“If you cannot measure it, you cannot improve it” – Lord Kelvin.
The emergence of e-commerce has greatly transformed the retail business. With technology advancement and low entry barrier, it is very easy to start a store but it’s hard to sustain and successfully scale up.
We are a Shopify partner, working with many Shopify based e-commerce companies; the main challenge in taking a data-based decision is data overload. Google analytics and other marketing platforms provide a lot of data points and therefore we tend to overlook the key business metrics.
In this scenario, it is imperative to track all key metrics to keep the business on path of profitability.
Gross Margin: It measures the average profit generated from each product. The industry Gross Margin varies between 20 – 40 % (https://www.marketingsherpa.com/article/chart/ecommerce-average-gross-margins).
How to improve –
- Track the Margin and Margin% for all the products on weekly basis
- Set a benchmark (let it be 10 %), never cut the price below the benchmark. If the competition forces you to lower the cost, try to enhance value proposition by giving better and prompt service along timely delivery.
- Make sure the products have appealing images, properly written description, and customer review.
- Focus on the main product – The 80/20 rule even applies to the e-commerce industry; if any product is not generating significant revenue and margin is below the set benchmark, it is better to stop selling the said product.
- Many companies opt for outsourcing their non-core activities to e-commerce partners as running processes and activities in-house can be a financially risky proposition.
Cart Abandonment Rate: It is the ratio of number of payment process not completed (abandoned cart) to the number of initiated payments.
The industry average is 70-80% (https://www.barilliance.com/cart-abandonment-rate-statistics/).
How to improve –
- A/B test abandoned checkout – Regularly test the sales funnel; all the product elements should be proper, colour, size, description, price, discounts, offers, the trust badge placement and all the payment options should be properly present. Payment process should be smooth and seamless across all platforms and browsers.
A/B helps you find the best option selected by the customer.
- Primary Research – Customers are the best judge as they can give critical input to improve the payment process. Therefore it is imperative that you regularly take customer feedback
- Keep an eye on Competitors – Your payment process may be stable, but the competitor has come up with a safer and faster transaction, which may affect your performance. Thus keep an eye on what strategy competitors are adopting.
- Sanity Check – According to recent research, the main reasons for abandon cards are unexpected shipping costs, customers are forced to create a new account, security concerns, confusing check out or inability to find a coupon. Every day do the sanity check for the main reasons and try improving on them.
Customer Acquisition Cost (CAC) – It is the cost associated with acquiring a new customer; mathematically it is the ratio of total cost associated with customer acquisition to the number of customers acquired.
It’s a key metrics if you are running marketing campaigns on multiple channels.
How to improve
- Viable CAC – Calculate the viable CAC cost for your store, for a profitable business it should be 1/3 or below the LTV (Average Life Time Value). CAC nearing the LTV is an alarming sign. If CAC of a channel is above the threshold, first try to optimize it or you may need to stop that channel.
- Optimize the Campaign – Try to find the best performing campaign in a channel and scale them, Like on AdWords, you might be running a lot of campaigns, find the AdGroup and keywords giving maximum revenue and optimize those campaigns.
- Scale the Channels – Find the channel having minimum CAC and Gross margin %. Scale up the performing campaign on those channels.
Customer acquisition by channels – As the retailers are moving from organic to paid channels and the number of channels are too many, it is one of the most important metrics. There are 3 sub-metrics Traffic by channels, Revenue by channels and Margin % by channels.
Traffic by channels – It is the website traffic generated by various channels
Revenue by Channels – It’s the revenue generated from various paid channels
Profit Margin % – It is the ratio of profit to cost associated with the channels.
Mathematically Profit margin % = [(Revenue – Cost)/ Cost] * 100
How to improve
- All the three metrics are equally important, keep track of all the metrics
- First set a goal, if the goal is traffic, then concentrate on the channel giving better traffic, same is the case for revenue.
LTV – Customer’s lifetime value is the total amount spent by your customer throughout his lifetime. For e-commerce industry calculating customer lifetime is quite complicated. If you want to understand Lifetime value calculation in detail then head over to our Shopify blog (https://www.shopify.in/blog/customer-lifetime-value) as they have provided easy to use mathematical formulas to calculate Lifetime value.
LTV = (Average order value * Net profit * Avg Customer retention rate) *(Avg Purchasing frequency/year * Avg Customer life)
For the fashion industry, Net profit is 10%, Retention rate 50%, Customer Life 5 years.
Let’s calculate LTV of a fashion store having average order value $50 and average purchasing frequency is 3 times/year
Life time value of a fashion store (50 * 0.10 * .50) * (3*5) = $37.50
It is critical to track LTV: CAC
How to improve
- Engage the customer – Have multichannel support and engage the customer on all the channels.
- Marketing Automation – Automate various activities like autoresponders, mailers on the special occasion, mailer on specific action on store. Automation will save marketing cost and engage the customer.
Prepare a dashboard for all the metrics and track each data point continuously. Tracking the metrics will give you the clear picture of your e-commerce business.
Lastly, Tacking will just tell the current state, you should take the corrective measures and make your eStore more efficient and sustainable.
If you need immediate help this holiday season, contact us and we’ll get you on your way.