The Ultimate KPIs to Measure in Your E-Commerce Store

Even if you do so subconsciously, every business keeps track of key metrics. Whether it's revenue or inventory levels, keeping track of certain figures allows you to visualize your business in comparison to competitors and measure success. Often referred to as Key Performance Indicators, these standards can ensure your business's continued success and serve as warning indicators.
Key Performance Indicators, better known as KPIs, are quantifiable targets that can help you measure the success of your business. KPIs can act as goals for certain teams to reach, milestones, and help you benchmark. Read on to learn about the top KPIs that matter for e-commerce merchants.

Gross Profit

Imagine you're selling candy bars for $10. Your Shopify financial report tells you you have made $500 in sales. Pretty good, right?
Well, maybe not. What if you've spent $600 on machinery, labor, packaging, and shipping your candy bars? You haven't broken even yet!
Looking at sales only shows you the topline. This can be deceptive as it doesn't take into account all of the costs that go into your business.
Gross Profit = Revenue – Cost of Goods Sold
Gross profit can be a better measure for how profitable your business is, as it reflects how much money was actually earned from your sales. In addition, it can indicate if you need to adjust business practices to become more cost-effective. Returning to our candy bar example, you could reduce packaging, or switch to a cheaper shipping service.

Net Sales

While gross profit is one of the most common KPIs measured, the number can be deceiving! Many variable expenses are not included in the costs of goods sold (COGS), as it only looks at the cost of producing goods. If you experience high rates of returns, fraudulent orders, or offer many discounts, the gross profit number may be misleading. To gain a more accurate view of your business, use the net sales formula.
Net Sales = Gross sales - Returns - Discounts - Fraudulent Orders

Gross Margin

Using gross profit, you can find another valuable metric: your gross profit margin. While both are popular measures for profitability, the gross margin is a percentage while gross profit is a dollar value.
Gross Margin = (Total Revenue - Cost of Goods Sold) / Total Revenue

Gross margin may be useful when benchmarking against other companies, as it looks at the ratio of sales to the costs of goods sold (COGS). This makes more sense than comparing gross profit, as companies of various sizes have different equipment, and sales processes.
All businesses should aim to have a high gross margin, as it indicates the percent profitability of a company. This ratio will also tell you how much cash flow is available in your business.
According to SBO Financial, most companies should aim for margins between 40% to above 60%. If you sell fast-moving consumer goods (foods, beverages, candies, etc.) and make less than $10 million in sales per year, they recommend a profit margin of over 40%.

Customer Acquisition Metrics

Order Frequency

A metric that goes hand in hand with customer acquisition cost, order frequency can show you the value that each new client is bringing to your store.
Order Frequency = Total Number of Orders in a Year (365 days) / Unique Customers in a Year
This measures how likely clients are to return to your store and purchase again. As the most difficult part of marketing is turning a window shopper into a paying customer, this value will show you how often your clients return.
This ties directly into the customer lifetime value, as the higher the repeat rate the higher the lifetime value all else equal.

Customer Lifetime Value

Customer Lifetime Value = (Average Sale Value)(Order Frequency)(Average # Years a Customer Continues to Purchase)
This calculation can help you predict the value each new client brings to your business in the long term. This metric may be useful if you are considering making investments and want to predict future cash flow.
Using this metric in conjunction with the CAC (customer acquisition cost) can give you a holistic view of the cost of a client. If the cost of acquiring a paying customer is higher than the entire amount the client is expected to spend at your store throughout multiple purchases, you must reconsider specific aspects of running your business.

Return on Ad Spend

Many people focus on a company’s return on ad spend to approximate the success of a new product or sales tactic. While this may give you a good idea of sales shortcomings and successes, this metric fails to accurately summarize the complex buyer’s journey.
Ads are a tiny portion of creating sales. Your website, product, brand, price, and hundreds of other factors play a larger role in determining if an ad-viewer converts. More accurate metrics to judge may be your CTR, or CPC. Look out for a more in-depth article explaining customer acquisition metrics!
Return on Ad Spend = Revenue from Marketing / Advertising Costs
The ROAS only accounts for clicks on ads and paid promotions. Word of mouth referrals, unpaid promotions, and hundreds of other factors are not accounted for in the final metric.
Nonetheless, it may be valuable to see how much you are spending on advertising in comparison to products sold. Specific ROAS ratios range across industries and campaigns, however a ROAS of 4:1 ($4 in sales for every $1 of advertising) is typically considered good, with higher ratios being better.

Inventory Days

A recent Forbes article reveals poor inventory management has caused retailers worldwide to loose $1.8 trillion.
That might include you!

Proper inventory management is one of the most important parts of ensuring the longevity of your business. If you overstock on inventory, you risk wasting your cash flow- but if you don't carry enough stock, you risk running out of a product consumers love and losing out on potential revenue!
Measuring inventory days can help you manage this delicate tightrope.
Inventory days looks at the average time, in days, it takes for a business to turn stock into sales. This varies depending on industry: fast-moving consumer goods and perishables have much lower inventory days than companies selling larger products, such as apparel and luxury items.
Inventory Days = [($ of available inventory / monthly cost of goods sold)] (30)

For retail and e-commerce businesses, the recommendation is 30 inventory days, with restaurants and cafes at just 3.
Inventory is a large investment for most businesses, so keeping track of this metric can show you how efficient your business is. However, please note that market fluctuations and trends may drastically impact the accuracy of this metric. Many clothing brands experience overnight success, and world events may shift this balance.
Beyond seeing the efficiency of your business, inventory should be a cornerstone of your daily operations. It is one of the most important assets in your business, and can dictate how long your store runs for. Inventory valuation, stock to sales ratio, and inventory turnover rate will be explored in depth in an upcoming blog post.

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