GUIDE
Measuring and analyzing Key
Performance Indicators in Ecommerce
MARCH 2014
Introduction
3
Key Performance Indicators
4
1. Return on Investment
4
2. Year over Year Growth
4
3. Customer Lifetime Value
5
4. Average Order Value
6
5.
Conversion
Rate
6
6. Customer Acquisition Cost
6
7. Cart Abandonment Rate
7
8. Purchase Intention
8
9. Search Penetration Index
9
10. Visitor Satisfaction Index
9
11. Customer satisfaction Index
10
12. Net Promoter Score
10
Conclusion
12
There is a paradigm in ecommerce like in any other industry: it seems easy to build an online store; the internet is full of content that emphasize the huge opportunity of selling online. But in the first stages, owners have to struggle to actually make money with their ecommerce website.
From the beginning, any ecommerce website should be linked to a Web Analytics account.
Measurement and monitoring are as important as the website’s design, usability and other elements. Any change has effects that have to be analyzed in terms of efficiency and profitability.
A website’s performance can be measured with Key Performance Indicators, either basic ones automatically displayed by Web Analytics or more complex ones obtained by applying some mathematical formulas. This paper contains twelve vital KPIs selected for the ecommerce industry.
KEY PERFORMANCE INDICATORS
1. ROI, Return on Investment
Formula: ROI=Revenue⁄Costs Per each important channel; Per total marketing spends; Per campaign
It measures the contribution of the overall investment in all of the online marketing activities or in particular activities like Email campaigns, Social Media, SEM, to the
company’s profits. In order to avoid errors determined by the inter-correlation between the effects of different promotional activities, it is recommended to calculate ROI for each activity of a campaign.
It is important to calculate ROI, because some marketing activities doesn’t lead to immediate results in sales, but their effect should be measured. By doing so, ROI can show what type of marketing efforts are driving sales.
2. YOY, Year Over Year Growth
Depending on the company’s annual objectives, the indicator can be used to compare different metrics like Revenue, Conversion Rate, Average Order Value, for two
successive years. For an easier understanding of how this indicator works, the formula below refers to an aleatory metric, Revenue.
Formula: YOY= Revenuet-1 ∕ Revenuet
It reveals the variation of: Revenue;
KEY PERFORMANCE INDICATORS
Average order value; Customer lifetime
It can be easily calculated with Web Analytics tools by reporting the previous year revenues or any other metrics that matter for the analysis (t-1) to current values of the chosen metrics to analyze(t). This KPI is more useful for an overview, than a detailed analysis.
3. CLV, Customer Lifetime Value
Formula: CLV= Profit per customer in a year×Number of years
CLV reveals how profitable customers are and if it is worth to invest in acquiring or keeping them. When focusing on only increasing the Conversion Rate, without knowing which customers are the most profitable may affect the long term profitability of a business.
The easiest way to understand this KPI is to make a simple exercise. Access the Analytics account and select two segments of traffic: new and returning visitors. Per each channel, see what are the revenues and then substract the costs associated with each channel (paid traffic, direct, referral, organic etc). This is the profit per each segment, new and returning visitors, per each important channel, in a year.
For ecommerce websites that have an activity of over one year, this analysis gets more complex and it implies surveying customers to measure their satisfaction. Most of the market studies reveal that it costs 6 to 7 times more to gain a new customer than to keep an existing one.
4. AOV, Average Order Value
Formula: AOV= Revenue∕(Number oforders) Per each important channel;
Per total
AOV can be used as a criterion to compare the efficiency of the marketing campaigns, the ones that imply customer acquisition: search, display, targeted email and so on. Usually, campaigns with high AOV are worth to invest in, when marketers don’t rely only on the conversion rate to draw conclusions. Combining these two vital KPIs, AOV and Conversion Rate(see at point 5), results in a more accurate analysis of a website.
5. CR, Conversion Rate
Formula: CR= Transactions∕Visits Per each important channel; Per total;
Per campaign
The formula applies only to ecommerce websites. For blogs, publishing sites and presentations sites, a conversion is most usually defined as a subscription, either paid or unpaid. It is vital to clearly define what a ‘conversion’ is in any marketing campaign. Conversion Rate acts as a goal and goals have to be clear and measurable in order to be achieved.
6. CAC, Customer Acquisition Cost
CAC is the investment into acquiring a new customer. In ecommerce, the highest costs with driving visitors to a website are the expenses with search marketing. In order to determine CAC:
The first step is to determine the costs with acquiring visitors with Search and Display campaigns:
How to calculate: Total investment per campaign ∕ Number of visitors on the
website= dollars($) invested in a new visitor
The intermediate phase refers to costs associated with social media, newsletter & email marketing and other activities that are nothing else but micro-
conversions. Because not all of the visitors buy from their first visit, they can be turned into leads.
How to calculate: Dollars($) invested in a new visitor ∕ Number of micro- conversions= dollars($)invested in leads
In the last phase, conversion rate is the one that determines CAC:
How to calculate: Dollars($) invested in leads ∕ Number of conversions= CAC
7. CAR, Cart Abandonment Rate
Transport, shipping taxes are not visible;
The call to action button is not placed above the fold; Copywriting doesn’t persuade;
No customer support sign (phone number, forms etc.); Other distractions
! When calculating CAR, a conversion is defined as a transaction, order.
8. PI, Purchase intention
The indicator reveals how many visitors have the intention to buy from the total number of visitors. The instrument that measures PI: survey.
Setting up a survey is the most effective method to get information about consumers. Even if the sample is not representative and general conclusions cannot be applied for all of a website’s visitors (the general collectivity), it can reveal motivations, reasons to take action that marketers can’t even guess. Surveying customers generates ideas and hypotheses to further test through A/B testing.
9. SPI, Search Penetration Index
Formula: SPI = (Number of visits)∕(Number of searches)
Knowing how many visits come from all of the Search Efforts helps with allocating resources more efficiently. It shows which method is the most suitable for bringing traffic to a website.
10. VSI, Visitor Satisfaction Index
Scalable measurement of visitors’ satisfaction with different aspects of the website: loading speed;
Unlike frequent buyers or raging fans of a brand/e-shop, visitors usually don’t accept so easily to answer to a survey. That’s why, small gifts like invitations to an event, vouchers for next purchases, samples can motivate them to answer to some questions. All of these ‘triggers’ can be displayed through interactions like pop-ups, interstitials on a website.
11. CSI, Customer Satisfaction Index
Scalable measurement(1-5 scale) of customers’ satisfaction with different aspects of the website:
Offers;
Variety of products; Delivery and shipping; Payment options; Returns policy
Customer Satisfaction Index can be determined either by displaying surveys on site or by sending post order emails. Unlike simple visitors, customers are usually willing to spend 3 minutes to answer to the retailer’s questions concerning the products and services.
12. NPS, Net Promoter Score
This score reveals how many customers are willing to recommend a website to others. The most suitable instrument to measure this score is the survey. By raising the
question ‘How likely is it that you recommend [the company/website] to a friend?’, 3 types of groups can be determined: Promoters, Passives, Detractors.
Measurement: 0 to 10 points rating scale Scores:
9-10: Promoters-loyal customers
7-8: Passives-satisfied customers, but not enthusiastic 0-6: Detractors- unhappy customers
Usually, a high Customer Satisfaction Index (CSI) is associated with a high Net Promoter Score, because of the positive effects of Word of Mouth (WOM). Once customers are pleased with one’s website and gets involved in its social media activities, they are more likely to recommend it to others around.
CONCLUSION
If you can measure it, you can improve it.
All of the data gathered from either Web Analytics or Surveys is more like raw data, than information. The process of transforming data into information requires patience, measurement tools and a critical eye that can identify the weaknesses and find the opportunities for growth.
Knowing the exact numbers that define the performance of an ecommerce website is useful not only to see where its aspects can be improved, but to determine a time trend for particular metrics like revenue, average order value, profits and so on.
These facts proved to be worth taking into consideration; as a consequence, we’ve included some of the basic key performance indicators into the Marketizator platform: Conversion Rate, Average Order Value and Cart Abandonment Rate. As far as the rest of the KPIs are concerned, Marketizator can be integrated with Web Analytics tools like Google Analytics, Kissmetrics and Mixpanel.
For the more complex KPIs that include creating a survey and gathering data, our tool allows marketers to create surveys on-site and get reports displayed either through graphics or tables.
You can register for an account on Marketizator and test it for a 30 days free trial here.
If you need information or assistance at integration, do not hesitate to contact us at anytime at [email protected].
