Online sellers know if things are going well or not with their business and generally know the reasons why. But as you grow your business, it can become more difficult to know what’s behind a rise in sales, a drop in profit, or a squeeze on cash flow.
The products sitting on the virtual shelves next to yours may belong to a savvy retailer who measures and analyzes key performance indicators and can react to changes faster than you and may be better able to identify problems and opportunities.
It can be helpful to see what multi-channel retailers look at to see if any of these metrics may be worth monitoring for your business. For instance, do you keep track of new versus returning customers? Do you know if your average order size is growing or shrinking?
Rob McGrorty is Director of Product and Operations at Webgility, a provider of ecommerce software solutions for multi-channel enterprises. This is the first of a three-part series he’s contributing designed to help readers understand the metrics that they can use to gain financial insight into their business. Part one delves into multi-channel metrics. Part two takes a look at customer metrics, and part three will tackle the all-important product metrics. – Editor
Do You Know Your Multi-Channel Metrics?
By Rob McGrorty
Metrics, KPIs (Key Performance Indicators), and Analytics have been buzzwords in ecommerce for quite some time now. As is often the case with any SMB-heavy industry (small- and medium-sized businesses), individual sellers are on their own to figure out how to first find, then glean, meaningful information from the piles of data their stores cough up every day.
To help move the discussion beyond the realm of jargon and into something useful, this three-part primer of important ecommerce metrics spells out specific KPIs that relate to multi-channel selling, customers, and products as well as why these key indicators are important to the health – and growth – of your online retail business. First up? Multi-channel.
Selling in different online locations has its own special set of challenges, the biggest of which is how to get big-picture perspective on your business when every online retail entity has its own way of managing your sales data. In a world with increasingly niche sales channel options, these metrics will allow you to be strategic about how and where you sell.
Total Average Order Value (AOV)
The average order value is total order value of all orders over a time period divided by the total number of orders in that same time period. Simply put, this is the average total collected from a customer per order.
To get value out of the calculation, you’ll need to weed out unrelated amounts like taxes or marketplace fees, while making sure you’ve completely accounted for the item prices, shipping revenue, and any discounts applied to orders.
Why is this important? Knowing the AOV allows you to better plan discount initiatives, set free shipping parameters, track the value of a new or returning customer more effectively, and project the number of new orders you’ll need to hit your revenue targets. Not to mention you’ll better understand the ratio of per-order fees or shipping expenses by looking at them vs the AOV.
The Collectible AOV is the dollar-value that your company can actually collect in cash. Essentially, this is an important extension to your AOV, which subtracts out your payment processor fees since they are unavoidable across the board for your business. While your shipping and inventory expenditures can vary and are often outflows of cash as opposed to deductions from cash receipts, payment processor fees – and in some cases marketplace fees – are important to remove from AOV to better depict cash movements.
Why is this important? Knowing your Collectible AOV lets you keep an eye on cash flow, helps you see positive or negative trends in sales, and compare payment processors and channels to identify the best fits for your business.
This is the average value of an order in each channel after the cost to ship has been accounted for. Why is this important? Shipping is a major variable cost for your business and can determine profitability of what and where to sell.
Comparing Delivered AOV across your different channels helps you drill down on shipping costs to see where you might improve rates or promote products in more cost-effective geographic areas. This is a great way to investigate the need for regional fulfilment centers, or to simply change carriers or channels for a specific item.
Average Order Profit
The average order profit uncovers exactly how much money you are making from each order on average. It is revealed by subtracting shipping, inventory, payment processor fees, marketplace fees, and sales taxes from the total order value of each order.
Why is this important? Averaging this profit amount across the last 30 days helps to visualize the average profit your business generates on each order in a more logical way. Which helps you plan better and gives you more power for negotiating. It also gives you a better picture of the performance of different channels and provides a benchmark to know who are your most- or least-valuable customer types as you compare them to the average.
Total Sales by Channel
This is your total revenue across all of your stores, which helps you track your current performance by how much money each of your stores bring in each day.
Why is this important? Knowing this KPI, you can monitor fluctuations over time and compare the relative performance of each channel to quickly identify trends, underperformance, or breakthroughs. Yeah, this one was a gimme.
Ironically, the very quality that makes big profits possible in ecommerce – being multi-channel – is also what makes it so difficult to get ahead. Making real progress in online retail comes with bringing all of your data together under one roof and insisting that it speak the same language.
Taking the time and effort to identify and track your KPIs will give you better perspective on how far you’ve come and a – dare I say, hopeful – view of where your business is going in the future.
Coming up in the series we’ll discuss how to better serve your customers (and your bottom line) using metrics and how to use product metrics to maximize your profit margins.
About the Guest Columnist:
Rob McGrorty is the Director of Product and Operations at Webgility, Inc., leader of e-commerce software solutions for multi-channel enterprises. Keep an eye out for the next installment of his guest series on ecommerce/retail metrics.