by Evan Loh, airCFO Manager of Financial Advisory
With the continued evolution in technology (not to mention the continued impact of COVID) more people are selling and buying online than ever. Even if you have a brick and mortar storefront – or many of them – you likely have either shifted to an online-only model or have put more focus on selling efficiently and profitably online.
In this article, we share ten eCommerce metrics you need to track for your startup. At airCFO, we help startup founders like you create simple, streamlined dashboards on these metrics, helping you answer questions such as:
- Are we bringing enough customers into our sales funnel?
- What levers do we need to move to be more profitable?
- Will our current working capital be enough to deliver and sustain our desired growth rate, or do we need an infusion of cash?
Whatever the case, we’re here to help.
The eCommerce Sales Funnel
Similar to a marketing funnel showing awareness, consideration, and purchase conversions, an eCommerce sales funnel shows total site visits, browsing sessions, sessions with product(s) in the online cart or basket, and sales.
Measuring the conversion rate between these steps helps you understand how to more effectively convert website visitors into customers. And of course, understanding that the cost of acquisition is lower for a customer who has already purchased from you, measuring the repeat customer rate is also key.
There are a variety of ways leads and prospects become aware of your online business, from search engines to online ads to social media. Regardless of the path, once they land on your website you want to measure key metrics.
The easiest way to do so is through Google Analytics, a free tool that lets you measure and analyze website metrics and better understand lead, prospect, and customer behavior.
You can choose any time period you like, such as weekly, monthly, quarterly, or annually. It can also be very useful to measure year/year changes to see how your metrics are shifting.
Four important metrics to track are:
Website Visits measures the total number of visitors coming to your website. You can splice this in many ways, including which channel they came from (ie social, email, paid or organic search). You can also look at this as organic traffic vs paid traffic from referrals such as paid ads.
New Users measures how many of those visitors are new to your website versus repeat visitors. Growing new visitors indicates your awareness marketing is working. Growing repeat traffic indicates people coming back for more. Growing a new client base is a challenge, but there are a lot of great resources available that focus heavily on building the top of your funnel.
Conversion measures how many website visitors are converting into paying customers. Google Analytics uses sales transactions divided by visits. Conversion rates can feel rather small when only 1%-2% of visitors are converting. However, it is important to tie together these conversions with a customer’s profitability. At scale, even a small conversion rate can have a big impact.
Retention measures how often customers come back and make another purchase. This metric can vary significantly based on the number of products you carry and your chosen model (for example, individual purchases versus subscription sales). By measuring retention, you can measure if you are effectively lowering the cost of acquisition and increasing recurring revenue overall. Using a platform like Shopify as your ecommerce backend will give you access to a multitude of reports that can start to demonstrate how retention is performing over time.
In this next section, we address how to measure sales volume through your revenue compounded monthly growth rate (CMGR) and average order value (AOV).
REVENUE COMPOUNDED MONTHLY GROWTH RATE (CMGR)
Your CMGR describes your growth rate over a given period, assuming that your growth happens at a constant rate every month during that time.
To calculate your revenue CMGR, you’d use the following formula:
Now, imagine your revenue was growing as follows:
|Month 1||Month 2||Month 3||Month 4||Month 5||Month 6|
To calculate your revenue CMGR, you’d plug in your numbers:
And, as you can see, your revenue CMGR is 18%.
A few things to note:
- In eCommerce, numbers can fluctuate significantly. If your growth rate is inconsistent, using a CMGR range will help you more effectively model what-if scenarios.
- If you’re just starting out, you may be working with small dollar values so your revenue CMGR growth rates may seem high. If that’s true for your company, computing a simple growth rate on total revenue will suffice. Once sales start to steady, revenue CMGR becomes a powerful metric.
AVERAGE ORDER VALUE (AOV)
Average order value (AOV) tracks the average dollar amount spent each time a customer places an order on a website or mobile app.
To calculate your company’s average order value, simply divide total revenue by the number of orders.
You can increase your eCommerce sales volume by:
- Increasing web traffic (that is, getting more leads in to your funnel)
- Increasing customer purchases through methods such as:
- Bundling strategies
- Offering a discount or free shipping after hitting a certain spend amount
- Subscription models
To keep a business alive, you need to generate profit.
Here are a few key metrics of eCommerce profitability:
GROSS PROFIT MARGIN
Gross profit margin is a financial metric that helps you assess financial health by showing how much money is left over from revenues after removing the cost of goods sold (COGS).
The formula is as follows:
You can measure gross profit margin on a product basis, average selling cost bases, or for sales over a period of time. To accurately measure cost, you need to include the raw materials as well as manufacturing, warehousing, and shipping.
Gross profit margin immediately gives you insight as to how your current revenue is serving the rest of your business – and whether it’s doing so at a profit or loss. This is important because you need to have enough margin to cover other costs of running your business, such as payroll, rent, and marketing, to hit break even and ultimately make profit.
LIFETIME VALUE / CUSTOMER ACQUISITION COST (LTV/CAC)
The LTV/CAC ratio compares the value of a customer over their lifetime, verus the cost of acquiring them. It’s an important metric that measures the efficiency of a crucial part of your business: your marketing and sales funnels and helps you determine what you should be spending to acquire a customer.
Lifetime Value – sometimes referred to as customer lifetime value – is the total dollar amount you’re likely to receive from a customer over the life of their account with you. This helps you account for and accurately predict your business’s revenue and profit.
The LTV formula for eCommerce companies is:
Customer Acquisition Cost (CAC) is the average expense of gaining a single customer. Understanding what expenses should be linked to acquiring a customer is quite complex; Andrew Chen’s blog does a great job of highlighting the specifics.
The CAC formula is:
Generally, a higher ratio relates to a higher return on your sales and marketing. A general rule of thumb is to aim for an LTV:CAC of 3:1, as it is seen as validation of the business model when you are earning back more than the cost of acquisition.
Keep in mind that LTV:CAC analysis can get complex as you start to segment your customer base into different spending patterns. When your customer base carries several distinct characteristics, it can become several people’s full-time job to monitor and optimize for this ratio.
Now let’s look at measuring efficiency for your startup, using net burn rate and runway.
NET BURN & RUNWAY
Burn rate is the rate at which a new company uses up its venture capital. Net burn rate is your cash used in a single month. This helps you understand how much revenue you need to break even.
The formula for net burn rate is simple: just subtract operating expenses from revenue.
With eCommerce companies, burn rate might not apply given that you are likely bringing in revenues from day one and investing in the business with existing profits. However, when you are looking to accelerate the growth of your store, spending will be ahead of the sales which is when you will have to manage your burn rate.
As well, your business might be bringing in revenues from product sales, but may also be spending more in other areas of the business (hiring talent, technology, marketing) in order to grow.
When you know your net burn rate, you can then calculate your runway – how much longer you have until you run out of money if nothing changes.
The formula for runway is:
From a financial standpoint, projecting your future investment expenses and their impact on revenue is a practice we highly recommend, because it is crucial that these investments are efficient in leading you to increased profitability.
INVENTORY TURNOVER RATIO
The inventory turnover ratio shows how many times a company has sold and replaced inventory in a given period. While not helpful in a dropshipping business, any other online store will want to monitor its turnover ratio to see how much cash is tied up in inventory. Once calculated, you can then divide the days in the period by the inventory turnover formula to calculate how many days it will take to sell inventory on hand.
A high inventory turnover ratio indicates that you can’t keep that product in stock due to the sales volume, while a low inventory turnover might indicate that there is low demand for the product, or that it is priced too high.
The inventory turnover formula is:
To get average inventory, use this formula:
Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory.
So there you have it – ten eCommerce metrics you need to track for your startup.
At airCFO, we help startup founders and their teams develop strategies and tactics to create profitable, predictable growth.
If you need guidance or help, we’d love to hear from you.
Author Note: Evan serves as a Financial Advisory manager at airCFO. He is an seasoned corporate development professional leading investments and advising on strategy & operations for both startups and enterprises.