Everything You Need to Know to Track Your eCommerce Store's Success

Greetings and welcome to a new edition of my newsletter. I have spoken about many eCommerce metrics in the past, mostly related to developers and development teams. Today, I plan to discuss the critical business metrics that every eCommerce company must track in today's edition.

Business metrics, similar to a captain's compass, effectively guide your eCommerce enterprise towards remarkable success—or, depending on your inclination, the most immediate impediment. They assist in navigating the complex realm of numbers, enabling one to make decisions based on data.

Decoding Key eCommerce Business Metrics

It is crucial for founders of eCommerce enterprises to closely monitor these financial ratios and matrices, as doing so offers a comprehensive assessment of the company's operations. Companies can make well-informed decisions regarding cost reduction, investment expansion, and operational optimization by monitoring these indicators. The degree to which each of these metrics reveals information about the organization determines profitability or loss. Gaining insights from numerical #data regarding consumer behavior, market developments, and the financial well-being of the organization transcends mere number monitoring. Profitability, customer satisfaction, and sustainable expansion in the fiercely competitive eCommerce industry can result from making well-informed decisions grounded in these metrics.

A knowledgeable merchant is cognizant of the fact that in the dynamic realm of electronic commerce, success hinges on their capacity to comprehend financial metrics and matrices. In the complex realm of eCommerce, they serve as a guiding principle and navigational tool, providing insights into one's financial standing, directional guidance, and profitable means of reaching desired objectives.

Decoding Financial Metrics in eCommerce

Average Order Value (AOV)

This metric tells you the average amount a customer spends each time they place an order.

The formula for Average Order Value (AOV) is:

Average Order Value (AOV) = Total Revenue / Number of Orders        

In this formula:

• Total Revenue represents the total sales or revenue generated by the company.
• Number of Orders is the total count of orders placed during a specific period.

AOV tells you how much money a customer usually spends on each sale. It’s a useful way to figure out how customers buy things and can help you come up with ways to make each deal more valuable overall.

Revenue

This is the total sales your eCommerce business has generated. It is the money coming into your business from selling products or services.

The formula for revenue is:

Revenue = Number of Units Sold × Price per Unit        

In this formula:

• Number of Units Sold is the total quantity of products or services sold.
• Price per Unit is the price at which each unit is sold.

Revenue is the total amount of money that was made from selling goods or providing services during a certain time frame.

Conversion Rate

This percentage tells you how many of your website visitors are completing a desired action, like making a purchase.

The formula for Conversion Rate is:

Conversion Rate = (Number of Conversions / Number of Visitors) × 100        

In this formula:

• Number of Conversions is the total count of desired actions completed by visitors (e.g., purchases, sign-ups, etc.).
• Number of Visitors is the total count of visitors to a website or platform.

Conversion Rate is given as a percentage and shows what number of website visitors do what you want them to do. It is one of the most important ways to measure how well a website or marketing strategy turns visitors into customers or leads. A higher conversion rate means that the conversion process was more successful.

Return on Investment (ROI)

This calculates the profitability of an investment and is particularly useful for evaluating the effectiveness of marketing campaigns or new product launches.nbsp;

The formula for return on investment (ROI) is:

ROI = (Cost of Investment / Net Profit) × 100        

In this formula:

• Net Profit is the total profit after deducting all expenses, including taxes and interest.
• Cost of Investment represents the total cost incurred to invest.

ROI is a number that shows how profitable an investment is compared to how much it costs. A positive ROI means that the investment made money, while a negative ROI means that it lost money. ROI is a common way to measure how well and efficiently an investment is working. It helps businesses and investors make smart choices about how to use their resources and whether a project will work.

Operating Expenses

These are all the expenses associated with running your riverboat through the eCommerce tributaries. They include marketing costs, salaries, rent, utilities, and other similar expenditures.

The formula for Operating Expenses is:

Operating Expenses = {Selling, General, and Administrative Expenses (SG&A)} + {Research and Development (R&D)}        

In this formula:

• {SG&A} includes all selling, general, and administrative expenses incurred by the company, such as marketing expenses, salaries, rent, utilities, and other overhead costs related to running the day-to-day operations.
• {R&D} represents the research and development expenses, including costs associated with developing new products or improving existing ones.

Operating Expenses are an important part of a business's income statement because they show how much it costs to run and keep the business. Operating income (EBIT) shows how profitable the company is before interest and taxes. By deducting operating costs from gross profit, one can determine it.

Cost of Goods Sold (COGS)

This is the price tag of all the ingredients that make up your product. COGS covers the direct costs associated with producing or procuring the products you sell, such as manufacturing costs, shipping fees, and any other costs directly related to the production of goods.

The formula for Cost of Goods Sold (COGS) is:

COGS = Beginning Inventory + Cost of Goods Purchased ? Ending Inventory        

In this formula:

• Beginning Inventory is the value of inventory at the beginning of the accounting period.
• Cost of Goods Purchased is the total cost of additional inventory purchased or produced during the accounting period.
• Ending Inventory is the value of inventory at the end of the accounting period.

Alternatively, you may see it calculated as:

COGS = Opening Inventory + Purchases ? Closing Inventory        

These formulas help figure out how much it costs a business to make or buy the things it sells during a certain period. COGS is an important part of figuring out gross profit and the general profitability of a business.

Gross Profit

This is calculated by deducting COGS from your revenue. Think of gross profit as the precious elixir of your core business operations. It represents your basic profitability once the direct costs of producing your products are deducted.

The formula for Gross Profit is:

Gross Profit = Revenue ? Cost of Goods Sold (COGS)        

In this formula:

• Revenue represents the total sales or revenue generated by the company.
• COGS is the Cost of Goods Sold, which includes the direct costs associated with producing or purchasing the goods sold by the company.

Gross profit is an important financial metric that shows how much money a business makes from selling things or services.

Gross Margin

It shows the percentage of revenue that supersedes the COGS—basically, it’s what’s left over after you’ve accounted for the cost of producing what you sell.

The formula for Gross Margin is:

Gross Margin = (Gross Profit / Revenue) × 100        

In this formula:

• Gross Profit is calculated as revenue minus the cost of Goods Sold (COGS), representing the profit from core business operations.
• Revenue represents the total sales or revenue generated by the company.

Gross Margin is shown as a number and shows how profitable each sale is after the direct costs of making or buying the goods are taken into account. A bigger gross margin is usually a good thing because it means that more of the revenue is being kept as profit.

Net Income

Imagine operating expenses, taxes, and interest as a swarm of locusts descending on your earnings. What remains after they have had their fill is your net income. This is your total profit after every single expense has been accounted for.

The formula for Net Income is:

Net Income = Revenue ? Expenses        

In this formula:

• Revenue represents the total sales or revenue generated by the company.
• Expenses include all costs and deductions, such as Cost of Goods Sold (COGS), operating expenses (like selling, general, and administrative expenses), interest, taxes, and other applicable expenses.

Net Income, which is additionally referred to as net profit or net gains, is the amount that is left over after all costs are taken out of the total income. It is an important way to see how profitable a business is, and it is usually shown on the income statement.

Net Profit Margin

It shows you the percentage of your revenue that remains after all your expenses have had their bite.

The formula for Net Profit Margin is:

Net Profit Margin = (Net Income / Revenue) × 100        

In this formula:

• Net Income is the total profit after deducting all expenses, including taxes and interest.
• Revenue represents the total sales or revenue generated by the company.

The percentage that shows how much of each dollar of income is left over as profit after all costs are paid is called the net profit margin. This metric can show the profitability and effectiveness of a company's processes. A bigger net profit margin is usually a good thing because it means that more of the revenue is kept as profit.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

EBITDA displays your ability to generate profitability from your operations. It gives you a perfect representation of your company's performance, overlooking expenses like taxes and depreciation.

The formula for EBITDA is:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization        

Alternatively, EBITDA can be calculated by adding EBIT (Earnings Before Interest and Taxes) and Depreciation & Amortization:

EBITDA = EBIT + Depreciation + Amortization        

In these formulas:

• Net Income is the total profit after deducting all expenses, including taxes and interest.
• Interest represents the interest expense.
• Taxes are the taxes paid by the company.
• Depreciation is the systematic write-off of the value of tangible assets over time.
• Amortization is the systematic write-off of the value of intangible assets over time.
• EBIT is Earnings Before Interest and Taxes.

Customer Acquisition Cost (CAC)

This is the overall cost incurred to acquire a new customer. It includes marketing and advertising expenditures.

The formula for Customer Acquisition Cost (CAC) is:

CAC = Total Marketing and Sales Expenses / Number of New Customers Acquired        

In this formula:

• Total Marketing and Sales Expenses represents the total costs incurred by the company for marketing and sales activities within a specific period. This includes advertising, promotions, salaries, and other expenses associated with acquiring customers.
• The number of new customers acquired is the total count of new customers gained during the same period.

CAC is an approach to figuring out how much it costs a business to get a new customer on average. It is an important way to measure how well and economically methods for getting new customers work. A smaller CAC is usually better because it means the business is getting customers for less money, which can help it make more money overall.

Customer Lifetime Value (CLV)

This magic orb predicts the net profit your business might derive from the entire relationship with a customer. It helps understand the long-term value a customer brings to the table.

The formula for Customer Lifetime Value (CLV) is:

CLV = Average Purchase Value × Purchase Frequency × Customer Lifespan        

In this formula:

• Average Purchase Value is the average amount of money a customer spends on each purchase.
• Purchase Frequency is the average number of purchases a customer makes in a given time period.
• Customer Lifespan is the estimated number of years a customer continues to make purchases from the company.

The customer lifetime value (CLV) shows how much money you expect to make from a single account. It is a good way to figure out how much a customer is worth to the business in the long run. Companies often use CLV to help them decide how to sell and keep customers.

Inventory Turnover

This ratio measures how quickly you are selling your inventory. The formula for calculating it is the product of the cost of goods sold and the typical inventory over a specific time period.

The formula for Inventory Turnover is:

Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory        

In this formula:

• Cost of Goods Sold (COGS) is the total cost of goods sold during a specific period.
• Average Inventory is the average value of inventory over the same period.

Inventory Turnover is a way to figure out how fast a business sells its stock and gets more within a certain amount of time. A higher inventory turnover is usually a good thing because it means that you are managing your inventory well, keeping costs low, and making the most of your cash flow.

Churn Rate

It is the rate at which customers stop using your eCommerce services over a particular period.

The formula for the Churn Rate is:

Churn Rate = (Number of Customers Lost during a Period / Total Number of Customers at the Start of the Period) × 100        

In this formula:

• Number of Customers Lost during a period represents the count of customers who stop using the product or service during a specific time frame.
• Total Number of Customers at the start of the period is the total count of customers at the beginning of the same time frame.

Churn Rate is a very important metric for companies, especially those that make money through subscriptions or recurring payments. It is shown as a percentage. It shows how many customers left the service over a certain periodnbsp;and helps figure out how to keep customers. A lower loss rate is usually better because it means that customers will stay with you longer and be more loyal.

Now, let’s talk about Contribution Margin 1 (CM1) and Contribution Margin 2 (CM2). These metrics help evaluate the profitability of a product.

Contribution Margin 1 (CM1)

This represents the contribution of sales towards covering fixed costs and contributing to profit.

The formula for Contribution Margin 1 (CM1) is:

CM1 = Revenue ? Variable Costs        

In this formula:

• Revenue represents the total sales or revenue generated by the company.
• Variable costs are the costs directly associated with the production or sale of each unit, such as the cost of goods sold (COGS) and variable marketing expenses.

For each sale, CM1 figures out how much it helps cover set costs and make a profit for the business. It gives you an idea of how profitable different goods or services are by looking at the direct variable costs that come with making or selling them.

Contribution Margin 2 (CM2)

This offers a broader glance at the contribution margin, considering more types of variable costs.

The formula for Contribution Margin 2 (CM2) is:

CM2 = Revenue ? (Variable Costs + Additional Variable Costs)        

In this formula:

• Revenue represents the total sales or revenue generated by the company.
• Variable Costs are the costs directly associated with the production or sale of each unit, such as the cost of goods sold (COGS) and variable marketing expenses.
• Additional Variable Costs include other variable expenses that are not directly tied to the production or sale of a specific product but are still considered variable, such as sales commissions and shipping costs.

By looking at a wider range of variable prices, CM2 gives a more complete picture of the contribution margin. It shows how much each sale contributed after taking into account changeable costs that aren’t part of the basic costs of production or sale.

Both CM1 and CM2 help you get an understanding of how much each sale contributes to covering fixed costs and generating profits, which are vital for making informed decisions about pricing strategies, cost management, product offerings, and overall profitability.

The Power of Monitoring Financial Metrics

Monitoring these metrics is not an option for eCommerce companies; it is an absolute necessity. By examining these figures, one can gain insight into the inner workings of the business and assess its financial well-being from various angles. Consistently monitoring and analyzing these metrics will furnish you with the knowledge required to formulate strategies and decisions based on data.

They provide a transparent perspective of your eCommerce operation, draw attention to areas of concern, unveil potential advantages, assist in optimizing processes and profits, and ultimately steer you towards efficiently and profitably accomplishing your business objectives. Therefore, it equips you with the ability to navigate your eCommerce vessel with resolve and efficiency amidst the turbulent waters of the business world. Maintain vigilance and knowledge, and make decisions that contribute to your success.

What are some of the metrics that you track daily for your business? What are the tools that you use to measure those metrics?

In my next edition of the newsletter, I will talk about "Leveraging eCommerce Metrics for Business Growth," which is a continuation of this edition. Let me know if you want me to include anything in it.

I look forward to your input in the comments.