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The Four Magic Numbers in Improving E-Commerce Performance

The Four Magic Numbers in Improving E-Commerce Performance

The Four Magic Numbers in Improving E-Commerce Performance

It's Tuesday morning and your eyes glaze over as endless data pours down your screen leaving you more confused than you started. Someone told you that you need to understand your e-commerce metrics and suggested you 'dig through the data' but Google Analytics is a foreign language with no translator in site. You've created an amazing product or brand that's really starting to resonate with people but you're not sure how to continue driving growth for your e-commerce business. All of this can be pretty overwhelming.

We're big fans of trying to distill the complexities in e-commerce down to the simplest principles possible. When it comes to e-commerce analytics, data and finding the 'magic eight ball' of continued growth, we strip everything down to four key metrics. We then look at these four numbers through the lens of your customer relationship and analyze that relationship using a little framework we've created called the E-Commerce Customer Lifecycle. This analysis yields a multitude of opportunities for simple marketing, design and/or technology improvements that will drive an increase in these four key metrics and further result in an increase in overall e-commerce performance. The following is a breakdown of these three practices and how they can help your business:

The Four E-Commerce Metrics for Success

If you want to make more money as an e-commerce business, there are really only four metrics that you need to focus on:

  • Visitors: How many people are visiting your website?
  • Conversion Rate: What percentage of visitors make a purchase?
  • Average Order Size: How large is each purchase?
  • Profit Margin: How much profit do you make with each purchase?

Walking through the math of 'e-commerce profitability', it's simply a matter of putting these numbers together using the following formula: Visitors * Conversion Rate * Average Order Size * Profit Margin. Let's say you have 10,000 visitors coming to your website in a given month and you average a 2% conversion rate. This means that 2% of those 10,000 visitors, or 200 visitors, will make a purchase through your site. If your average order size is $100, then you should average $20,000 per month in revenue. Let's say your average order margin is 60%, then you're generating $12,000 in gross profit on a monthly basis. Naturally, every business has additional overhead such as rent, labor, marketing costs, etc. that needs to be factored into the overall profitability of your company. However, many of these costs can even be factored into this profitability equation if you wanted to calculate net profitability instead of gross profitability. Given that we're concerned with what changes we can make to our e-commerce strategy that will affect profitability, however, we'll focus on gross profitability for now.

Looking Through the Lens of Your Customer Relationship

Now that we understand the impact these four e-commerce metrics have on profitability, our next step is to understand what drives the performance of these numbers. We start by looking at the relationship between you and your customer. There are a few questions to consider in this evaluation. Have they heard of your brand? Do they trust you enough to make a purchase? Does your story resonate with their buying criteria? Do you continue to offer enough value that they make repeat purchases or referrals? By asking these questions, we place ourselves in a mindset of the customer and can better evaluate our current e-commerce strategy practices using the E-Commerce Customer Lifecycle framework.

Finding Opportunities in the E-Commerce Customer Lifecycle

e-commerce metrics and the e-commerce customer lifeycle

The E-Commerce Customer Lifecycle (ECL) is simply a series of questions that explore the five key stages in the relationship your brand has with your customer. Those questions include:

  • Acquisition: How do you get people to your website?
  • Conversion: How do you get them to buy once they're there?
  • Fulfillment: How do you get them the product once they've purchased it?
  • Retention: How do you get them to come back and buy again or make a referral?
  • Measurement: How do you measure all of this activity to ensure it's profitable?

Comparing these questions to the four e-commerce metrics we've previously outlined, it's easy to see how having a clear answer to each question in the ECL could relate to improving performance in the business. Increasing the number of visitors to the website stems from answering the Acquisition question while increasing your conversion rate stems from answering the Conversion question and so on. We partnered with Shopify to produce a podcast series detailing strategies for each of these five areas of the ECL:

We've found that it's helpful to look at three aspects in each area of the ECL: What is the process by which you manage this area of the business? What are the platforms or technology that's used in managing this area of the business? Who are the people involved/responsible for managing this area of the business? Just the act of identifying the answers to these three questions is often enough to expose the current gaps in your e-commerce strategy. Any of these gaps that exist are often the 'quick win' opportunities worth tackling first. Once the 'quick wins' are knocked out, then it's simply a matter of analyzing the depth of process, platforms and people by which you're managing each aspect of the ECL.

Next time you find yourself in the throngs of spreadsheets or analytics charts, just take a step back and focus on the four 'magic' numbers that we've listed out above. They're relatively easy enough to calculate meaning you can start making e-commerce strategy decisions with metrics-driven approach without having to get a PHD.