?? Metrics for eCommerce Success ??

Welcome back to the 'eCommerce 20/20' article series during the Covid-19 crisis with Yves Le Breton and Sri Rajagopalan. Together we are treading on 50+ years of CPG cross-functional experience in brand building, strategy, innovation, marketing, field sales, ecommerce, and IT. Our views are straight from the trenches, real world experience crafting, strategizing and then building. Click on our names to follow us - Yves and Sri.

Metrics. Everyone wants them, everyone needs them. Whether you’re a high school teacher or a digital marketer, metrics and benchmarks are how we observe performance and make decisions. They also help land success or determine further actions. The real question is which metrics are most important for a digital business, so here's our opinion on which ten metrics to track across the whole sales funnel.

1. Impressions & Reach

Audience and attention - the two key words that start the cycle of product awareness. The more a person sees your product and key messages about it, the higher the odds of them purchasing it. And when they purchase your product, by and large, your brand equity and awareness go up, which generates more sales. It's a virtuous circle.

Impressions are simply the number of times a consumer is shown a product, whether in an advertisement or elsewhere. Reach qualifies it to when they actually see it, browse it, hover over it, or click it - i.e they engage in some form with it. Impressions are an old school advertising metric, from the beginning of television times, when showing an ad equated to seeing an ad.

In today’s times, when we can measure consumer interaction, Reach is a far more important metric - though agency led digital media is still using Impressions as a starting point. For more information see: Reach vs Impressions: What’s the Difference?

2. Cost Per Visit (CPV)

This metric is relatively new, and aims to help a marketer narrow down the understanding of the value of their digital advertising above and beyond reach and impressions to an actual click to a particular item advertised.

This can take various forms such as for a retailer, the CPV would be click to go to a store, for a vendor manufacturer it’s a given SKU or product. This metric doesn’t separate out or call out repeat visits by a consumer or from the same IP address but at least teases out a legitimate visit vs just a mouse hover over an advertisement.

Another challenge that is being sorted out in the industry is the use of panel data or self reported data to calculate this at scale but that is being slowly replaced with actual data. The image below shows the actual calculation to determine CPV.

3. Conversion Rate (CR)

There are many ways to define a website’s Conversion Rate depending on what kind of business you’re running, but the most simple definition is the percentage of visitors that have navigated to the website who complete a desired action (e.g. buying a product). The Conversion Rate measures what happens once people are on your website, so it’s greatly impacted by your design choices and your user experience (UX).

Once you have your CR you can calculate your Customer Acquisition Cost (CAC), which is your Cost Per Visit divided by your Conversion Rate:

CAC=CPV/CR

This metric measures how efficiently you acquire consumers into your advertising funnel and lead them to perform an action on your website, such as purchasing a product.

In our opinion the CAC is one of the most important metrics for any digital business to keep track of over time, because it cannot indefinitely exceed the lifetime value of your customers or you will go out of business (see below for more on lifetime value).

4. Average Order Value (AOV)

The AOV is defined as the total revenue of a website divided by the total number of orders or transactions. The higher the AOV, the more efficient the sale. This is due to the fact that fulfillment and shipping costs are not directly proportional to the size of the order, so the sale becomes more efficient thanks to economies of scale in shipping.

In many cases when the AOV is too low, the fulfillment costs of sending the product to the consumer may erode any profit and therefore make the product not ideal for ecommerce. As an example the recommended AOV on Amazon 1P is > $8 (depending on weight and size of the product). DTC businesses constantly try to up-sell using AI with suggestions made to the consumers via ‘others also bought’ etc... For more on how AI is making a profound impact on AOV see: The Impact of AI on Ecommerce AOV

5. Purchase Frequency (PF)

This is the number of times an average customer buys a good or service from your website in a given period of time, and it’s calculated by dividing the total number of orders by the total number of unique customers.

There are many ways to evaluate performance for this metric, because an increased purchase frequency does not always guarantee success. For example, an increased frequency combined with a decreasing order value is not a desirable outcome and it can lead to an unsustainable business model.

Every business's goal is to drive for increasing purchase frequency at the individual buying cycle, but the reality of consumption intersects with this based on the category of the product. Food and beverages tend to have the highest purchase frequencies since they are consumed everyday vs a shirt which may see a purchase once every few years. This metric also plays an important part in creating a brand strategy as it is a key input into the future size and scope of a brand. Bottom line, this is used to determine the efficiency of bringing customers back to a given store or brand.

6. Gross Margin (GM)

Knowing your Gross Margin is essential to any business, online or offline. Simply stated the Gross Margin is the amount of money you make selling your products, and it is determined by calculating the difference between the cost to make or buy a product - Cost of Goods Sold (COGS) - and the online price or revenue. The GM can be expressed either as a dollar value (REV-COGS) or a percentage (REV-COGS/REV).

Once you have your AOV, PF and GM you can calculate another very important metric called the Customer Lifetime Value (CLV), which is defined as the product of all three above metrics:

CLV=AOV*PF*GM

Customer Lifetime Value can be difficult to calculate for brands that operate primarily on a B2B model as they don’t have visibility into who’s actually buying their products. DTC companies and retailers on the other hand are very familiar with this metric since they have full ownership of the sales cycle and can track which customers buy products and how often they come back. This is a huge advantage for retailers and a huge weakness for manufacturers. Perhaps a wake up call post this Coronavirus pandemic for large brands to embrace DTC.

7. Shopping Cart Abandonment Rate (SCAR)

An often ignored and overlooked metric in ecommerce is the amount of times customers click through a product, put it in the shopping basket for a purchase, but actually don’t complete the transaction and purchase the product. This is largely a function of the user experience (UX) on the website which can be affected by any of the following issues:

• Not having a guest check out option and forcing registration on the website
• The final order total not reflecting what was advertised or expected
• Shipping costs or taxes being too high once in cart
• The website/checkout appearing not to be secure
• Finding a better price somewhere else

Cart abandonment on average is still over 65% (2019 Optinmonster), which means there are more intended purchase occasions than actual purchases. And a high SCAR can also cause an inaccurate CPV since visitors are not converting into purchasers. See the image below for how high SCAR’s can be in different categories with financial products being the highest.

8. Return On Advertising Spend (ROAS)

Also known as ROAS, this determines the actual sales generated by an advertising campaign when measured against the actual spend on the campaign as a ratio.

When used with several metrics above such as a CPV, AOV & CAC it adds significant value. On its own the metric is directionally demonstrating the efficiency of the campaign, however, unless an accurate attribution is done to the campaign you may not be able to break down results due to other conditions impacting the sale of a product, and thus you may be looking at a higher ROAS than is really attributable to the campaign. This is a starting point for a marketer to discuss a campaign with an agency or to use as a self benchmark while crafting an outcome in marketing. For a summary on how ROI and ROAS are different see: ROI v ROAS Which Is Better? 

9. Churn Rate

A website's Churn Rate, also known as the rate of attrition or customer churn, is the rate at which existing customers stop doing business with that website. It is most commonly used by companies who depend on a recurring business model (e.g. phone companies, credit cards…), but it’s also very important for other companies since it’s generally more expensive to attract new customers than to keep existing ones.

Websites with a high Churn Rate need to be focused on reducing the “friction” that prevents one-time shoppers from transforming into lifetime shoppers, the goal being to increase CLV which we discussed in Q6. Retailers are focused on this metric when they offer incentives to customers who try to cancel a subscription or close their accounts. You may have experienced this personally when trying to change or cancel a credit card, cable service, etc... Reducing churn to a minimum is key to reducing business marketing commercial costs. 

10. Ratings & Reviews (R&R)

Ratings & Reviews are a good way to track customer satisfaction and advocacy after a purchase. This last part of the marketing funnel is often overlooked by brands, but not by retailers who understand that R&R’s, and consumer generated content in general, are essential to keep customers coming back and to attract new customers.

According to Bazaarvoice, the *quantity* of R&R is directly correlated with a product’s revenue, and R&R are particularly important in the early stages of a product’s life cycle:

By and large, the same thing applies to the *quality* of R&R, which is no surprise to anyone, but what’s interesting about quality is that there are diminishing returns above a certain level, which is not the case for quantity. 

A study by Northwestern University found that, in moderation, a few bad R&R actually help boost sales. In fact, product purchases were most influenced when the average quality rating was between 4.2 and 4.5 out of 5. Sales of products with flawless ratings were less influenced by R&R, likely due to consumers thinking that it’s just “too good to be true”. Having a few less-than-perfect reviews decreases a product’s average quality rating, but grows the business more.

Bottomline, what you measure matters as much as how often and when you choose to. Our take is driven by aspirations that you already track sales, net margins, growth of both, etc. the one's we would call basic must haves. Not knowing the right metrics or being a senior leader not asking the questions is a poor excuse at avoiding a difficult topic that after covid19 is going to challenge your syndicated data based dashboard of causals, and gross aggregated sales.

Yves and Sri share their personal opinions and views on CPG and ecommerce. This is not meant to be a guidance or exact forecast of the future. We would like to see brands progress towards the future and consumers engage with and continue to get value from brands. This is our motivation. Join us on this journey of CPG progression – get in touch ??!