Key performance indicators or KPIs are the data points that you want to regularly track and use to measure success in your e-commerce business. When you look up important KPIs to measure, you’ll find lists of 30+ or even 60+ to consider. However, for most e-commerce businesses, especially in earlier stages, you only need to track a few for success.
When selecting what KPIs you should be measuring for your own business, there’s a few different factors to consider. First and foremost, how much does the KPI affect the bottom line of your business? Only track the most significant. Then, ask yourself, how accurately can you measure the metric? How timely are the results? And, can you take action upon the results?
Too often, we find e-commerce business owners too focused on high-level numbers that don’t actually give an idea of profitability. In this article, we go through five KPIs that you should be measuring on a regular basis and working to improve. These specific KPIs are particularly important to your accounting and financial success.
- Cost per acquisition (CPA)
- Average order value (AOV)
- Customer lifetime value (CLV)
- Inventory turnover
- Gross profit margin
- How to sync e-commerce data to your accounting software
- Key takeaways on e-commerce accounting KPIs
Cost per acquisition (CPA)
Cost per acquisition or CPA is the cost of acquiring a paying customer and is crucial to running a successful e-commerce business. This cost might include advertising, email campaigns and even the cost of discounts.
To calculate the cost per acquisition, you divide the total cost of a campaign by the number of conversions (paying customers) it had. For example, you spent $1000 on a Google Ads campaign for your line of boots and acquired 120 customers. Therefore, $1000 / 120 = $8.33. Ideally, that customer would bring it more than $8.33 in revenue for it to be worthwhile.
Rather than just measuring the conversion rate or the number of website visits, your CPA is a financial metric that gives you direct insight into how much revenue a campaign is generating. The goal you set for your CPA will depend on factors such as past performance, industry trends, budget and what your profitability goals are at any point in time.
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Average order value (AOV)
Average order value or AOV is the average amount a customer spends on an order. AOV is a great metric to track as it affects many other key metrics. Ways you might improve your AOV include setting a minimum spend for free shipping, offering discounts for customers that spend over a certain amount, offering volume discounts, upselling and cross-selling.
You can calculate your AOV by simply dividing your total revenue by the total number of checkouts. For example, you’ve generated $100,000 in total revenue over 1,250 orders. Your AOV would be $100,000 / 1,250 = $80.
It’s important to note that your AOV might be skewed by few and far huge orders. It might be worthwhile to look at your median and mode on top of your average as well as to remove outliers when doing calculations.
Customer lifetime value (CLV)
Following on from CPA and AOV, a related metric is the Customer Lifetime Value or CLV. As the name suggests, this is the average revenue that can be earned from a customer throughout their entire lifetime with your company. The higher your CLV is, the more you might be willing to pay to acquire each customer.
Retaining customers is generally the better and faster path to driving additional revenue compared to trying to acquire new customers. Hence, building customer loyalty and customer retention should be a major priority for your e-commerce business.
You can calculate CLV by multiplying the average order value with the purchase frequency and then by the average customer lifetime. As a simplified example, let’s say you run a subscription-based e-commerce business and the average order value is $50. Customers place a new order every month and continue buying for two years. Therefore, $50 x 12 x 2 = $1,200.
Great e-commerce accountants will know that inventory turnover is an absolutely essential metric to look at for e-commerce businesses. It measures how often you sell through the inventory you have in-stock within a year. It’s difficult to strike the balance between having enough stock to sell while not having a massive excess.
To calculate your inventory turnover, start by selecting a time frame, generally one year. Then, get your average inventory by taking the dollar value of your beginning inventory, add your ending inventory and divide it by 2. For example, ($100,000 + $75,000) / 2 = $87,500. Then, take your COGS for that year and divide it by the average inventory. If your COGS was $200,000, then your inventory turnover is $200,000 / $87,500 = 2.29.
The number that you end up with is the amount of times you sold the value of your average inventory. Generally, you’ll want to be increasing this number to somewhere between 5 and 10. This would suggest that you sell and restock your entire inventory every 1 to 2 months. Of course, your goal might be different depending on what type of e-commerce business you run.
Gross profit margin
Last but definitely not least is gross profit margin, the actual profit your e-commerce business has earned once COGS is considered. The higher your gross margin or gross margin rate, the more profitable your business is.
To calculate your gross margin, you take your revenue and subtract your COGS. For example, if you make $50,000 in revenue with a COGS of $30,000, your gross margin would be $50,000 – $30,000 = $20,000. To calculate your gross margin rate, you take your gross margin, divide it by your revenue, and multiply the result by 100. For example, ($20,000 / $50,000) * 100 = 40%.
To run a profitable and high-growth e-commerce business, you’ll want to be improving your gross profit margin. The average gross margin rate is between 30% and 40%, however, it depends on a range of factors. Improving your gross margin will depend on all areas of your business from reducing costs to increasing revenue.
How to sync e-commerce data to your accounting software
In order to accurately track your KPIs, you need to be able to have all your e-commerce data in one place. The best way to manage your financial data is with a cloud-based accounting software where you can access reports and financial statements such as your balance sheet or cash flow statement.
The easiet way to do this is by using an e-commerce accounting integration that can automatically sync transactions from your e-commerce platform to major accounting software such as Xero, MYOB and QuickBooks Online. Transactions are automatically matched to the bank feed to speed up reconciliation. Rest assured that your data is always up-to-date and accurate.
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Key takeaways on e-commerce accounting KPIs
Knowing what key performance indicators to look at can make or break your e-commerce business. CPA, CLV, AOV, gross profit margin and inventory turnover are five KPIs that give you a clearer picture of your bottom line. Need help from an accounting professional to make sense of these? Reach out to one of our Amaka Certified Advisors.
By using Amaka’s business activity tracker, FitBiz, you can keep a finger on your business with an ongoing dose of goals, growth and performance insights sent straight to your inbox. Once you connect your Shopify store, you’ll get access to smart sales trends, smart comparisons, and comprehensive breakdowns by time and product.