In the competitive world of online retail, building an e-commerce business that stands the test of time, and has the potential to scale and attract investment, is no easy feat.
While the online world of business is an exciting space, it’s not all that different to traditional bricks and mortar businesses when it comes to building a business that is solid, sustainable, and has the right foundation for growth.
Rather than feeling overwhelmed by the metrics, here are four key metrics that matter when evaluating the health of your business.
Understand your gross profit margin
With e-commerce businesses, the platforms we use to facilitate online business such as Shopify, various apps and software that directly integrate with the platform and performance marketing tools, give us real-time insight into the analytics and metrics that matter.
But for any business to have sustainable growth, you need to be confident about your gross profit margin. This means not just looking at the cost of the product and the number of units you’re selling, but also being clear on your costs around freight and logistics, tariffs, shipping to customers, warehousing and merchant fees.
For example, many e-commerce businesses have seen their gross profit margin heavily impacted by the exponential increase in shipping costs globally brought on by the pandemic.
You should know what your cost of sales are, how sustainable they are, and whether unit economics will improve as volume increases. Know what your minimum gross profit margin should be, noting that this can vary from industry to industry.
For example, if your gross profit margin is less than 50% and you’re currently spending 20-30% of your revenue on acquiring customers, it makes it very difficult be able to build a solid foundation to accelerate growth by investing further in talent and marketing whilst remaining profitable. However, if your profit margins are a bit lower at the moment, don’t worry, just be sure to have a plan for how these margins will improve over time as the volume grows.
Know your Return on Advertising Spend (ROAS)
Advertising through platforms such as Facebook, Instagram, TikTok and Google Ads has been the formula to success for many online retailers.
At the start of the pandemic, advertising on Facebook was still relatively inexpensive, but growing awareness of the power of these platforms has seen costs skyrocket. Attribution has also been made more difficult due to recent Apple iOS upgrades, which have limited the ability for businesses to effectively reach and engage their target audiences on Facebook and Instagram.
These developments may have impacted your Return on Advertising Spend (ROAS), but even if your ROAS has reduced, you still need to know how you’re addressing it through your marketing strategy, and the difference between converting cold and warm leads. For example, your company might have been enjoying a ROAS of 3 to 4 at the start of pandemic, and seen this drop down to 1-2 in recent months, but if you can also show that your revenue is growing due to other engagement channels, you’ll still have a strong case for future growth.
One important metric linked to ROAS, is looking at how your business’s overall revenue has been tracking for a period of time, in comparison to your advertising spend.
Ideally, you want a fairly steady advertising spend, while your overall revenue has grown at a faster rate. This is a great indicator that as a business you’re getting things like quality of products, customer service and email marketing right, so that you aren’t solely reliant on advertising to be bringing in new customers.
What’s the lifetime value of your customers?
There are a number of plug-ins available through Shopify which will tell you in real-time what the lifetime value of your customers is by cohort – by year, quarter or even month of acquisition. Some businesses think of lifetime value as the total revenue a customer spends whilst others see this as the cumulative gross profit margin from a customer’s total purchases. Regardless of how you define the metric, this is extremely important in helping you decide the budget and focus of your sales and marketing campaigns.
For example, if the lifetime value of your customer is $500, you would feel a lot more comfortable spending $100 on acquiring the customer versus if the lifetime value of your customer is only $150.
Beyond your average order value (AOV), this can be heavily influenced by the way you use your email database, how you nurture your existing customers, how you diversify your marketing, and how you build loyalty.
You want to be able to demonstrate a good lifetime value on your customers, which is also directly linked to the final metric – customer churn.
How high or low is your customer churn?
The higher the customer churn, the less time a customer tends to stay in your world, which also means the lifetime value of your customer is lower.
A high customer churn rate means you’re constantly having to spend to target and find new customers, which may lead to you saturating your addressable market a lot earlier.
In the early days of a business, there’s often a fairly obvious target market for your product, but once you’ve exhausted this market, your outreach is going to be going to colder and colder audiences, making customer acquisition harder and unfortunately much more expensive as it will likely cost more to convert a potential customer who is not quite within your addressable target market.
High customer churn suggests that the products are highly commoditised, that customers tend to make one-off impulse purchases due to performance marketing ads or influencers, or that the company relies too much on offering discounts in its ad campaigns thus only attracting highly price-conscious customers who are less likely to be sticky. Customer churn of 80% means you’re losing 80% of your existing active customers within the year. So rather than spending the energy and dollars nurturing your customer base, you’re having to go and find new customers to replace them (and then some more if you want to continue to grow) – eek!
The flipside is customer retention – which again is reflective of your overall business. You should be aiming to build a sustainable and profitable business with a loyal customer base due to your customer service, your ability to develop new and relevant products, the quality of your products, and your ability to build a community. The increase in the cost of customer acquisition as mentioned earlier means an increasingly heavier weight is being placed on the value of customer retention.
No metric is an island
All of these metrics work together, to tell the story of your business and how profitable and sustainable it is. In evaluating the overall health and growth potential of a business you should look for all of these metrics to be working well, and to reflect your overall success in building customer relationships, serving quality products, and being strategic with your marketing.
Having visibility on these metrics empowers you as an owner or CEO, which is ideal when planning for future growth.
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