An Ultimate Guide To The Most Important KPIs For E-commerce Business’s Success
Knowing where your money is going and what is driving your business forward is critical to success, especially when you are an e-commerce business owner. Running a successful e-commerce business might seem intimidating, especially when it comes to managing the numbers. But certain key performance indicators (KPIs) can help track your progress and enhance your KPI reporting. KPIs are “key performance indicators” that businesses use to track their financial health and performance. E-commerce businesses are no different – in fact, given the fast-paced and ever-changing nature of the online world, it is even more important for e-commerce businesses to keep a close eye on their KPIs. In this blog, we will look at the most important ones so that you can start tracking them today and ensure your e-commerce business is on the right track! So, get ready to understand KPIs that can tell you how well your e-commerce business is doing – or if it needs a little help!
What are E-commerce KPIs?
E-commerce KPIs are the metrics used to measure and track the success of an online store. They provide insights into the health of the business and allow business owners to make data-driven decisions to improve their bottom line. You can track several KPIs, but the most important ones include gross margin, customer acquisition costs, and lifetime value. By effective KPI tracking and enhanced KPI reporting, you can get a better understanding of which areas of your e-commerce business are performing well and which ones need improvement. So, let us get started to know the most important KPIs for e-commerce organisations.
1. Cost of Goods Sold (COGS)- COGS, known as cost of goods sold, is one of the most important KPIs because it allows you to see how much it costs to produce and sell your products or services. To calculate your COGS, simply add all the direct costs associated with producing and selling your product or service. After that, divide that number by the total number of units sold. This will give you your average COGS per unit sold. If your COGS is too high, it means you are not making enough money to cover your costs. This can lead to financial problems down the road. That is why it is important to keep track of your COGS and make sure it stays within a reasonable range.
2. Gross profit margin- Gross profit margin is another important KPI for e-commerce businesses to track. It measures the percentage of revenue that is left after subtracting the cost of goods sold (COGS) from total revenue. This metric is a key indicator of a company’s profitability and ability to generate positive cash flow. Since a healthy cash balance must be maintained by every business, it makes gross profit margin even more essential.
3. Net profit margin- The third essential KPI to track would be the net profit margin. It is a measure of the profitability of a business and is calculated by dividing the net profit by the revenue. A high net profit margin shows that a business is making good profits and is efficient in its operations. Contrary to this, a low net profit margin indicates that a business is not making enough profits or is inefficient in its operations.
4. Customer lifetime value- Lifetime value is the net present value of the cash flows associated with a customer relationship. In other words, it measures how much revenue an organisation can reasonably expect from a single customer throughout its relationship. E-commerce businesses rely on CLV to make financial decisions because it is a key indicator of profitability. If a business knows that it can generate a high CLV, then it can make investments to acquire new customers and grow its revenue.
5. Customer Acquisition Cost (CAC)- Customer acquisition cost (CAC) is another important KPI that states the total amount of money your e-commerce business spends to acquire new customers. This includes advertising, marketing, and other costs associated with getting people to visit your website and purchase. A team of accountants plays a vital role in ensuring that a company’s CAC is tracked and monitored effectively. They can help provide insights into where costs are being incurred and whether or not any efficiencies could be gained. Additionally, they can help assess whether the current level of spending is sustainable and provide recommendations on how to improve the efficiency of customer acquisition.
6. Conversion rate- Another important marketing KPI for e-commerce businesses is conversion rate. The conversion rate measures the number of visitors to your website or online store that take the desired action – in this case, making a purchase. The conversion rate has a big impact on the finances of a business. For instance, if a business has a high conversion rate, it may be able to negotiate better terms with its suppliers. A higher conversion rate indicates that more customers are buying from your business, which is obviously a good thing. On the other hand, a lower conversion rate depicts fewer customers taking the desired action (making a purchase).
7. Churn rate- Customer retention is a critical metric as it costs far more to acquire new customers than to keep existing ones. There are several ways to measure customer retention, but one of the most important is the churn rate. This is the percentage of customers who cease doing business with an organisation over a given period of time. A high churn rate depicts a company losing customers at an alarming rate and needing to take steps to improve its retention rates. While a low churn rate depicts that customers are happy with your product or services. By reducing the churn rate, businesses can increase their revenue, profits, and cash flow. In turn, this allows them to reinvest in their growth and continue expanding their operations.
8. On-time delivery- This KPI is one of the manufacturing KPIs for e-commerce businesses which measures how often products are delivered on time from the manufacturing facility to the customer. This is important to track because it directly impacts customer satisfaction. If products are consistently arriving late, customers will likely take their business elsewhere. Furthermore, on-time delivery will ensure that there is adequate inflow and outflow of cash in businesses.
9. Production yield- With the help of production yield, you can measure the percentage of good products coming out of the manufacturing process compared to the total number of products started. A high yield percentage indicates that the process is efficient and effective, while a low yield percentage indicates room for improvement. Moreover, the level of production yield also affects the financial system of businesses. If you have a high yield of production, you can eliminate the wastage of raw materials and thereby maintaining a positive cash balance. Contrary to this, a low production yield leads to the wastage of raw materials and negatively impacts your cash balance.
The data from these KPIs can help you decide where to invest more resources and which areas of your e-commerce business need attention. Doing so helps to deliver clean KPI reporting, gain insights into how customers perceive you, and give you direction to create a better customer experience overall. Also, the process of KPI tracking is largely dependent on improving KPIs on a regular basis. So, let us learn how it should be done.
How to Improve Your KPIs?
In order to improve your KPIs, one method is to ensure that you have accurate and up-to-date data. This means having a good e-commerce accounting system in place and keeping track of your finances on a regular basis. You should also make sure that you are using the right KPIs for your business. Not all businesses are the same, so it is important to tailor your KPIs to suit your specific needs. Another way to improve your KPIs is to set realistic goals. If you set unrealistic goals, then you are more likely to miss them. Finally, it is crucial to review your KPIs regularly and make changes if necessary. This will help you to keep your activities on track and achieve your desired results. But how to track KPIs and implement them in your e-commerce business? Here are some points to ensure the effective implementation of KPIs.
How to Implement KPIs in Your E-commerce Business?
There are certain key steps to take when implementing KPIs in your e-commerce business. So, let us grab the details to improve your e-commerce accounting and overall financial system.
1. Define what you want to measure – The first step is to decide which aspects of your business you want to track with KPIs. Once you know what to measure, you can select the appropriate KPIs.
2. Select the right tools and data sources – Another important step is to select the tools that best fit your needs. With a lot of data, you need something or someone to consolidate data into one place. Alternatively, if you only have a small amount of data, a simple spreadsheet is enough. For such purposes, it is better to consult professionals like e-commerce accountants and experience what they can offer.
3. Set up a system for KPI tracking and reporting – Once you have selected the tools you will use, it is time to set up a system for KPI tracking and reporting. In order to ensure effective KPI reporting, you can also consider outsourced accounting and bookkeeping services from trusted and reliable outsourcing companies.
4. Analyse and take action- Once you have a system in place, it is time to start analysing your KPIs. Regular monitoring and analysis will allow you to track your efforts’ effectiveness over time.
Final Words
By utilising the important KPIs listed in this blog, you will be better equipped to make decisions and track their progress. By actively monitoring these KPIs, you can consistently improve their performance, increase profits and stay ahead of industry trends. Furthermore, by understanding what customer behaviours influence these KPIs, you can effectively identify which areas serve as potential sources for financial growth. With an effective system of KPI tracking and reporting, you will have the foundation to succeed financially in today’s rapidly changing market landscape.