better; but strive to achieve a score of 40 or higher.
13. Repeat Customer Rate
Repeat customer rate is an eCommerce operational benchmark that holds a large sway over the financial health of a retail operation. Since it costs significantly more to obtain new customers than to retain current customers, a high repeat customer rate allows eCommerce businesses to save on CAC costs and drive a more profitable LTV.
To calculate repeat customer rate, divide the number of return customers by the total number of customers in a set period and multiply that amount by 100 to develop a percentage. This amount can be calculated daily, weekly, or monthly. A healthy repeat customer rate for eCommerce businesses ranges from 20% to 40% with anything upwards of 30% considered above-average.
14. Inventory Days on Hand (DOH) for Inventory Control
Inventory days on hand (DOH) is an operational benchmark that refers to how long it takes an eCommerce retailer to sell its inventory. Since inventory accounts for a large amount of a retailer’s working capital (as cash tied up in product waiting to be sold), fewer days on hand indicates that stock moves at an optimized rate. Also referred to as weeks on hand, this metric enables businesses to track their performance over time.
To calculate the number of inventory days on hand, divide the value of inventory by the costs of goods sold and multiply the quotient by the number of days in the period you want to calculate. Optimal inventory days on hand for eCommerce businesses is around four weeks for established brands with consistent supplier relations.
Pro Tip: Keep an eye out on your lead times when reviewing to avoid stockouts.
15. Marketing Efficiency Ratio (MER)
Marketing efficiency ratio (MER) gauges the overall performance of all digital marketing efforts beyond just paid ads. Also referred to as ‘blended ROAS,’ MER is calculated by dividing the total revenue for a set period by the total marketing spend for the same period.
The marketing efficiency ratio for eCommerce businesses will vary depending on the amount of digital marketing activity taking place. The average MER for 2021 was 4.78, though a ratio of 2 to 4 is acceptable for eCommerce businesses.
16. Cash Flow Margin
Last but not least, cash flow margin is an essential eCommerce financial benchmark for all online retailers. It measures an eCommerce retailer’s cash from operating activities as a percentage of sales revenue over a given period. As a benchmark, it describes how effective an eCommerce business is at converting sales into cash, and will require various metrics to calculate.
To calculate your cash flow margin, you’ll need to add your net income to both your non-cash expenses and change in working capital and divide the sum by the sales for that period.
Maintain financial and operational benchmarks
Benchmarks are more than just an assortment of business metrics, they’re an indication of general business health and a roadmap to your business trajectory.
Though eCommerce dashboards are home to dozens of key performance indicators, the above 16 financial and operational benchmarks are a must to gauge the sustainability and profitability of your business.
Want to improve your cash flow and get more confident with your numbers? Learn how to use Xero effectively for your eCommerce business with our free Xero toolkit. This includes our profit margin calculator, eCommerce annual forecast template, salary cap calculator, financial roadmapping template, and more. Download now.