Sales Tax Fundamentals
Get up to speed on the basics of sales tax
9 Financial Metrics ECommerce Merchants Should be Monitoring
byNovember 1, 2020
This timely post is from our friends at Bean Ninjas
As an eCommerce entrepreneur, you have a ton of responsibilities on your plate, from sales and marketing to managing your team, vendors, and any suppliers.
This becomes infinitely harder if you don’t know your numbers.
When you don’t have a firm grasp of the financial side of your business, it is essentially the equivalent of boarding a plane without a pilot. You are going to be in for a rough ride.
In this post, we’re going to look at the top 9 metrics that every eCommerce business owner should be monitoring on a monthly basis, including:
This is the one metric that even the most stubborn non-metrics-driven eCommerce entrepreneur checks.
If it is going up and to the right, they might even be bragging about their top-line revenue growth.
However, this is a dangerous move since top-line revenue doesn’t tell the whole story. You also need to consider revenue for each of your acquisition channels, sales velocity, and the big one – gross margin.
In fact, many eCommerce businesses have grown their business into bankruptcy because they are obsessed over top-line revenue at the expense of everything else.
2. Contribution Margin
Contribution margin is the selling price per unit less the cost of the unit.
This is the fuel that funds your ability to acquire new customers, launch new products, pay yourself and your team, etc.
Once you have multiple SKUs or are selling on multiple channels, we recommend separating cost of sales, which includes cost of goods sold (COGS), fulfillment, freight, pick/pack, and processing fees) from operating expenses.
Then, you can take revenue minus cost of sales to get your contribution margin.
One of the biggest issues that I hear is, my revenue is increasing, but my bank account isn’t.
This happens when you are tracking and focusing on profit.
Revenue – cost of sales – customer acquisition costs – operating expenses = PROFIT
Or put another way, how efficiently are you turning that revenue into profit.
The best way to keep tabs on the cash going in and out of the business is through your cash flow statement. If you use cloud accounting software like Xero, it is easy to monitor this on a weekly or monthly basis.
Pro Tip: One of our favorite models for cash flow management is the Profit First Framework. This system forces you to run a profitable and sustainable business instead of getting distracted by top-line revenue growth.
4. eCommerce Conversion Rate
How many visitors are buying something when they get on your website?
This is your conversion rate.
A good eCommerce conversion rate benchmark to shoot for is 3-5%. <insert link>
If you increase your conversion rate by even a small amount – like 1-2% points – it could mean thousands of dollars in additional revenue.
Here are a few tips for doing this.
- Revise your product descriptions, so they are more compelling
- Optimize your design for ease of use
- Simplify the checkout process. The fewer clicks someone needs to take, the more likely they’ll buy.
Pro Tip: We recommend also segmenting your conversion rate by channel, especially if you are running paid ads in order to maximize the return on ad spend (ROAS). After all, what’s the point of spending tons of money on ads if they aren’t leading to more purchases?
5. Customer Acquisition Cost (CAC)
This brings us to CAC – or the cost to acquire a new customer.
This is pretty self-explanatory, but a good rule of thumb is to ensure that your acquisition costs are always far less than the revenue you are bringing in.
For example, if you are spending $10 to acquire a customer and that customer spends $50 on a product, that’s a scalable and sustainable way to run a business.
On the flip side, if you are spending $50 to acquire each customer, and they are spending an average of $10 in your store. You are in for a wake-up call.
6. Customer Lifetime Value (CLTV)
Customer Lifetime Value is the amount of money a customer spends with you in a given customer lifecycle.
This metric is subjective, given that a customer lifecycle for a business might be 6 months or 10 years.
For this reason, the metric is better suited for established eCommerce businesses that have been around for years. They have more data and insights for how many customers buy again, how often they make repeat purchases, and how much they spend on average.
Whereas with newer businesses, CLTV can become a vanity metric. Even if you have only in business for 6 months, you can say our CLTV is 2 years. Then, you can use it to justify spending more money on acquiring customers than they should thinking they’ll just make it back at a later date.
7. Average Order Value (AOV)
A better metric for newer businesses to track closely is Average Order Value. This is the amount of money that a customer spends when they buy from you.
So, you want to make sure that your acquisition costs are less than the average order value.
In our experience, the best thing you can do is find ways to increase AOV. This can be done through packages and bundles, upsells, or cross-sells.
8. Cart Abandonment Rate
Did you know that the average cart abandonment rate for eCommerce businesses is 69.57%?
That means that nearly 7 out of every 10 shoppers think about buying something but ultimately doesn’t.
Anything you can do to understand what makes your customers buy as well as strategies for recovering abandoned revenue will go a long way in making your business more profitable.
9. Customer Refund / Return Rate
Another metric to keep an eye on is the number of refunds, exchanges, and credit card chargebacks.
Refunds are not only a headache for your customer service team to manage, but it also gets expensive.
Your refund rate will vary based on the industry that you are in. For example, an apparel business typically has a much higher refund or exchange rate than a business that sells fishing gear.
Bonus – The Growth Equation
In addition, a bonus metric to keep an eye on is the Growth Equation, which is:
Visitors x Conversion Rate x AOV = Revenue
This one equation simplifies your eCommerce financials and allows you to cut through the uncertainty of what to focus on first and target in on those areas of impact to grow your business strategically
As your business grows, it becomes more important to monitor and analyze your data. When you are tracking these 9 metrics, it can help you spot trends, spot potential issues before they blow up, and make informed data-driven decisions to grow your business.
About the Author
Wayne Richard is the International Team Leader/Account Manager at Bean Ninjas. Wayne is a management accountant who forged a 15-year career with tech heavyweight Hewlett Packard before starting his own cloud accounting firm in Tucson, Arizona.
Fate (and the Internet) brought him to discover Bean Ninjas via a blog post. Two years later and Wayne’s involvement with Bean Ninjas had grown from a blog comment to a contractor and eventually equity partnership.
When Wayne isn’t managing a global team and equipping eCommerce entrepreneurs with the financial tools they need to enjoy business success and lifestyle freedom, he’s being an everyday superhero to his wife and five children.