Every successful eCommerce business is backed by data. Dropshipping businesses are no different. Without tracking data, you have no way to know your business growth, deadly weaknesses and potential opportunities. Blindfolded, how on earth could you thrive?
In this article we’ll discuss the most essential eCommerce metrics to keep track. Not all of them are straightforward and viewable on a real-time dashboard, but it’s vital to keep an eye on them as you make any improvement to your business.
eCommerce metric #1: Average Order Value (AOV)
Average Order Value (AOV) is the average money a customer spend in one order. Here’s how it’s calculated:
Average Order Value = Revenue / Number of orders
For example, your December’s revenue is $50,000 with 800 orders. Your AOV is $50,000 / 800 = $62.50.
Why does AOV matter? Because this metric is closely tied to your profit. Higher AOV means higher profit margin, as most cost per order is fixed whether someone buys more or less.
Increasing AOV typically results in more money gained, same as increasing the number of orders does. The difference is that it’s cheaper to increase AOV, while to gain new customers you’re required to spend more on advertisements.
There’re many methods to improve AOV: Cross-selling, upselling, bundles, volume discounts, free shipping threshold, etc. Check out this article for tactics to boost your AOV.
eCommerce metric #2: Customer Lifetime Value (LTV)
Traditionally, entrepreneurs associate increasing profitability with acquiring new customers. But that acquisition model has been shifted to retention model, which focuses more on increasing repeated purchases. The new model shows more benefit, as it takes less money and effort while promises to raise your profit margin.
This is where Customer Lifetime Value (LTV) becomes important. LTV is the projected revenue that a customer will generate during their lifetime.
Why should you track this eCommerce metric? LTV will give you an idea of how much you can spend (on ads) to acquire a new customer (Customer Acquisition Cost – CAC). Your LTV should be (much) higher than your CAC, otherwise you’re paying more than you’ll get from a customer.
Let’s say your AOV is $62.50. If the average customer purchased 3 times, your LTV is $187.50. -Generally it means it’s not the end of the world if you spend more than $62.50 on ads – but if the number exceeds $187.50, you’ll doomed. Also note that there’re other costs not yet mentioned (COGS, shipping costs, processing fees…).
For how to calculate LTV, check out this infographic.
eCommerce metric #3: Conversion rate
Conversion rate is one of the most meaningful metrics for a business. It’s the percentage of the visitors on your website who decide to make a purchase. For example, yesterday your site had 800 visitors, among which 40 customers made a purchase. Your conversion rate was 5%.
Conversion rate = Number of purchases / Number of visitors
But don’t just stop there! Dig deeper into segments, such as:
- Traffic source (Facebook, Google, Instagram, etc.)
- Device (desktop, mobile, tablet)
- New vs. returning visitors
Learn which ones bring you the best ROI and invest more in profitable segments. Likewise, look for barriers in those underperforming and make strategic adjustments.
eCommerce metric #4: Net Profit Margin
Simple, universal and utterly important – if I could vote for the best metric, this would be the one. Net Profit Margin is the percentage of revenue left after all expenses have been deducted from sales.
Net profit margin = Profit / Revenue
Revenue is a good number. But ultimately, you want to know how much profit you’ve made, and how effective.
Assuming that your monthly revenue is $300,000; with 2% profit margin you only bring home $6,000. That’s the same as a $50,000 business with 12% profit margin, but you’re handling more risks and expenses running a bigger business.
Knowing your profit margin helps you make good decisions. Would you decide to double the ad spend, knowing your current margin is 30%? In this world of modern ecommerce, opportunity waits for no one, and it’s up to you to ride the upcoming wave or miss it all.
A data-driven ecommerce business has what it takes to become a top business. Monitor these 4 metrics and you’ll stay informed to make great improvements.
If you’re interested in data and profitability analytics with Shopify, stay tuned for our app True Profit. It automatically pulls and updates data from Shopify, AliExpress, Facebook Ads and Google AdWords to give you the real picture of your profitability. You get to see Profit, COGS, Shipping cost, Processing fees, Conversion rate and other major metrics in real time.
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