Practical Ecommerce

4 Key Ecommerce Metrics that Determine Success

There are four key ecommerce metrics that determine success. They are:

  1. Understanding lifetime value of a customer;
  2. Monitoring customer satisfaction;
  3. Measuring your sales funnel;
  4. Determining marketing ROI.

The most successful ecommerce brands incorporate these elements whether they realize it or not. If you’re an online retailer just starting or are trying to grow your business, implementing these four metrics will help your business thrive.

1. Understand the Lifetime Value of a Customer

Many companies calculate their return on investment on a single sale. Instead, the ROI should be focused on the lifetime value of the customer. It’s the most accurate measurement of a customer’s economic worth for the company.

To determine a customer’s lifetime value — CLV, or CLTV — consider the following formula.

A customer's lifetime value is calculated using all interactions a customer has with your business.

A customer’s lifetime value is calculated using all interactions a customer has with your business.

To accurately determine the “profit” in the equation, it’s crucial that you measure your inventory and sales margins accurately. Without accurate measurements, it will be impossible to determine CLV, which allows you to determine your actual return on invested capital. To find the average acquisition cost, simply divide your acquisition spending by the number of customers acquired from your marketing campaign. When you plug these values into the CLV formula, you should have a fairly accurate assessment of a customer’s economic value to your company.

Customer lifetime value is significant because it’s more cost effective to keep an existing customer than to acquire a new one.

To assess and predict your level of customer retention, consider adding an accurate customer experience metric such as a net promoter score — NPS. With this method, you can determine which consumers are “promoters,” “passives,” and “detractors.” Higher customer satisfaction will usually result in promoters, though many satisfied customers are also “passive.” It’s important to remember that NPS is more than just about the numbers and rankings; it’s an opportunity for your brand to listen and respond to authentic customer feedback. When you understand the satisfaction of your customers, you will be better equipped to determine CLV and thus your return on invested capital.

2. Monitor Customer Satisfaction

Ecommerce offers many tools to understand customers. Whether it’s Google Analytics or your site’s internal software, you can track the demographics, psychographics, purchase history, and drivers behind your visitors. Furthermore, use this information and compare it to your target audience. Are these statistics lining up? How can you change strategy to improve performance?

Many ecommerce businesses that falter have outsourced customer service. It’s best to perform customer service in house. After all, you know more about your business and products than anyone else. Doing it in house shows that you truly care about the customer experience, which is what drives repeat business.

When listening to customers, you can learn:

  • What the experience is actually like from their perspective;
  • Whether customer needs or desires are being met by your current offering;
  • The truth behind the numbers.

Actually listening to a customer’s voice reveals more about the experience than numbers ever can. For instance, a customer might walk into your store, browse your shelves, and then purchase several items. From a numbers perspective, the purchase and transaction was a success.

However, communicating with the customer about the experience might have shown you that he walked into your store to purchase a brand new computer. Since he wasn’t able to find it, he purchased a few small items to prevent a wasted trip, and then went to one of your competitors to get what he needed. From this vantage point, the transaction was a failure. This is why knowing your customer is more important than simply knowing the numbers. The principles in this brick-and-mortar example also apply to ecommerce.

Now that you’ve gathered user information and have established a relationship with customers, it’s time to implement satisfaction metrics. Feedback requests and surveys are good ways to hear firsthand from the customer. Again, using the net promoter score system is a valuable tool to grow your brand. Since NPS measures customers’ satisfaction and their likelihood to recommend your brand, you have a better barometer of measuring word of mouth sales. Use the information to improve performance.

3. Measure the Funnel

Online tools can track customer information. But they can also measure the sales funnel. Use Advanced Segments on Google Analytics to measure:

  • Landing pages;
  • Conversion rates;
  • Types of visitors.

To ensure that your landing page is successful, make sure that the bulk of your important information is “above the fold.” The call-to-action and purpose should be apparent to the visitor without the need to navigate anywhere. By keeping navigation simple, your visitors are focused and will journey through the conversion path that you’ve created.

Practice A/B testing to determine helpful improvements. Perhaps resizing an image or repurposing a button is all that’s separating a dead page from incredible conversion rates. In short, clarity, headlines, large “red” buttons, and calls-to-action are all elements that will greatly enhance the effectiveness of your landing page.

Determining how people stumbled into your site in the first place can tell you a lot about your marketing efforts. Are you successful with search engine optimization? What keywords are people searching to find you? Are they “searchers,” “comparers,” “researchers,” or “advice-seekers”?

4. Determine the Marketing ROI

Ecommerce sites typically rely on search engine marketing, affiliate marketing, and more to gain visibility and traffic. Calculate the margin per order and the customer’s lifetime value. Again, the mistake most ecommerce companies make is to calculate return on investment on one purchase instead of lifetime value. For repeat business, base the calculations using CLV for a more accurate prediction. Determining marketing ROI will let you know the status of your marketing efforts as well as how you can improve.

To calculate this, use the following formula.

Determining ROI helps you improve marketing efforts.

Determining ROI helps you improve marketing efforts.

Dividing “Acquisition Spending” by the “Number of Customers Acquired” will give you your acquisition cost. By comparing this with the customer lifetime value, you can check whether your CLV is lower, the same as, or higher than your average acquisition cost. Once you know your marketing ROI, continue tweaking it for the results you desire.

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Jaime Brugueras
Jaime Brugueras
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Comments ( 3 )

  1. darrylxxx April 12, 2013 Reply

    Good article. I thought readers might like my list http://qr.ae/TSiX7 – optionally, a lot more things to track!

  2. David Burdon April 16, 2013 Reply

    A handy set of 4 metrics. Customer lifetime value is handy as a concept but difficult to use in practice except with a lot of estimation and guesswork.

  3. Aleksey Raevskiy May 2, 2013 Reply

    Jaime,
    Interesting article. Concerning cltv global view is rather clear and simple but going deeper we know that all channels have different targeting abilities. And that’s where the attribution model of click chains becomes extra important.

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