Profit matters more than all the other factors for eCommerce retailers: Without profit, a business isn’t sustainable. Outside investment might keep it afloat for a while, but most retail businesses — the long tail that comprises tens of thousands of small and medium businesses — must show a yearly profit to survive.
Retailers strive to maximize profit, but profit is like happiness; it’s not something that can be aimed at directly. It is a product of multiple factors, and it’s those factors that provide insight into the state of the business and a dial that retailers can turn to adjust their store’s profitability.
Which factors are important? There are a vast number of measurements that a retailer could make, most of which have little or no impact on the health of a business. Spending time measuring and tweaking those factors is premature optimization, a waste of resources that could be better invested elsewhere.
But there are several factors, key performance indicators or metrics that every eCommerce retailer should track because they contribute directly to the bottom line.
When a shopper arrives at an eCommerce store and hits the back button or closes the tab without clicking a link or performing a search, they have bounced. The bounce rate is the number of one-page sessions divided by the total number of sessions.
(visitors ÷ visitors who bounce) × 100
Google Analytics tracks bounce rates.
If 1,000 shoppers visit a store in a day and 900 of them leave without moving beyond their first page, the store has a bounce rate of 90 percent for that day. A shopper who bounces visits the store with intent but doesn’t buy anything because their intent is unfulfilled.
Bounce rate is a broad metric; there are many reasons a shopper might fail to move beyond the first page.
- The search result, social media post, or ad that prompted their visit misled them. The store didn’t deliver what they expected. This indicates a mismatch between the store’s marketing strategy and its offerings.
- Their shopper’s landing page offers a poor experience: it’s slow to load, badly designed, doesn’t answer their questions, or is unsatisfactory in some other way.
A shopper who bounces is a wasted opportunity, especially if the marketing money has been spent to get them to the store.
Conversion rate measures the proportion of shoppers who convert, where conversion is the completion of an action that benefits the business.The most obvious conversion on an ecommerce store is buying something, but conversions can track other goals, such as contacting a sales representative or submitting contact details.
(number of visitors ÷ number of conversions) × 100
If a store receives 5,000 visitors a month and 768 buy something, the store has a conversion rate of 15 percent, which is healthy. Industry average conversion rates are about 1.3 percent.
If an unusually large proportion of shoppers, don’t bounce but fail to convert, it is an indication that they are dissatisfied with the store or its products.
- They couldn’t find what they wanted, either because it isn’t stocked or because the store’s search and information architecture are not well optimized.
- They found what they wanted, but decided not to buy it.
There are many reasons why a shopper may choose not to complete a purchase: because the price was too high, the checkout process was too onerous, the return and refund policy was lacking or hard to find, and others.
Conversion rate optimization is a process of gradual change that tests possible causes of low conversion rates. For example, a store might foreground its return policy for a proportion of visitors to see whether it increases conversion rates. CRO is an ongoing iterative process aimed at removing as many conversion blockers as possible.
Average Order Value
Average order value (AOV) measures the average amount shoppers spend when they place an order on an eCommerce store. It is simple to calculate.
revenue ÷ number of orders
Earlier, we referred to metrics being like dials that retailers read and seek to adjust. AOV is one of the most important dials to optimize because it represents the amount of value each customer provides to the business, something that has a close relationship to profit.
Ecommerce retailers have several tools in their arsenal that can positively affect AOV.
- Cross-selling. When a shopper puts a product in their cart, display related products that they may also like to buy. If the shopper puts spoons in their cart, show them forks.
- Up-selling. In addition to related products, display more expensive products of the same type. If the shopper adds cheap spoons to their cart, show them silver-plated spoons, perhaps with a discount.
- Product bundles. Bundle related products together in a set that costs less than each item individually. For example, when a shopper searches for teacups, show them a bundle that includes cups, saucers, and a teapot.
Ecommerce applications such as WooCommerce and Magento include functionality for cross-selling, up-selling, and product bundles.
Cost Per Acquisition
Conversion rates and average order values are useful pieces of information, but they are missing an essential element. A store can have incredible conversion rates and impressive-looking average order values, but still be losing money.
If a store spends $20 on marketing to attract each shopper, and 100 percent of them convert, but they only spend an average of $17, the store loses $3 on every sale. Cost per acquisition (CPA) takes account of how much money the business spends to attract a shopper. It can be compared to the average order value to find out if the store is making money.
marketing costs ÷ conversions
Acquisition costs can be the most challenging metric to calculate because it is not always clear which marketing costs contributed to a sale. It’s possible to generate a rough overall figure, but that doesn’t help a retailer to figure out which marketing strategies are worth the investment.
To discover the CPA, a retailer must track the route a shopper took before they arrived on the site. This is typically achieved with UTM parameters, snippets of text added to URLs that contain information analytics platforms can use to build reports.
Gross Profit Margin
Conversion rate optimization for the last of our quintet of eCommerce metrics, we come to Gross Profit Margin, which measures what proportion of revenue is left after subtracting the cost of the goods sold.
(sales revenue — the cost of goods sold) ÷ sales revenue
If a store has revenues of $50,000 and spends $30,000 on stock, its gross profit margin is calculated as follows.
($50,000 — $30,000) ÷ $50,000
That gives us a ratio of 0.4 or 40 percent. Whether that is a healthy margin depends on the business. A retailer of luxury watches will have a higher margin than one that sells discount cutlery. But a negative profit margin is a bad sign for any business.
The cost of goods sold typically includes all of a business’s variable costs, including products, manufacturing costs, and credit card fees. It doesn’t include fixed costs like rent, but these operating costs can be included to figure out a net profit margin.
Gross profit margin is useful because it allows a retailer to assess how well the core business is functioning without distortion by other factors, although a healthy net profit margin is just as important.
Also Read: How is AI Helping the eCommerce Industry?
In this article, we have covered five metrics that all ecommerce businesses should track.
- Bounce rate
- Conversion rate
- Average order value
- Cost per acquisition
- Gross profit margin
There are many more metrics a retailer might want to track, but these five provide a solid foundation that captures the performance of an online store while allowing retailers to assess the efficacy of optimization efforts.