You can’t improve what you don’t measure — Peter Drucker
KPIs are the north stars that guide your business.
In the hyper-competitive ecommerce space, to rise above the competition, we need to be continually testing and iterating on our hypothesis to improve business operations. To ensure we are moving in the right direction, we have to measure our progress through data-driven analytics support.
The whole premise of Data-Driven decision making is rooted in solid, meaningful, and accurate metrics that are relevant for each business.
“But there are too many metrics, how do I know what to focus on??”
“I hear terms like AOV, Repurchase rate, CLV talked about a lot but what do they mean and why should I care”?
Read on and find out.
What are KPIs?
Before we define KPIs, we need first to introduce metrics. So what is a metric? A metric is simply a unit of measurement, used for quantitative assessment or evaluation. For example, a centimeter is a metric, and it is used to describe lengths. Metrics are essential for growth, as Peter Drucker, the father of modern business management, once said, “you can’t improve what you don’t measure”. Just as athletes are trying to shave seconds off their best times, ecommerce merchants are working to improve conversions to their store.
So what are KPIs? KPIs stands for Key Performance Indicator, and they are just a set of metrics that businesses use to measure their performance against objectives and the overall health of their business. It’s crucial to agree upon the right set of KPIs for each business, and not to fall into the trap of chasing vanity metrics that look great but aren’t meaningful. For example, when people try to lose weight, they often focus on lbs, which is a vanity metric that isn’t very telling about your overall health. BMI (Body Mass Index) might be a better metric to use.
The same thing applies to ecommerce. While it’s important to look at the top line, it’s just as important to pay attention to bottom-line margins. You can’t build a sustainable business by losing money indefinitely without a plan to turn a profit down the line.
Next, we’ll talk about some of the familiar KPIs like AOV, Repurchase Rate. We’ll also cover a few metrics you may not be familiar with such as CLV, Acquisition to Churn rate, and Avg. days between purchases.
Why do KPIs matter? Why should I care?
Without proper measurement and tracking of your key metrics, a business doesn’t know how well they are doing, what to focus on, and where to look for improvements. It’s like flying blind or setting sail without a compass and hoping you don’t crash. There might be a time in the past where only a “roll up the sleeves and putting in the hard work” attitude would turn out ok, but those days are long gone. What we have now is a hyper-competitive, low barriers to entry internet marketplace where someone, somewhere are doing everything worth doing. Every one of us is facing competition, and only by continually measuring and improving do you increase your chances to come out on top. And it’s not about tracking everything, but tracking the right metrics and think about how to move the metrics to improve your performance.
If you have not started learning about your metrics, you really should start looking into it. You can study up online to do it yourself via Google Analytics and other tools. If you want to get access to KPIs right away, you can always find an analytics platform such as Segments.
Why can KPIs do for me?
While there are many, I’ll try to summarize and include just the most important ecommerce KPIs here that relates to customer orders.
First up, you have AOV, AOPU, and ARPU. They stand for avg. order value, avg. order per user, and avg. revenue per user. These three metrics help you understand what is the avg. amount customers are spending on your store, as well as how many orders/revenue you’re getting from each paying customer. For these metrics, the higher the value, the better the performance. They are the foundation to your store, as it’s critical to understand whether your unit economics on each user order is going to be profitable or not. You have to be careful when you calculate these metrics too. You should use net revenue by excluding taxes, shipping charges, and canceled orders in your calculations. If you didn’t, it could skew your results, thinking you are doing better than you are.
Next, we have Repurchase Rate. We define repurchase rate as the # of repeat customers divided by overall customers within the same period. This metric helps you understand how much business you are doing from repeat customers. In general, if you can induce more repeat purchases from the same customer, the more profitable you will be. Why? It’s simple math because you’ve already spent the money acquiring the user upfront so the more they spend, the better. There are some exceptions as certain items are buy-once products with very long repurchase cycles. Things like baby goods, durable goods, fit in this category.
Last but not least, I’ll introduce three combo metric that might not be as familiar, and they are CLV, ADP, and ACR.
CLV stands for customer lifetime value. As the name suggests, it’s a metric that tries to measure the spending potential of a customer through their lifetime with your store, and it’s usually predictive. CLV is vital to understand because it tells you the potential spend on avg. you can expect, which goes into your breakeven analysis when you calculate your other expenses like marketing spend.
ADP is avg. days between purchases. This metric describes the buying cycles of your store and helps you gauge when customers might come back and when they might be at risk of churning. Every product has it’s own purchase cycle, are you still using a static business rule delay on your email flows? Then you should be looking into your purchase cycles.
And we have ACR, acquisition to churn rate.ACR is sometimes known as the leaky bucket rate, and it measures how well you are retaining users relative to your newly acquired users. If the rate is above 1, then you are acquiring users faster than you are losing them. When it’s below 1, then you might be in trouble because you are likely losing users more quickly than you can acquire them.
In summary, we discussed the importance of tracking and continuously reviewing your KPIs to measure your business performance. Be sure always to ask your analytics provider how the metrics are calculated and verify they are accurate. Remember, you can’t improve what you don’t measure. In a hyper-competitive marketplace, the better you know your customers, the more successful you’re likely to be. The best way to do that is through your data.
Finally, data is power, and we want to give ecommerce data powers back to the people. So join us and start growing with your data today!