If you run an ecommerce business and feel overwhelmed by understanding all of the data you generate every day across different platforms and tools, this content is for you.
Today, we’ll discuss how to build a comprehensive and effective ecommerce analytics framework for your online business, without wasting time on superficial and irrelevant information.
Because, ultimately, as an ecommerce manager, it’s crucial: 1) to have a clear view of the current state of your business; 2) to quickly access essential information to achieve established goals; and finally, 3) to make data-informed decisions swiftly and confidently.
What Exactly Ecommerce Analytics Is All About?
Think of your ecommerce as an airplane.
To take off, have a smooth journey, and land safely, an airplane needs certain essential elements in place, such as: the right amount and type of fuel, all major electronic controls working, a compass, a well-trained crew, and all appropriate safety procedures.
Just as the food served on board, for example, does not affect the plane’s ability to safely reach its destination (although it determines the airline’s reputation), an online business follows the same logic.
Your ecommerce is like that airplane, and most likely, you spend much of your time dealing with minor (but not irrelevant) details and forget to assess if you have enough fuel to safely reach the final destination.
Therefore, it’s crucial to create an analysis model for your ecommerce, which functions like a flight plan. This model will help you determine your ability to achieve your goals and monitor the performance of your “airplane” during the journey.
How To Conduct Data Analysis For My Ecommerce?
Continuing with the airplane analogy, you need to identify, first and foremost, what are the essential elements that can help you reach your destination. And even if you don’t yet know what that final destination is, it’s necessary, at least, to know which elements need to be in place to continue the journey and land safely (wherever that may be).
Therefore, wrapping up the airplane analogy (I promise), you need to have a cockpit that serves to:
- Assess before any decision-making or planning, to know where you are in the present moment and what is needed to get from point A to point B.
- Rapidly identify if the decisions made prior are safely guiding you to point B.
- Analyze if point B is ideal for your business and if you can reach it within the planned time frame.
In summary, assembling an ecommerce analytics model will function as a map, a compass, and a to-do list all at once. This model should help you know where, how, when, and why, enabling you to achieve your goals and enhance your ecommerce overall performance.
But What Is Ecommerce Performance?
Ecommerce performance, in summary, is the ability of your online store to deliver consistent results that you need in the short term to achieve your goals in the long-term.
While this may seem basic, I want to introduce you to a new perspective on ecommerce performance. Stay with me.
Knowing that performance is the ability of your ecommerce to deliver results, we need to understand what these “results” are, right?
Because what is a satisfactory result for one ecommerce manager may not be for another.
So, to clarify this issue, it’s important to take a step back and, before identifying what a “satisfactory result” is for your ecommerce, let’s discuss your personal goals.
Every founder or stakeholder of an online business has their personal goals, and it’s from them that we start our process.
You have a business that should meet your personal and professional objectives. Identifying these objectives as early as possible will be crucial to formulating a successful and achievable flight plan. Otherwise, you’ll be flying blind, which can result in excessive fuel consumption and compromise the safety of your journey. I hope the analogy makes sense to you.
So, at this moment as you read this content, try to mark one of the options below, and it’s okay if this plan changes over time. But TODAY, which option best corresponds to your goals:
- I want my ecommerce to consistently sustain my personal lifestyle.
- I want my ecommerce to lead me to a future exit that will provide me with financial freedom.
- I want to raise capital (whether through VC money, debt, or reinvestment) to expand my ecommerce and conquer new markets, surpassing my competition.
There are three paths. Nothing more and nothing less. And everything begins with them.
Each of these paths requires certain variables to be in place, considering a first principles approach.
For example:
If I want my ecommerce to sustain my personal lifestyle:
- I have to quantify my personal fixed expenses, and thus I will get to how much capital I need to withdraw from my business every month.
- With this, I can easily calculate how much my business needs to generate in monthly and annual revenue.
- And thus, I now have a clear goal, both in the short and long term, for my online business.
The same applies to the other options presented. Simply quantify your goal and reverse engineer it into short and long-term milestones.
Ultimately, it’s about achieving operational efficiency that consistently delivers profitability, as your compensation comes from your business’s profit.
An exit, for instance, will only be realized at a satisfactory price if the buyer sees value in your business and potential for return, which concept also applies to investments. Whether through venture capital or reinvestment, efficiency and profitability are the metrics of value.
Therefore, outline your goal to quantify what performance means for YOUR BUSINESS, and then distill this goal to identify how to achieve greater efficiency from it.
Now that you are able to understand the macro performance of your ecommerce, let’s delve into how to measure it.
How To Measure The Performance Of My Ecommerce?
An ecommerce is comprised of several “operational pillars” that could be divided into:
- Inventory: encompasses the entire process from conception, through manufacturing, to shipping your products to the customer’s doorstep.
- Sales channels: encompass every sales channel responsible for enabling your customer to interact with your products and decide to exchange their money to receive your product in return.
- Marketing: encompasses every channel, tool, or medium used to make more customers discover and purchase your product at the lowest cost possible.
Each of these pillars has its methods of performance evaluation, and as a manager, you need to have easy access to all of them when devising your future plans, analyzing the real-time health of your business, and assessing your ability to achieve your goals. And that’s what we’ll talk about now.
Where Do Most People Go Wrong In This Process?
During the past decade we’ve been in this industry, we’ve noticed that many ecommerce managers make the mistake of focusing exclusively on one of these pillars, neglecting the others, or analyzing them superficially.
The result is superficial or limited data, which directly impacts the ecommerce’s success in the medium and long term.
To prove my point, follow this example:
All ecommerce managers know in detail the average ROAS of their campaigns, the best attributions to creatives, and the best channels. That’s an “ecommerce manager starter pack” kind of data-base.
However, few know what is the minimum contribution margin they need in their operation and how it impacts their growth and pricing strategies (ultimately their ads bidding).
And that’s what we’ll see next in this content: what are the KPIs of each pillar of your online operation and how to build an ecommerce management report that allows you to make faster and better decisions regarding the performance of your ecommerce.
What Are The Kpis And Metrics To Analyze In My Ecommerce?
As you may have noticed, we’re addicted to processes, and because of that, structuring an ecommerce performance analysis report needs to follow a logical line because, as we’ve mentioned, the goal here is for you to make faster and better decisions for each operational pillar of your business.
Therefore, we divide ecommerce performance KPIs into some groups:
- Profitability KPIs: where we group all the data that interferes directly in the business profitability.
- Inventory KPIs: where we group the information that demonstrates how the product mix is performing from categories to SKUs.
- KPIs for customers cohorts: where we will analyze how each group of customers is behaving within the store.
- Sales channel KPIs: where we analyze how each channel is performing comparatively.
- Marketing KPIs: where we analyze in detail the efficiency of marketing investments.
Key Performance Indicators to Maximize Your Ecommerce Profitability
Tracking profitability is crucial for the success of any operation. To do this, it’s essential to understand and closely monitor Key Performance Indicators (KPIs) related to it, such as contribution margin and net profit. That’s the basic…
Now let’s explore these concepts in detail.
Contribution Margin for ecommerce:
Contribution Margin is the difference between the total revenue generated by the sales of your products and the variable costs associated with the production or sale of that product, i.e., every cost directly linked to each sale, like product manufacturing cost,packaging, commissions, payment processor fee, and such.
In simplified terms, Contribution Margin is how much money is left to cover the fixed expenses of your operation and generate net profit after subtracting variable costs.
Contribution Margin Formula:
Contribution Margin = Total Gross Revenue – Variable Costs
For example, if a product is sold for $100 and the variable costs are $60, the contribution margin would be $40.
Pro tip: Since the contribution margin is responsible for covering your operation’s expenses, we always like to keep an eye on the ratio between contribution margin and expenses. This allows us to identify trends month by month and seek alternatives to improve the difference between these metrics.
Net Profit for ecommerce:
Net profit is the value that remains after subtracting all the fixed expenses and variable costs from gross revenue. This is the true indicator of how profitable your business is and is a gauge of the efficiency of your operation.
Before we dive into the formula, we need to understand that the era of “growth at all costs” is over, considering the global macro scenario and the outlook for short- and medium-term interest rates and inflation.
Therefore, you should reverse engineer and look at your business with an “investor’s perspective” and from net profit, see what the average final profitability of your business is and then cross it with other safe investments, such as treasuries, and ask the following question: “Is it worth taking the risk I take with my business compared to other ‘safer’ alternative investments?”
This question is important because it’s the same one an investor will ask when analyzing your business.
According to a recent study, the average net margin of American ecommerce businesses is a measly 0.64%. It’s like for every $100 your business makes, only $0.64 is left for the owner. Is that a good investment for you?
Formula for Net Profit:
Net Profit = Total Gross Revenue – (Variable Costs + Fixed Expenses)
Expenses, Variable Costs and Their Impact on Your Ecommerce Profitability:
Expenses and costs are Indispensable to any ecommerce. They can be divided into two main categories: variable costs and fixed expenses.
- Variable Costs: As we’ve seen earlier, these are costs that vary according to the volume of sales, such as cost of goods sold, sales commissions, payment processing fees, and shipping. The more you sell, the more these costs increase.
- Fixed Expenses: These are expenses that remain relatively constant regardless of the volume of sales, such as rent for physical space, team wages, marketing investments, among others.
Example of the Impact of Expenses on Profitability:
Let’s suppose that, in one month, your ecommerce had a total gross revenue of $50,000. The variable costs were $20,000, and the fixed expenses were $25,000.
- Calculate the Contribution Margin = $50,000 – $20,000 = $30,000
- Calculate the Net Profit = $30,000 – $25,000 = $5,000
In this example, although the contribution margin is relatively healthy, the fixed expenses significantly impacted the net profit, reducing it to $5,000 and giving your business a net margin of 10% ($5,000 / $50,000).
Final Takeaway:
Understanding and closely monitoring contribution margin, net profit, and the impact of expenses is essential to ensure the profitability of your ecommerce.
By optimizing your operation to maximize contribution margin and control expenses, you can significantly boost net profit and the overall success of your online business, turning it into a valuable asset with high growth potential.
Inventory KPIs for Your Ecommerce
Ultimately, the goal of your ecommerce is to connect specific demand with an offer. In this case, your products.
Therefore, an inventory KPI report should show which products have higher demand and higher margins so that you can identify winning and losing SKUs as well as strategic improvement opportunities and inventory management.
Thus, inventory KPIs should provide insights into which products are driving more revenue, which are the most profitable, and which have the highest average order value, dictating your future purchases, marketing campaigns and such.
Let’s explore these KPIs in detail to help you optimize your inventory performance once and for all.
Top Revenue Generating Products:
Identifying the products that are the top revenue generators is crucial for dictating your marketing efforts and a more efficient inventory management because these are the items that are contributing significantly to the growth of your business.
Inventory KPIs to Track on your ecommerce:
- Revenue by Category or Groups: Calculate the total revenue generated by each category or groups of similar products so that you have a macro view and identify potential trends.
- Revenue per Product: Calculate the total revenue generated by each individual product to identify which ones generate the most revenue compared to others.
- Share of Total Ecommerce Revenue: Indicates the proportion of total revenue that each product (and category) contributes to your ecommerce’s total revenue. This way, you’ll know which are your true hit products.
Pro tip: This analysis format is essential because many managers are passionate about their products, but not always the product we love is the best for achieving the results you expect.
For this reason, we need to have an analytical and 100% rational view of inventory to optimize our stock for the real demand of our customer base.
Most Profitable Products:
Not always the products that generate the most revenue are the most profitable. It’s important to identify the products that offer the best profit margins to maximize the profitability of your business by betting and investing in the right products.
KPIs to Track:
- Profit Margin per Product: Calculate the profit margin generated by each product, deducting production and sales costs.
Products with Highest Average Order Value:
Understanding which products have the highest average order value is crucial for upselling and cross-selling strategies, as well as for boosting revenue per transaction.
With a higher average order value, it’s possible to further increase the ROAS of paid media campaigns and elevate the profitability of the business as a whole.
So identify the products with the highest average order value, assess the profitability of each, and see if they are preferred by new or recurring customers. Use this information to create more profitable offers and campaigns.
Pro tip: This data can often be more difficult to locate with traditional ecommerce analytics tools, but with SmartSeller, it’s possible.
Other Important Inventory KPIs for ecommerce:
In addition to the KPIs mentioned above, there are other data points that can provide valuable insights about your inventory performance:
- Inventory Turnover: Evaluates how quickly products are sold and replaced in stock.
- Excess or Obsolete Products: Identifies items that are taking up space in the inventory and are not contributing to the store revenue.
- Days Remaining in Stock: Particularly important for your top-selling products, so you can replenish stock quickly.
Final Takeaway:
Mastering inventory KPIs is essential for maximizing the efficiency and profitability of your ecommerce.
By identifying the top revenue-generating products, the most profitable ones, and those with the highest average order value and demand, you can better direct your marketing efforts, optimize your inventory, and drive growth for your online business.
Remember to regularly review these KPIs to adjust your strategies as needed and maintain a healthy and profitable inventory management.
Customer Cohort KPIs for Ecommerce:
Understanding the behavior of your customers is essential for the success of your ecommerce, with impacts in the short, medium, and long term.
KPIs related to customer cohorts are important because they offer valuable insights into the performance of your marketing strategies, customer satisfaction with your product, brand, or service, and the growth potential of your ecommerce.
Now let’s explore these KPIs in detail and discover how to segment customers by different characteristics to maximize results and facilitate your decision-making for new marketing and sales strategies:
Segmentation of New and Recurring Customers:
First and foremost, it’s important to analyze new and recurring customers separately, as they have distinct purchasing behaviors and require different marketing and retention approaches.
Customers KPIs to Track:
- New Customer Acquisition Rate: Indicates the effectiveness of your strategies for acquiring new customers.
- Recurring Customer Retention Rate: Evaluate your business’s ability to retain recurring customers over time.
Segmentation by Region:
Understanding where your customers come from can help you tailor your marketing and logistics strategies to better meet the specific needs of each region.
Key KPIs to Track:
- Geographical Distribution of Customers: Shows the proportion of customers located in different regions.
- Total Revenue generated by Region: Identifies regions with higher purchase intent, opening opportunities to establish your brand in previously unexplored areas.
- Conversion Rate by Region: Evaluates the effectiveness of your marketing campaigns in different geographical areas.
- ROAS (Return on Ad Spend) by Region: Tracking potential returns by region is an important metric to identify growth opportunities in specific geographic areas.
- Products Sold by Region: Want to be more detailed? Identify the top-selling SKUs by region, for both new and returning customers. By combining this data with the others presented here, you can thoroughly map out consumer behavior in different regions and uncover previously hidden opportunities. SmartSeller provides a detailed report on customer behavior by region, offering valuable never-seen insights.
Segmentation by Average Order Value
Analyzing the average order value of your customers’ cohorts can help you identify upselling and cross-selling opportunities, as well as segment your customer base based on their purchasing power.
Key KPIs to Track:
- Average Order Value of New and recurring Customers: Calculate the average amount spent by customers in each transaction and update this value month by month.
- Variation of Average Order Value Over Time: Evaluating changes in average order value over time will help identify purchasing trends and take action promptly.
Segmentation by Purchased Products:
Understanding which products are most popular among your customers can help you optimize your product mix and personalize your marketing strategies. Remember that the goal of your ecommerce is to match existing demand with your product offerings.
Key KPIs to Track:
- Best Selling Products for New and Recurring Customers: Identify the products that have the highest demand in each customer segment.
- Units Sold per Transaction: Evaluate which customer profile tends to purchase more products per transaction and at what stage of their shopping journey with your brand.
Other Relevant Segmentations:
In addition to the segmentations mentioned above, you may also consider other categories of analysis, such as:
- Age Group Segmentation: Analyze the purchasing preferences of different age groups.
- Gender Segmentation: Identify distinct purchasing patterns between men and women and focus your efforts on the group that performs best.
- Acquisition Channel Segmentation: Evaluate the effectiveness of different marketing channels in acquiring new customers. And if you want to be more detailed and precise, add the cost of each channel and identify the final ROI of each one.
Final takeaway:
Mastering customer cohort KPIs is crucial for driving the growth of your ecommerce and, as a bonus, solidifying your brand in the minds of consumers.
By segmenting your customers based on different characteristics and behaviors, such as region, average order value, and purchased products, you can personalize your marketing strategies, enhance the customer experience, and increase brand loyalty.
Remember to regularly review these KPIs to identify improvement opportunities and ensure the ongoing success of your online business.
Main KPIs for sales and marketing channels for ecommerce
In the competitive landscape of ecommerce, understanding the effectiveness of different sales and marketing channels is crucial to allocate your resources and energy intelligently and achieve success.
Let’s explore the essential KPIs for analyzing different sales channels and marketing campaigns across various advertising platforms, helping to optimize your strategy and maximize return on your investments.
Sales Channel KPIs:
Sales channels represent the various touchpoints where customers can view and purchase your products. Analyzing the performance of each channel separately and cross-referencing it with the overall business performance is crucial to determine where to focus efforts and resources.
KPIs to track:
- Revenue per Channel: Calculate the revenue generated by each individual sales channel.
- Customer Acquisition Cost per Channel: Analyze the average cost of acquiring a new customer on each channel.
- Net Return per Channel: Subtract the customer acquisition costs from the revenue generated by each channel to get to a net result for each sales channel. This data can identify channels with higher margins and greater growth potential.
- Channel’s Share in Total Revenue: Identify how each sales channel impacts your overall operation. With this information, you’ll be able to channel resources and efforts into the most promising and important sales channels for your business.
- Compare with Previous Periods: Compare all these metrics with previous periods to gain insight into the evolution of each channel separately.
Key Performance Indicators (KPIs) for Marketing Campaigns:
Marketing campaigns are essential for attracting qualified traffic to your website and converting leads into customers. At the same time, they account for the main expenses of American ecommerce businesses. According to a study conducted by Bluehost, Marketing and Sales Commissions represent, on average, 10% of American e-commerce total expenses.
Therefore, the main benefit of this analysis, as obvious as it may seem, is to be able to monitor the performance of each campaign and thus identify which strategies are delivering the best returns on investment.
Important Note: We know that attribution is a real problem for all online advertisers, which is why you should look for alternative attribution tools, add UTM parameters to your campaign links, and cross-reference information with more than one platform.
Main KPIs to track:
- Return on Investment (ROI) per marketing channel: Calculate the financial return obtained in relation to the investment made on each channel and compare them.
- Cost per Acquisition (CAC) per channel: Evaluate the average cost to acquire a new customer from each marketing channel.
- Gross revenue per marketing channel: Always track the gross revenue generated by every channel.
- Net revenue per marketing channel: Always deduct the results from marketing channels with your COGS and CAC to arrive at net results, and then identify which channels are the most profitable.
- Channel revenue share to the total operating revenue: And we always suggest identifying the impact of revenue generated by marketing channels on the overall business result, thus we will be able to identify channels that we are excessively exposed to.
Final Takeaways
In conclusion, understanding the key performance indicators and their interrelation across the different operational pillars of your ecommerce is essential for long-term success.
By adopting a holistic approach and deeply analyzing each aspect, managers can make more informed and effective decisions to drive the growth of their online businesses with greater agility and in today’s competitive markets, velocity is an advantage.
By focusing on profitability, inventory, customer cohorts, sales and marketing channels, online entrepreneurs can optimize their operations, maximize efficiency, and ensure the sustainability of their companies in the competitive online market.
Ultimately, mastering these KPIs not only improves the performance of your ecommerce but also opens doors to continuous growth and lasting competitive advantage.