It’s easy to get lost with all the metrics eCommerce offers.
But to succeed, you must focus.
Today, we’ll talk about the most important key performance indicators (KPIs) every store owner needs to track.
There are just three: profit, customer acquisition cost, and customer lifetime value. Unless you’re a huge brand, everything else is just a distraction.
By the end of this article, you’ll understand these three eCommerce KPIs and how to measure them.
Editor’s note: This article comes from years of experience helping clients sell more using high-converting content. If you’re interested in more sales at your eCommerce store, send us a message.
KPI #1—Profit: What exactly is eCommerce profit?
Profit is the most basic metric of all businesses.
Yet I’m shocked how many people can’t define it. That’s because there are tons of definitions and accounting tricks that change what it means.
You’re welcome to use the profit metric that works best for you, like gross or operating profit. But I prefer net profit, which in my own words is:
Money remaining in a business after all expenses have been paid, including taxes and wages.
Profit is not the total money coming in (that’s revenue). And I avoid “gross profit” (after cost of goods sold) because it ignores overhead and other expenses. I prefer measuring after tax. That’s because it’s a final figure—100% of my profit is actually profit.
And it’s after wages. One of the biggest financial mistakes small businesses make is counting “owner/operator salary” and “profit” as the same thing.
For example, a European friend of mine got a work visa to start a business in the United States. His business was “profitable,” by which he meant that it paid his salary. But it wasn’t enough to hire someone else or expand. He eventually had to kill his entrepreneurship dream.
The goal is to separate owner salary from profit. For example, in my business, I earn a fixed “salary” for my work. Money above and beyond that, I count as profit.
If all the extra money in your business goes to pay your personal expenses, you aren’t profitable in my book. And if you want to grow a valuable eCommerce store, you need to focus on profitability.
If the way I’ve just described profit sounds completely foreign to you, I recommend you read the book Profit First by Mike Michalowicz. It will help you get and stay profitable.
KPI #2—Customer acquisition cost (CAC)
Most eCommerce stores severely underestimate their customer acquisition cost, or CAC.
“Severely underestimate?” you might be thinking. “But my CAC is already through the roof!”
Yes, that’s the point. This is why you need accurate data—because the truth is probably even worse than you thought.
Let’s say I’m a clothing retailer running Instagram ads. I just spent $8,000 on ads this month and brought in 200 customers. I might conclude my CAC was $40 ($8,000 ÷ 200).
And if my average first purchase is $100 with a 50% margin, I spent $40 to find customers who make me $50—a good deal!
But I’m probably wrong.
As above, that $50 margin might not include profit. But more importantly, I didn’t calculate these costs:
- $300 to a graphic designer for ad creative
- $149 monthly subscription for a landing page tool
- $99 monthly subscription for an ad management tool
- 20 hours of my time managing the campaign
- A 15% “first purchase” discount for half of the customers
- 10 hours of live support for new customers, billed by my overseas staff at $20/hour
- 12 customers who returned their product for a full refund and never returned
- 15 customers who exchanged their product for a different size
Let’s say my time is worth $30/hour (meaning I earn around $60,000 per year). Thus my 20 hours of ad management cost the business $600.
The discount cost $1,500 ($15 × 100). Customer support was $200. Removing the customers who returned their product, I gained 188 customers, not 200. And shipping charges were $345 ($10 × 12 customers who asked for a return, plus $15 × 15 customers who exchanged their product).
These are all reasonable numbers.
But when I include them, I realize that the campaign didn’t cost $8,000 for 200 customers. It cost $11,193 for 188 customers. My CAC wasn’t $40 but $59.54—meaning I lost $9.54 per customer.
Is losing almost $10 on each buyer good or bad? To answer that, we need to look at customer lifetime value.
KPI #3—Customer lifetime value (LTV)
This is the total value of all purchases across the lifetime of your customer, the expectation being that you’ll sell more than once.
Your customer LTV is a simpler metric than CAC to calculate, so I’ll share a basic philosophy to boosting it.
According to executive consultant Jay Abraham, there are only three ways to grow a business:
- Increasing the number of customers
- Increasing the number of orders per customer
- Increasing the value of each order
Your CAC defines the first. The next two define your LTV.
To grow your LTV, increase the orders each customer makes and the total profitability of each order. And remember that some products might have higher profits despite a lower price.
Bonus: Using OMM and cohort analysis
By focusing on profit, CAC, and LTV, you’re ahead of most eCommerce owners already.
But there are two strategies you can use to measure these figures accurately.
The first is by selecting the “one metric that matters,” or OMM. It’s the single number you focus on—at least until another OMM is more relevant.
Think carefully about your OMM. Ideally, it should impact profitability and improve either CAC or LTV (it’s hard to do both simultaneously).
Some sample OMMs include:
- Percentage of new customers who place a second $100+ order within 90 days
- Price per customer who buys flagship product through Instagram ads
- Conversion rate of organic search visitors to buyers
And finally, the best way to track your OMM is with cohort analysis. This analytics strategy just means you track each group separately.
So customers acquired in June and July are counted separately or through one ad campaign versus another.
This helps you know if you’re improving. For example, why are customers making more repeat purchases? Just because more time has passed?
Or are July’s customers buying more after 30 days than June’s customers, who bought more after 30 days than May’s customers? Cohort analysis helps you answer these important questions.
Need help with KPIs?
If you want better SEO results—acquiring more clients through Google search—the right KPIs will make or break you.
Most SEO agencies ignore the KPIs I’ve shared in this piece and instead focus on what might be called “vanity metrics,” like traffic or high rankings.
These numbers can be important, but if you’re ignoring their impact on profit, CAC, and LTV, you’re making a mistake.
Want an experienced team to help guide your SEO results toward these KPIs? Let us know.