The Ultimate Guide to Ecommerce Business Metrics

Understanding how to read eCommerce business metrics is crucial for running a healthy consumer brand and can make all the difference when driving growth, making investment decisions, and balancing profitability.?

However, not everyone has the same level of understanding of some of the most critical business metrics and how they relate to each other.?

To fix that, I have written this guide, it is meant to work as a point of reference for any consumer brand operating its own eCommerce store with a non-subscription business (if you run a subscription business I am sure you will still find value, though).?

For this explainer, I will use some examples from JUNIPER , a premium interior design brand I co-founded. Note however, that while there will be similarities to real life, the numbers are made up to make simple examples.

The explainer is divided in two parts. (1) Basic Level Metrics and (2) Advanced Level Metrics. You will know what is most relevant to you.

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Basic Level Metrics

I am sure you know what revenue and net income are. But how about the different margins in the income statement? To further complicate things, people often interchangeably use different definitions, so I wanted to start with these basic concepts so we can later use these terms for other purposes.

Product Margin

Product margin is the difference between the revenue generated by a product and the cost of goods sold (COGS). It is a measure of the profitability of a product.

For Juniper, let's assume an average order of bed linens is 2,000 SEK, and its COGS is 600 SEK.

Product profit = Revenue - COGS = 2,000 SEK - 600 SEK = 1,400 SEK

Product margin = Product profit / Revenue = 1,400 SEK / 2,000 SEK = 70%

Margins should always be expressed as percentages while "Product profit" would be a nominal number in a currency unit.

Gross Margin

Gross margin is similar to product margin, but it also includes all other variable costs related to the purchase, excludeing marketing costs. This would entail e.g. payment fees, warehousing, outbound logistics, CSR, and potentially time spent on customer service (although, one should be careful as this does not scale linearly with revenue typically)?

Gross profit = Revenue - COGS - Other Variable Costs

Gross margin = (Revenue - COGS - Other Variable Costs) / Revenue

Using Juniper, the gross margin could come out to e.g.,

Gross Margin = (2,000 SEK - 600 SEK - 200 SEK) / 2,000 SEK = 60%

Contribution Margin

Contribution margin is the revenue minus COGS and all other variable costs related to the purchase, including marketing costs. If marketing costs would make up 30% of Juniper's total revenue or 600 SEK relative to the suggested AOV above. The contribution margin would come out to 30% or 600 SEK.

Contribution Margin = (Revenue - COGS - Other Variable costs - Marketing costs) / Revenue

Contribution Margin = (2,000 SEK - 600 SEK - 200 SEK - 600 SEK) / 2,000 SEK = 30%

This money contributes to cover fixed costs (hence the word contribution). As long as this value is positive, the eCommerce business is (sort of) contributing to the business as whole. If your contrubition margin is negative, your business is in trouble and you need to take immediate action to rectify the situation.

Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is the total marketing costs divided by the total number of orders.

CAC = Total Marketing Costs / Total Orders

Your CAC needs to be less than your product level gross profit for the contribution margin to be positive.

It is useful to look at two different CACs. The blended CAC or simply CAC which includes all customers and all marketing spend.?

And what I like to call New CAC which only looks at the new customers you have acquired. This simplification assumes all returning customers are handled through free CRM measures, which is of course partly wrong, but is still useful. If you run e.g. paid text messages as a CRM effort this should be relatively simple to compensate.?

New CAC = Total Marketing Costs / New customers

Conversion Rate

Conversion rate is the percentage of website visitors who complete a desired action. Most commonly this is used in relation to the number of customer completing a purchase on your website. However, conversion rate can be used for any sub-funnel as well. Such as how many people sign up for your newsletter or make it past the front page. Breaking down your customer journey funnel in several conversion rate number is often relevant to drive improvements.

Conversion Rate = Number of Successful Conversions / Total Number of Visitors

Average Order Value (AOV)

Average Order Value (AOV) is the total revenue divided by the total number of orders. For Juniper, in the example above the order was 2,000 SEK and we can assume this to be the AOV..

AOV = Total revenue / Number of orders

Return on Ad Spend (ROAS)

Return on Ad Spend (ROAS) is the revenue generated from a marketing campaign or channel divided by the marketing spend. ROAS is usually used to measure efficiency for one of your marketing channels, such as Meta or Google.??

ROAS = Revenue / Campaign or Channel Marketing Spend

Using the numbers above we would arrive at:

2,000 SEK / 600 SEK = 3.3x

Note though that if you look at Meta's reported ROAS that will include sales tax. In Sweden with a 25% sales tax, this would mean:

2,500 SEK / 600 = 4.2x

Neither number is more correct than the other in my opinion. But it is good to remember and ensure you compare Apples to Apples. The most common mistake is when ROAS is compared to MER.

Marketing Efficiency Ratio (MER)

If ROAS measured your individual campaign or channel's efficiency, MER does the same thing for the whole business. You take your revenue and divide it by marketing spend across all channels.

MER = Total revenue / Total marketing spend

aMER = Total revenue from new customers / Total marketing spend

These days when attribution has become increasingly more complex, MER is more and more popular. Unlike ROAS, MER is always measured at the revenue level without sales tax. So be careful if you include sales tax for ROAS and not for MER. Then, you can't easily compare the two numbers.??

For both ROAS and MER, it's a near-universal truth that higher marketing spend leads to lower efficiency (all else equal). I.e. Sales scale less than linearly with marketing spend. But it could still result in higher profits as the nominal gross profit will increase while the fixed costs remain stable.

Summary of Basic Level Metrics

We covered essential metrics like product margin, gross margin, contribution margin, CAC, conversion rate, AOV, ROAS, and MER. Understanding these metrics provides a solid foundation for analyzing an ecommerce business's performance and identifying areas for improvement.

Advanced Level?Metrics

As this section will be more about analysis and how to look at different metrics. There won't be explicit formulas to the same degree but hopefully the qualitative texts will still give support to get a good understanding.

CAC and Gross Profit by Product Category

First of all. Something as simple as understanding CAC and gross profit by product category helps you allocate your resources more effectively, prioritize marketing efforts, and identify areas for improvement.?

As an example for Juniper we split Facebook campaigns by product category to be able to control for these variables and look at acceptable CAC levels by product category. Simple but very useful.

Average time to Second Order (ATSO)

It should be pointed out that this is not a recognized metric by experts in the field. I have made it up, but it makes a lot of sense.

Time to second order is the average time it takes for a customer to make their second purchase and should be specified in days.

Look at all your customers returning for their second purchase last year. And calculate the average time between their first and second order. Optimizing to shorten this time is a strong way to generate a better cash flow position and (probably) become more profitable.

Note that this metric needs to be calculated at the individual customer level.

Average Lifetime Orders (ALTO)

Again, this is not a widely recognized metric. But it does make sense and describes the average number of orders a customer places during their "lifetime", but of course it doesn't actually make sense to look at a person's entire lifetime.?

I suggest that the lifetime you consider should be relative to your ATSO. 3 x ATSO is a good starting point. However, as retail is highly cyclical over the year, you must consider this and adhere to rolling calendar years. So if your average customer comes back after 2 months. The time period you should be working with should be at least 6 months, but probably make a rounding to 12 months.

Looking at average lifetime orders as opposed to just the number of returning customers is essential. If one customer places five orders over your decided time period that increases the ALTO.

Which is important as businesses typically will see a certain degree of Pareto Principle in their customer base, where a small share of customers generate a large share of the profit.

E.g. if your New CAC is anywhere near your average order gross profit. You essentially generate all profit from returning customers and no profit on customers that don't return.

The ALTO should be specified as a multiple of orders and will always be more than 1. Let's assume 50% of your customers come back for a second purchase within the timeframe specified and half of those 50% come back for a third purchase.

ALTO = Share making 1st purchase + Share making a 2nd purchase + Share making 3rd purchase etc.

ALTO = 100% + 50% + 25% = 175% = 1.75 orders on average

Customer Retention Rate (CRR)

Customer Retention Rate feels like a straightforward metric and is often talked about. Mainly I think because SaaS companies have gotten so much media attention.

And if you asked most people working in ecommerce, they would probably immediately say they had a good understanding of what retention rate is. But it gets a lot more complicated when you start thinking about all the ifs and buts of timelines and definitions just like in the above section. To keep things simple though, use the same timeframe as previously.

Customer Retention rate = Returning customers after 3 x ATSO rounded to calender years / Total number of customers (part of the sample you are looking at).

This metric is a share of the total and must come out to below 1.

Note, that this metric must also be calculated at the individual customer level.

Customer Lifetime Value (CLTV)

Customer Lifetime Value (CLTV) is the total gross profit a business can expect from a customer during their entire relationship.

Like the above metrics, it is often challenging to calculate CLTV. And the complexities should be discussed more than they are. We already addressed the timeframe above so simply stick to the same whether 1, 2, or 3 years.?

The longer your window, the longer it will take to measure results from changes.

So if we assume your AOV remains constant over purchase 1, 2, 3 etc. (this is not obvious in real life) and your ALTO is 1.75. Then using the AOV and gross margin from Juniper above we get:

CLTV = AOV * ALTO * Gross margin = 2,000 SEK * 1.75 * 60% = 2100

A common misconception is that CLTV should be measured at revenue level instead of Gross Profit level, be an ambassador to change this!

CLTV to CAC Ratio

The CLTV to CAC ratio compares the total value an average customer brings to the business with the cost of acquiring that customer. A higher ratio indicates a more profitable business, all else being equal.

CLTV to CAC Ratio = CLTV / CAC

Just remember here that it should be the CAC to acquire THAT customer. The closest simple proxy you will find is the New CAC of the month that the customer was acquired and then look at this in cohorts by month for example.

You can affect this ratio in many ways of course, either by reducing CAC or increasing CLTV. And the higher the ratio is, the greater your chances should be to run a profitable business.

Operational Cash Flow

Operational cash flow is the amount of revenue received minus all money spent on operational expenses, such as inventory, shipping, advertising, and overhead.

Operational Cash Flow = Revenue - Operational Expenses

Understanding how your cash flow changes over time based on your core operations is crucial if you are either unprofitable or growing quickly (but probably important regardless).

Juniper almost went bankrupt during our first year of operation because we didn't scale at a pace we could sustain from a cash flow perspective and had poor payment terms towards our leading supplier. Capital got locked up in inventory, and out bank account got depleted despite making a profit in the income statement.?

Two metrics to measure inventory turnover

The inventory turnover ratio measures how often you sell and replace your inventory during a specific period.?

It's essential to understand this metric by product category, as marketing efforts can be used to increase inventory turnover for slow-moving categories or leverage them as giveaways when selling popular items.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Value

Days to Turn Over Inventory = 365 / Inventory Turnover Ratio

You can improve these metrics by purchasing smaller batches more often from your factory, which will free up capital to activate in other ways.

Summary of Advanced Level Metrics

In this section, we covered several concepts to better understand your business.?

We went through metrics to better understand the customer journey beyond the first purchase. The concepts covered were Average Time to Second Order (ATSO), Average Lifetime Orders (ALTO), Customer Retention Rate (CRR), Customer Lifetime Value (CLTV), and CLTV/CAC ratio. Working with measures to improve these are crucial to driving profitability.

We then went on to look at three measures more closely associated with accounting and keeping more cash available in your bank account.

Operational Cash Flow and two ways to look at Inventory Turnover. These areas are designed to make you understand how the money in your bank account develops and how you can positively affect that beyond driving a profitable business.

Wow, you made it this far.

I am well aware this was a monster of an article on a very dry topic. You are probably not going to read it end to end more than maybe once. But you can use it as a reference and send it to people that need a refresher on this topic. I sincerely hope this is helpful.

Before you go, here are three quick nuggets:

Vendor of the month:? Metorik ?provides a single dashboard unifying your WooCommerce or Shopify store's orders, customers, subscriptions, products, and more. Useful for analysis and I use it a lot. The only downside is a lack of flexibility, but for the majority of users, this probably won't matter too much.

Book I am reading:?Think Like A Monk by Jay Shetty. An excellent guide to take a step back and calm things down in life.

Consumer Brand that inspires me: NUDIENT is a mobile case brand known for creating stylish yet functional phone cases. It is growing rapidly and built the right way, on a combination of product, brand, and numbers.

That's all for now

I hope you found this explainer helpful; if you have any thoughts or comments, please DM me.

Sleep is crucial to do good analysis, so get yours, and remember to send the link to someone you think could benefit from reading this.

Happy analyzing!