The most successful e-Shop is one that makes decisions based on data. It is one that knows how well it is doing at any given time and also what actions are working to its advantage.
Nowadays there are thousands of metrics you can track, but only a few of them can directly and accurately capture the state of your business, and turn them into insights that will help you grow.
Although it is very useful to monitor Google Analytics metrics for your online store (sessions, page views, pages/session, etc.), they will not help you identify your weaknesses.
So below, we share the metrics that will allow you to have a clear picture of what you're doing right and wrong, and the progress you've made. Most importantly, they will show you the financial impact of every marketing action or decision you take. This will enable you to optimise your business decision-making process.
Average Order Value - AOV
It is a simple but very important measurement to monitor. AOV informs you about the average amount of orders. For example, if you have €100,000 sales in a year and 1,000 completed orders, then your AOV is €100.
The higher the average amount of orders (AOV), the better for your online store! This means your e-shop generates more revenue from each conversion. Also, a higher AOV usually means higher profit margins for your business.
You can find ways to increase the value of each order by trying to entice your customers with more purchase options, alternative or complementary products. One method that is very often used is free shipping if the order exceeds a certain amount.
Lifetime customer value (LCV) / Life-time value (LTV)
For this basic metric, you need to do some math. LTV helps you calculate the total spend of the average customer, from their first order to now. While there are many ways to calculate LTV, we'll show you the easiest one.
The equation has 3 factors: Average Order Value (AOV - the metric mentioned earlier), the times the average customer buys from your business each year (Purchase frequency) and the average customer relationship lifespan (in years).
Calculating the average customer relationship lifespan is quite easy. You simply divide 1 by your churn rate (where churn rate is the rate of customer loss - it's used mostly in subscription services and is the customers who left in a certain period of time).
Calculating Purchase Frequency is simply dividing the number of total orders in a given year by the number of unique customers in a given year.
LTV = Average Order Value Purchase Frequency (in a given year) Average Customer Lifespan
You can improve your LTV using various methods. For example, you can create personalised content, such as emails and offers on products that your customers have shown interest in. You can even create a loyalty program in an effort to increase and reward repeat purchases.
Tip: You should always check if LTV > CAC. Why? The reason is simple: the investment to acquire a customer should be lower than the actual revenue it generates over the entire lifecycle in order to remain profitable.
Cost of Customer Acquisition - CAC
Knowing the amount you are spending to acquire a single customer is extremely important. The CAC will show you exactly that. For example, if you spend €100 to attract 10 customers to your website, your CAC is €10.
Keep in mind that the CAC you get from the above equation will always be higher than the actual cost of acquiring customers. This is because it doesn't take into account the fact that part of the marketing spend is also responsible for the percentage of some repeat purchases in a given period.
In any case, CAC is the most critical metric, especially when combined with the LTV mentioned above. The key to a successful business: lifetime customer value being higher than the cost of acquiring customers (LTV > CAC). If this happens, it means you will have profitability in the long term. Even more ideal than this is to have an Average Order Value greater than the Cost of Customer Acquisition (AOV> CAC), as this means you are profitable from the very first sale.
Improving CAC is not a simple process and is directly related to improving promotion efforts, overall. It involves a lot of trial and error as you try to figure out which marketing campaigns are working and which are not. The more you can focus on your data and improve your marketing efforts accordingly, the better your CAC will be. You can also have a better CAC immediately by improving your targeting, i.e. reaching your ideal customers. The more specific the targeting, the lower the cost of acquisition.
So, take out your calculator and good luck!
