What is a Key Performance Indicator?
A key performance indicator (KPI) is a measuring tool or criteria that indicates how effectively and efficiently an organization as a whole is carrying out its work in order to achieve its set business targets.
In short, it is basically a tool to measure the performance of an organization in accordance with its target or goals.
What is the Difference Between Metrics and KPIs?
Metrics are limited to only tracking various business activities that surround an organization whereas KPIs are broader terms that assist the organization by keeping a check on its efficacy in the process of achievement of the set objective. On checking if the organization is not working up to its potential, then KPIs will indicate the parts of the business to focus on and alterations in the existing strategies.
Why are KPIs so Important in E-commerce?
Carrying out a well-established business isn’t as easy as it seems from the outside. There are multiple factors that are to be considered when taking even a small decision.
But sometimes, experienced CEOs make strategies on the basis of their gut feeling which no doubt can work perfectly but there’s always a limit to the success of one’s gut feeling. Luck isn’t always in our favor. That’s why KPIs are important in E-commerce.
KPIs provide businesses a direction to form strategies according to the objectives. Also, KPIs ensure the study of every strategy in detail prior to its operation which further helps in eliminating the potential risks that come along with every strategy.
Top KPI’s to Track Your eCommerce Business
A favorable change in the traffic of the website is always a positive sign for every online business. When your website suddenly starts experiencing high traffic, it means more and more people are visiting your website as the outcome of your investment in various marketing channels or tools to increase your reach organically. B
y doing so, you will also get to know about the success level of various marketing channels or tools in which you’ve invested which in turn would also be beneficial for the growth of your E-commerce business in the long run. Hence, traffic plays a vital role in indicating the performance of your business.
2. Shopping Cart Abandonment Rate
Before we begin further, it is important to understand the term, “cart abandonment”.
The term is often used in E-commerce when someone puts various items in the cart but closes the website without buying those items. Now, this occurs very frequently for different reasons. If we go through the reports for the year 2019, the abandonment rate of many e-commerce sites equates to 77.13%.
Sometimes, it is the result of improper working of the website or high shipping charges, or a change in the buyer’s mood. Due to the high cart abandonment rate, e-commerce sites have to incur huge losses which can be recovered by measuring the abandonment rate of your cart.
How to calculate the Cart Abandonment Rate?
Divide the total number of successful purchases by the total number of shopping carts formed. And if you want the value in percentage, subtract 1 from the acquired number and then multiply it by a hundred.
So your formula becomes something like this,
Cart Abandonment Rate = 1- (Total No. Of successful purchases/transactions) ÷ (Total No. Of shopping carts created) × 100
3. Conversion Rate
Conversion Rate means the total percentage of visitors taking some action(s) on your website. These actions could be anything, such as putting in your email or purchasing something, or making a return request.
Conversion rate is essential in making you aware of the efficacy of your webpage at encouraging the visitors on your website to take an action.
Suppose, you are experiencing high traffic on your lead capture page but the conversion rate remains low, it implies that you need to examine the ways that you require to improve your page to encourage more visitors to take an action.
How to calculate the Conversion Rate?
Divide the total number of conversions minus (-) the expected conversions by the total number of visitors and to achieve it in percentage form, multiply it by 100.
So your formula becomes something like this,
Conversion Rate = (No. Of conversions ÷ No. Of visitors) × 100
4. Cost of Customer Acquisition
The cost of customer acquisition refers to the estimation of the total cost that an enterprise needs to acquire or obtain a new customer. Cost of customer acquisition or CAC includes the cost of advertisement, the cost of hitting marketers, the cost of salesmen, etc.
The calculation of CAC gives an idea to the enterprise if its investment in various things is successful in yielding the desired results or not which further helps the enterprise to find out if their strategies are made with an objective of growth working or not.
How to calculate the Cost of Customer Acquisition?
Divide the total amount of money spent on marketing and sales in a given period by the total number of customers acquired during that period.
So, your formula becomes something like this,
Cost of Customer Acquisition (CAC) = (Total amount of money spent to acquire customers ) ÷ ( Total number of customers acquired )
5. Customer Lifetime Value
Customer Lifetime Value in the context of an eCommerce store refers to the estimation of the total profit that an enterprise expects from a particular customer in his entire future journey with the brand.
CLV will give you a clear understanding of your Return on Investment (ROI) as well as is essential for the making of strategies to attain future goals.
How to calculate the Customer Lifetime Value?
Figuring out CLV is a little more complicated than the other KPIs available. To calculate your CLV, you need to calculate three more averages that are distinct from the ones mentioned already.
• Average Order Value
• Number of times purchases made by a particular customer per year on average
• Average time of customer retention in months or years.
Now, the formula to calculate CLV becomes something like this,
Customer Lifetime Value (CLV) = (Average order value) x (Average number of times a customer purchases per year) x (Average time of customer retention in months or years)
6. Average Order Value
Average Order Value is an abbreviation for AOV. In e-commerce, AOV mentions the standard amount of money spent by customers per order.
An increase in AOV is believed to be the easiest method to increase your revenue. If the current year’s AOV is higher than the last year’s AOV, it is considered a good AOV.
How to calculate Average Order Value?
Divide your total revenue by the total number of orders.
So your formula becomes something like this
Avarage Order Value (AOV) = Total revenue ÷ Total No. Of orders
The aim of the article was to make you clear about the various concepts related to KPIs and what things to consider while you make a website for your eCommerce business. We understand that KPIs may appear confusing as well as hard to put into action but that’s how one learns.
Continuous application of KPIs by investing time and effort to understand them will for sure help you in achieving the desired result. And, with experience, comes knowledge.