In this article we look at some of the most important metrics in ecommerce, and how online retailers can look at them.
As Dan Barker says in this Twitter thread, it is possible to run an ecommerce site without paying too much attention to metrics like this. Indeed, you can do well by having great products and customer experience.
However, key metrics can help you to understand your site and customer behaviour more effectively, and give you more control.
This is a summary of Dan’s thread, explaining the basics of key ecommerce metrics, and how they can be used to understand and improve business performance.
CPA (Cost Per Acquisition) is a measure of how much you have spent to attract an order from a new customer.
CPA can be measured by taking the amount you spend on marketing, whether this is PPC, email or other channels, and dividing this figure by the number of new customers that place an order.
Or you could treat all marketing as spend on new customers, and divide this marketing spend by the total number of new customers in this period.
Most ecommerce sites class a new customer as one who has ordered once only, and some remove customers who returned items from this number.
This metric can be used to benchmark marketing spend, and also to compare the cost of acquisition between channels. For example, if CPA via email marketing is half that of PPC, then it may be wise to shift more budget to email.
This is a similar metric to CPA, and stands for ‘Cost Per Order’. This is all marketing costs over the specified period divided by the number of orders placed.
This can be a useful metric to guide and measure the success or otherwise of your business. For example, if you know that your average CPO is $3, and you make a profit of $6 on each order (after accounting for other costs), you’ll be making a profit.
You can then choose to spend more on marketing and increase your CPO to speed up growth, and you’ll know the point at which it becomes unprofitable.
CPM is ‘Cost Per Thousand Impressions’. For example, a display ad may cost you $10 CPM, meaning you pay this amount to achieve 1,000 views of the ad.
This isn’t a metric used by all sites, and is more applicable for retailers who use a lot of display and video advertising to generate traffic and sales.
CPV is ‘Cost Per Visit’ and CPS is ‘Cost Per Session’. The metrics mean the same, and are used as a rough guide to judge traffic across different channels, to see how they perform over time.
This can be used with RPS ‘Revenue Per Session’ to keep an eye on how profotbale each of your marketing channels are over time. So, if your CPS is $5 and RPS is $10 then anything over a 50% margin is profitable.
If your figure for CPS rises over the years then this will reduce your margins, and therefore profitability.
As Dan Barker explains, some sites use ‘Revenue Per User’:
“You sometimes also see ‘revenue per user’. I occasionally come across very misleading conversion rate optimisation tests, where they’ve declared a winner based on ‘revenue per user’ in one side of the test.
That’s not always bad, but occasionally if you look into them, all that’s happened is one version of the test *happens* to have a few VIP customers within it, who therefore have a very high ‘revenue per user’, and this skews the test completely.”
This means ‘Clickthrough Rate’. So, if an ad had 1,000 impressions and 10 of the people that view the ad click on it and head to your site or landing page that’s a CTR of 1%.
This can be used to compare different ads against each other, so a higher CTR ad is normally better than one with low CTR.
This isn’t always the case though, as a lower CTR ad may cost less, may convert more clicks into orders, and may attract higher value customers.
CVR ‘Conversion Rate’ is the likelihood that any visit to your website will convert into an order. So, if 100 people visit your ecommerce sites, and two of them make a purchase, then your conversion rate is 2%.
CVR is usually measured using sessions (i.e visits) but some calculate it by users. So, if you have 100 users that visit your site 200 times, and there are four orders, most would look at this as a 2% conversion rate, but looking at users, it would be 4% (four orders from 100 users).
LTV (Lifetime Value) is the amount of money the average customer spends with you over a lifetime, or a specified period.
LTV can be measured as the total amount a customer spends over their lifetime, or as the profit margin, so LTV in this case would be revenue minus the cost of acquisition and any other costs incurred during the relationship (returns and delivery costs for example).
Using LTV, companies can assess acquisition costs in terms of long-term profits, and also use it as a measure of how successful they are at driving repeat business from customers. If a customer makes multiple purchases over time, then this increases LTV and makes acquisition more proftbale.
CPA is sometimes known as CAC (Customer Acquisition Cost). Venture capitalists and investors often use this, looking at the CAC:LTV ratio, which is the amount you make from a customer over a specified period against the acquisition cost.
LTV:CAC can be used to compare:
- The relative effectiveness of two channels.
- Performance across different countries or territories.
- Performance for one period compared to the past, year on year performance for example.
How to look at these ecommerce metrics
For all of these metrics, they can be looked at on different levels to gain useful insights.
For example, with CPA you could look at:
- Overall CPA (or another metric) across all channels.
- CPA for different countries.
- CPA by device type.
- CPA by marketing channel.
Used like this, they can help you to understand overall business performance, to drill down into individual markets, devices, users, channels etc.
For example, if you look at your CPA for Google Adword, you can compare this with the CPA for YouTube ads. If the YouTube CPA is lower then it may be wise to move some budget from Adwords into this.
It may look like this:
- You acquire 100 customers from YouTube advertising at a CPA of £30 ($3,000 total spend).
- You acquire 100 customers from AdWords, with a CPA of $60 (spending $6,000).
- You could have spent $6,000 on YouTube, acquired the same number of customers, but saved $3,000. Or you could spend the money you saved on more YouTube ads and acquire more customers.
There are caveats here though. Spending more in a marketing channel can earn CPA rises, as you’ve already used the most obvious areas to spend it.
So, while the first 100 customers may cost $1,000 on AdWords, the next $1,000 may only acquire another 50 customers.
Metrics like this help you to measure how your marketing activity is performing, and can also be used to model future marketing spend.
For example, if you’re planning to run an ad campaign at $10 CPM and think there’s possibly 1m impressions per month, you can work out that this will cost $10,000. With a CTR of 1% and a CVR of 1%, you’d generate 100 orders.
From this you can calciulate an estimated CPA or CPO, and compare the cost of acquisition against other marketing options, and decide whether this spend is worth it.