As you run your eCommerce business, you’ll hear a bunch of financial metrics thrown around. But do you really know what contribution margins and conversion rates are? And why should key financial metrics be tracked?
In this post, we’ll cover everything you need to know about eCommerce financial metrics that you’re too afraid to ask.
- What are eCommerce financial metrics?
- Why all eCommerce entrepreneurs should know their numbers
- How often should you check your eCommerce metrics?
- What can go wrong if you don’t regularly track your financial metrics
- 24 most important eCommerce financial metrics to monitor
- How Bean Ninjas can help you stay on top of your financial metrics
What are eCommerce financial metrics?
Ecommerce financial metrics are any data sets that help inform your business’s financial performance. There is an abundance of metrics you can use to gauge the health of your eCommerce operation. (More on that below)
Why all eCommerce entrepreneurs should know their numbers
Monitoring your financial metrics lets you know how your business is performing. Without them, you wouldn’t know which areas are doing well and which ones need to improve. For example, if you didn’t know your cart abandonment rate was high then you wouldn’t know to send cart abandonment emails to get your customer back on the site.
Not only should you know your metrics at any given time, but you should also have key performance metrics (KPIs) set. These are unique metrics that hold value for your store that you track and monitor to determine your business growth.
How often should you check your eCommerce metrics?
Each business is different and you might be looking at more or fewer metrics than your peers. A good rule of thumb is to check your metrics on at least a monthly basis. This will allow you to track growth, performance, and gauge your inventory needs for the upcoming months.
What can go wrong if you don’t regularly track your financial metrics
Not understanding the financial health of your business is a recipe for disaster. If you don’t know your numbers, you can’t make any improvements. You could also be wasting money in areas that aren’t seeing any return, such as investing heavily in social media without realizing you’re targeting the wrong audience and not getting any traffic from your social accounts. Regularly monitoring your financial metrics reduces the risk of missing important business insights.
24 most important eCommerce financial metrics to monitor
Revenue is essentially your sales minus any returns or undeliverable products. Revenue growth shows how much your revenue has increased over the years.
A key metric for any store, revenue is critical to track because it shows you exactly how many sales you’ve made and if they have grown with time. But just because sales have grown doesn’t mean your revenue has. This ties into profitability.
For example, if your sales are the same in year one as they are in year two, but your returns and undeliverable items decreased, then your revenue has gone up. But if your sales have increased in year two and returns have gone up dramatically, then your revenue may have gone down with rising sales. Be sure to look at the full picture instead of just top-line revenue. Additional metrics like profit margin discussed below, are crucial to factor in.
Profit refers to your actual financial gain from running your eCommerce business. The simplest way to calculate profit is:
Revenue – expenses = profit
It’s important to know your profit because it shows you how efficiently your business is turning revenue into financial gains. It’s possible to have a high sales volume, but still not be profitable.
However, there is more to this metric than meets the eye. You also should calculate your gross profit and net profit.
Gross margin allows you to measure your profits as a share of your revenue. However, it’s not your final profit. Here’s a quick formula to help you calculate your gross margin:
Revenue – cost of goods sold (COGS) = gross margin
Gross margin is important because it reveals whether your items are making a profit. For example, if you have a negative gross margin then that means you’re losing money on each sale. You likely need to lower your overhead expenses at this point. But if you have a positive gross margin, you have room and money to invest in your growth.
Profit margin refers to three types of profit margins: gross profit margin (above), operating profit margin, and net profit margin. Together, each of these is defined as the difference between sales revenue and costs. The formula for gross margin is listed above. Here are the formulas for the other two profit margin metrics:
( Total revenue – (cost of goods sold (COGS) + operating costs ) / total revenue ) x 100 = operating profit margin
( ( Total Revenue – total costs ) / Total Revenue ) x 100 = net margin
It’s important to keep tabs on your profit margins so you can easily see the profitability of your business at a glance. Look at the specific metric to determine what adjustments need to be made to increase your margins. For instance, if you have a low operating profit margin then you should try reducing your COGS to improve it.
Cash flow, also known as your operational cash flow or operating cash flow, refers to how much cash your company generates in a period. Simply take your revenue and subtract operational expenses like shipping, advertising, overhead, and inventory.
Good cash flow management is critical to operating an eCommerce business and it’s often the reason many operations fail to grow. You need to understand how much cash you have on hand at any given time. For instance, say you need to expand to a larger warehouse. If you don’t know how much money is available as cash flow, how will you know if you can afford the higher building lease?
Contribution margins relate directly to the cost of your products. The higher your contribution margin, the more profitable the item is. The formula is simple:
Selling price per item – cost per item = contribution margin
You should know the contribution margin for every item you sell. This will give you an understanding of which items are best to keep in stock. For example, let’s say you have two items and they both have a selling price of $10. One of the items costs you $2 and the other costs $7 to sell. The item with the lower cost per item of $2 is one you should prioritize because it gives you the higher $8 contribution margin, as compared to the $3 contribution margin of the other item.
Conversion rate refers to the percentage of people visiting your website that make a purchase. You can calculate your business’s conversion rate using this formula:
(# of conversions / total site visitors) x 100 = conversion rate
Knowing your website’s conversion rate gives you important insights into your operation. For instance, you can make adjustments to your site and check your conversion rates to see if they improve. Updates to design, product descriptions, the checkout process, and CTA buttons are all examples of website changes you can test with your conversion rates.
Customer Acquisition Cost
Your customer acquisition cost (CAC) is simply the cost it takes to bring in a new customer. To determine your customer acquisition cost just divide your total marketing spend by the number of new customers.
Understanding your CAC gives you an idea of how well your marketing is working. For example, let’s say you spend $10,000 on a marketing campaign. The campaign results in 1,000 new paying customers. With these numbers, you know that your CAC for the campaign is $10 per customer.
Customer Lifetime Value
The customer lifetime value (CLV) refers to the amount of money a single customer will spend throughout their relationship with the business. There are many formulas of varying complexity to calculate this value. Here’s a basic one to help you determine yours:
Average total order amount x average number of purchases per year x retention rate = customer lifetime value
Knowing the lifetime value of your customers can help you make informed marketing decisions. For instance, if your CLV metric is high, then you know you should prioritize customer retention over bringing in one-time customers at higher costs.
Average Order Value
The average order value (AOV) is the average amount a customer spends on a single purchase at your store. You can calculate this metric by dividing your total revenue by the total number of orders.
AOV is a particularly good metric for new eCommerce businesses to examine. It helps you understand customer behavior and make adjustments to improve the value. For example, if your average order value is low, try suggesting additional products at checkout.
Cart Abandonment Rate
Are a large number of your customers leaving their carts behind instead of making a purchase? You can calculate this metric by dividing the number of completed purchases by the total number of “add-to carts.” You can typically find this number in your eCommerce dashboard analytics.
Understanding your cart abandonment rate will allow you to follow up effectively. If you have a high cart abandonment rate you can focus on ways to get your customers through to the checkout phase. For example, testing CTAs on product pages that engage customers and make them want to click “buy now.”
Checkout Abandonment Rate
There’s a subtle difference between the checkout abandonment rate and the cart abandonment rate metric mentioned above. Many people confuse the two, but checkout abandonments occur when the prospect is further along in the buying process. They’ve already started checking out, perhaps entered their email and payment information already, but for some reason still abandon the sale.
To calculate this number, divide the total completed purchases by the number of abandoned checkouts. Again, your eCommerce platform should have these numbers for you.
Knowing this number can reveal additional insights. Why are customers getting so far in the process and still abandoning the purchase? Try testing factors that affect this step, such as offering free shipping or a simpler payment option like Apple Pay.
Customer Refunds / Refund Rate
Your refund rate is the number of refunds, exchanges, and credit card chargebacks your store experiences. Here’s the formula to calculate this metric:
( Items returned / total items sold ) x 100 = customer refund rate
Returns can be expensive when you factor in restocking, refunds, and return shipping costs. This pivotal metric will reveal if you should be concerned about the volume of refunds for your store. For instance, if you have a high return rate that’s eating into your profits, you may want to reconsider your return policy or raise your margins to cover the cost. However, if you’re in the apparel industry you should expect more returns due to the nature of clothes shopping.
Return on Ad Spend (ROAS)
Also known as return on investment (ROI), ROAS is a measure of the revenue generated per marketing dollar. Here’s a formula:
Revenue dollars from marketing / advertising dollars spent = return on ad spend (ROAS)
ROAS can be a challenge to calculate because it can be difficult to prove which sales can be attributed to the funds spent on marketing. However, it’s a valuable metric to know because it can justify your marketing spend. Promo codes can come in handy for tracking. For example, if you advertise on a podcast, have the podcasters give their listeners a specific promo code for a discount at your store. You’ll be able to attribute sales with that promo code directly to the ad spend on the podcast spot.
Your site speed, or page speed, is the measurement of the time it takes content on a URL to load. Use a service like Google PageSpeed Insights or your eCommerce dashboard to test your site speed and see your page performance scores.
Site performance and page speed are crucial. Visitors don’t have patience for slow sites and they’re more likely to bounce if they experience a poor-performing site. Seconds make all the difference. There are many ways to improve your site speed. For example, reduce the number of pop-ups on your site, use a fast eCommerce platform, be selective with the apps you use to run your site, and regularly test site performance.
Customer satisfaction score (CSAT)
Customer satisfaction scores are based on survey results gauging the happiness of your customers. The metric and scoring vary based on the survey you use, for example, you may use a scale of 1 – 10 for responses or a simple yes or no.
A happy customer is more likely to be a return customer. Additionally, poor scores can help you discover ways to improve your business. For example, if you send out a survey and customers reply that their items arrived damaged, you can look into your packaging and shipping practices.
Net promoter score (NPS)
A net promoter score measures the percentage of customers likely to recommend your business. A simple survey asking “How likely are you to recommend our store?” with a scale of 0 – 10 will suffice for this metric.
This survey is easy to administer and can give you valuable insights. For example, if someone is unwilling to recommend your store then they’re likely to not revisit themselves. If possible, follow up with the person to find out what they were dissatisfied with.
Average ticket resolution
The average ticket resolution refers to the amount of time it takes your customer service team to resolve customer concerns. You can gauge this using your customer service software or your team’s records.
It’s important to respond to customer complaints promptly, but a quick resolution can be misleading. It could indicate that customers aren’t being effectively helped. If your ticket resolutions are taking too long or not long enough, it’s a sign to look into your customer service or ticketing process.
Traffic source refers to where your website traffic is coming from. This could be social media, Google, organic or paid searches, direct traffic, or other sources. Look at your Google Analytics or eCommerce Platform metrics to discover your site’s traffic sources.
To attract more customers, you need to understand their behavior. Traffic sources help reveal this. For example, if most of your traffic is coming from Facebook you could boost your paid ads on the social platform to drive even more traffic.
Organic vs. paid acquisition ratio
Your traffic will either come from organic or paid sources. This ratio shows the balance of the sources. For instance, if the majority of your web traffic is organic then you might see a ratio like 90 / 10, but if it’s split down the middle the ratio could be closer to 50 / 50.
Knowing this ratio will help you understand what’s working for your eCommerce store. If you’re spending a lot of money on paid ads but not seeing a return in sales, you might consider scaling back on paid ads and focusing your efforts on SEO instead.
Traffic volume, or website traffic, is the measurement of visits per page or site. Google Analytics and your eCommerce platform can indicate the number of visitors to your site.
This is an important metric because it reveals the popularity of the different pages of your site. For example, you can see which products are getting the most traffic. If a product is getting a lot of organic traffic, you may consider stocking more or improving different factors on the page to increase sales.
The number of email subscribers on your list is your email subscriber metric. Your email marketing platform will have the metrics indicating the number of subscribers, open rates, bounce rates, etc.
You should be keeping tabs on your email subscribers. Email is an excellent medium for eCommerce brands to reach their audience. For example, you can use it to communicate sales, new product launches, company updates, and more. Be sure to stay in touch with your subscribers so they aren’t confused when you email them after months of silence.
Social media engagement
Social media engagement metrics will vary by platform. However, most social channels will allow you to create a business account so you can monitor your analytics like audience engagement.
There’s no point in putting effort into your social media management if you don’t know whether your audience is engaging or not. Engagement insights are particularly helpful for eCommerce stores when used correctly. For example, if you have a strong following on Instagram and your audience prefers Reels, you can use a Reels video format to announce a new product in your store.
Repeat customer rate
The repeat customer rate measures how much of your recent purchases can be attributed to repeat business. The metric is calculated by taking repeat purchases divided by all purchases in a time frame.
Repeat customers are great for business. It typically costs less to retain a current customer than to acquire a new one. Understanding your repeat customer rate can indicate if your company is benefiting from brand loyalty. If not or if this metric is low, work on ways to encourage repeat purchases. For example, offering free shipping or a coupon code for the customer’s next purchase.
How Bean Ninjas can help you stay on top of your financial metrics
Simply put, running a successful eCommerce store means knowing your numbers. Closely monitoring a handful of financial metrics can help you streamline operations and scale more efficiently.
Looking for help with your eCommerce accounting? Schedule a free call with our team here.