Earlier this year, we wrote about how site speed is so crucial in eCommerce — especially if you are in charge of a growing brand that aims to take on some of the top-tier competitors in your market.
Now, let’s dig a little deeper. Besides a storefront that loads quickly, what else should a Director of Ecommerce or an executive know about their shop’s performance?
This is a particularly important question for brands that are looking to take their business international, where murkier issues of culture and compliance affect businesses.
This post will show you how to shore up your eCommerce fundamentals so your team has the bandwidth to respond to those thornier issues if and when they arise.
Here are five KPIs for global ecommerce that will let you know precisely how well your digital storefront is doing — and what you can do now to fix anything that’s underperforming.
Average Order Value
This is an easy one to calculate. Within a given timeframe (e.g. one month), take your total revenue figure and divide that by the total number of orders you received. If you sold $25,000 on 500 orders, then AOV = $50.
If you calculate this figure over several previous years, don’t be surprised to find that your AOV has fallen. Robin Nichols at A/B Tasty says this has been the norm for American eCommerce sites in recent years, and there are multiple reasons for this:
- When shopping costs drop, people don’t feel so pressured to bundle their orders. So, they might be spending the same amount of money, but across two or three orders rather than one.
- Competition has increased for eCommerce companies. Consequently, prices have been subject to downward pressure.
So, should you worry about a decreasing AOV? Well, that depends. If your revenue is increasing in general, then perhaps your customers are simply telling you they don’t mind placing multiple orders. In that case, optimizing this KPI would be a case of fixing something that’s not broken.
If revenue is flatlining, however, a decreasing AOV could be a signal that your sales funnel is leaking. In that case, here a couple of potential fixes:
- Reduce sticker shock. Inc. staff reporter Sonya Mann has an excellent piece on how to get your customers to spend more per order, and one source of friction she identifies is the payment process. If you sell big-ticket items like mattresses, for example, Mann shows that retailers such as Casper and Purple have found success in offering customers monthly payment plans.
- Focus on upsells and cross-sells. Jamie Walsh at UK-based web development firm Sutton Silver points out that if a customer has already converted, it might be easier to sell additional products, provided those translate to relevant sales messages. That’s where personalization and product recommendations come in. “You may have products that would be perfect for some of your customers that they’d never considered or even seen before,” Walsh writes. “By basing recommendations off their previous search and purchase histories, as well as geographic and demographic data, you can offer more relevant product to individual buyers, enticing them to buy more.”
Customer Acquisition Cost
There is a simple way to calculate customer acquisition cost and a more robust way. The calculation method you use depends on the complexity of your operations and how much precision you need in your numbers.
The simple method first, courtesy of Jason Kiwaluk at PayMotion:
Customer acquisition cost is your total marketing cost divided by the total number of new customers you acquired during a specific timeframe. Kiwaluk uses the example of a shoe retailer that spent $7,650 on marketing during the month of January. During that same January, the company sold to 500 new customers.
In that scenario, customer acquisition cost = $7,650 / 500, or $15.30. That’s how much marketing spend was required to attract and convert a new customer.
The more robust method, courtesy of Ann Pichestapong, co-founder and CEO of DataCue, goes a little deeper in calculating total marketing costs. Whereas Kiwaluk only factored in direct costs such as ad spend, content creation, website hosting and discounts offered, Pichestapong says the more accurate figure accounts for the salaries of your sales and marketing teams, the overhead costs of those operations, paid marketing and the costs of the tools you use.
What can that number tell you? In the absolute, not too much. An exceptionally high figure might indicate a shift in customer demographics or a problem with your marketing strategy, relationship marketing company Optimove writes, but it’s how that customer acquisition number relates to other metrics that’s important. We will get to those in a moment.
Cart Abandonment Rate
Cart abandonment rate is expressed as a percentage, and it will tell you what proportion of shoppers put an item in their shopping carts but then never go through with the purchase.
This could be a shockingly high number for your team, whose members have obsessed over every UX detail and storyboarded every potential source of friction. Still, across all sectors eCommerce companies see a cart abandonment rate of about 75 percent, says Salecycle.
So, why all the abandoned purchases? Well, user experience is often a good place to start looking. After all, “customers want to flow very smoothly from their first step (product research) right through the purchasing process to the confirmation page,” eCommerce fulfillment company Floship. “Yet at the same time, you don’t want to miss out on any cross-selling or up-selling opportunities.” That’s why ongoing testing is so important.
But while things like signup requests and complicated checkout processes do indeed chase away potential customers, far and away the No. 1 reason carts get abandoned is because of extra costs, says Giles Thomas, founder of AcquireConvert.
When shipping, taxes and other fees seem too high for buyers, they bounce. So, if your abandonment rate seems particularly high, have a look at your fulfillment costs. Those can get particularly high when you start shipping to other countries.
And this is the point where the KPIs start to paint a bigger picture. If your cart abandonment rate rises, then you have to attract more traffic to make up for the lost sales. That means customer acquisition costs go up, too.
We will see in a moment what long-term consequences that can have for a business.
Customer Retention Cost
These last two metrics are a little harder to calculate than the others, and they might require some digging to get the input figures you need.
Customer retention cost describes how much it costs the company to maintain a customer relationship. In other words, for someone who has already bought from you, what does it cost to get them to keep buying from you? This is especially important for businesses that rely on a subscription model of sales and see month-to-month customer churn.
The formula is similar to the customer acquisition cost formula: Take what you spend on customer retention and divide that by the number of repeat customers. Totango CMO Kaiser Mulla-Feroze breaks those costs down into staffing, systems and technology, and customer retention programs. This includes everything you spend on:
- Customer success and customer support
- Renewals and or account management
- Customer engagement
- Any services, training or onboarding your product requires
- Customer marketing
Add those figures, then divide by your number of repeat customers. That will tell you how much you’re spending to maintain each customer relationship.
“When your relationship with your customer base is operating as it should, most of your business will come from those who’ve already purchased from you,” writes David Hoos at The Good. “That allows your steady inflow of new customers to grow your business, rather than help maintain it.”
And you keep those customers coming back by keeping them engaged with you, whether that’s on an emotional level with your brand, or because your product contributes to their life in an ongoing way — if your coffee subscription product continually introduces your customers to new and exciting flavors, for example.
Both of these are facets of customer experience, and as Hoos points out, customer experience is the key to getting someone to buy from you again and again. Customer retention cost is a good barometer of that customer experience.
Customer Lifetime Value
Now, let’s pull these KPIs together for an especially important performance metric, customer lifetime value. This will tell you how much a customer is worth to your business over the duration of your relationship with that person.
This is another hard metric to calculate, but Alex McEachern at Smile.io does a good job of breaking it down. Here are the numbers you will need for the formula:
- Average order value. We talked about that above. Let’s use $50 in this example.
- Purchase frequency. This describes the number of times the average customer buys from your shop within a given period of time (e.g. annually). To find out annual purchase frequency, simply take the number of orders received in a given year and divide that by the number of unique customers in that same year. If you received 10,000 orders last year, and 5,000 different people placed those orders, then purchase frequency = 2 for that year.
- Customer value. Multiply average order value by purchase frequency. For the last year, then, the average customer was worth 2 x $50 = $100.
- Customer average lifespan. Eventually, many customer relationships go slack then dormant. That’s normal. In fact, McEachern says most eCommerce companies can count on a lifespan of between one and three years. Let’s say three years in this example.
OK, now we can calculate customer lifetime value. That’s simply customer value multiplied by customer average lifespan. For our example, that’s $100 x 3, or $300.
Ideally, that number is higher than customer acquisition costs and customer retention costs combined. If not, KeySplash Creative President and CEO Susan Gunelius shows that there are several ways you can boost that customer lifetime value figure, including:
- Increasing average order value. Look for upsell and cross-selling opportunities to get each customer to spend more money per transaction.
- Reducing the cost of serving customers. Think back to the point on cart abandonment rate. That’s an important indicator of whether it costs you too much money to serve customers — and that has ripple effects for customer acquisition and retention cost. By introducing efficiencies into the entire fulfillment and customer service processes (“from packaging products for shipping to answering customer service calls,” Gunelius writes), you trim those costs and incrementally raise each customer’s lifetime value.
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