Once, the british physicist William Thomson Kelvin said:
What is not defined cannot be measured. What is not measured, cannot be improved. What is not improved, is always degraded.
As the e-commerce industry is approaching the $8.1 trillion mark by 2026, Thomson's statement gains even greater relevance for businesses in this space, emphasizing the crucial role of data and parameters in achieving success.
Data is everything. E-commerce businesses need data and parameters to effectively establish business objectives, formulate strategies, execute informed decision-making, and accomplish desired goals.
But what data should you prioritize? In our metrics corner series, we highlight the key finance metrics that drive growth and financial performance for fast-scaling e-commerce businesses.
In this post, you’ll learn:
- What are e-commerce financial metrics?
- Why are e-commerce financial metrics important?
- E-commerce financial metrics you must mindfully watch
- How Bluecopa helps e-commerce teams measure financial KPIs?
- Why don’t you start measuring?
Let’s roll.
What are e-commerce financial metrics?
E-commerce financial metrics are quantitative measurements used to assess the financial performance and health of an e-commerce business. These metrics provide valuable insights into various aspects of the business, such as revenue, profitability, efficiency, customer acquisition, and retention.
Monitoring and analyzing these metrics help e-commerce businesses make data-driven decisions and optimize their operations for growth and profitability.
Why are e-commerce financial metrics important?
E-commerce financial metrics provide a quantitative and objective foundation for understanding and managing the financial aspects of an e-commerce business. They facilitate informed decision making, goal setting, performance evaluation, and investor relations, all contributing to the overall success and growth of the business. They are important for several reasons:
- Performance evaluation: Financial metrics provide a clear picture of the e-commerce business's performance and financial health. By monitoring key metrics, businesses can assess their revenue, profitability, and overall financial performance. This evaluation helps identify strengths, weaknesses, and areas for improvement.
- Decision making: Financial metrics enable data-driven decision making. They provide insights into various aspects of the business, such as sales trends, customer behavior, marketing effectiveness, and operational efficiency. By analyzing these metrics, businesses can make informed decisions on pricing strategies, marketing campaigns, inventory management, and resource allocation.
- Goal setting and tracking: E-commerce financial metrics serve as benchmarks for setting and tracking business goals. They help define realistic targets and measure progress towards achieving them. Whether it's increasing revenue, improving profitability, or optimizing marketing ROI, financial metrics provide the necessary framework for goal setting and performance monitoring.
- Investor confidence: For e-commerce businesses seeking investment or partnerships, financial metrics play a crucial role in building investor confidence. Metrics such as revenue growth, gross profit margin, and customer acquisition cost demonstrate the business's financial viability and potential for returns. Investors rely on these metrics to evaluate the attractiveness and sustainability of an e-commerce venture.
- Performance comparison: Financial metrics enable benchmarking and performance comparison against industry standards or competitors. Businesses can assess how they stack up against their peers, identify areas of competitive advantage or disadvantage, and make strategic adjustments accordingly.
E-commerce financial metrics you must mindfully watch
1. Gross Merchandise Value (GMV)
Gross merchandise value (GMV) is the total value of products sold by e-commerce businesses over a particular duration. GMV is a reliable growth indicator that can be used to track a company's performance over time and reveal insights into its overall health. It is particularly applicable in the customer-to-customer market and the consignment sector.
Here is the formula to calculate the GMV:
GMV = Sales Price of Goods x Number of Goods Sold
Following are some scenarios where calculating GMV is good. You can use GMV when your company is trying to:
- Track its sales performance over time
- Compare its sales performance against competitors
- Identify trends in sales
To calculate GMV, consider the following assumptions.
Sales Price of Goods: $100
Number of Goods Sold: 100
GMV = $100 x 100 = $10,000
In this example, the GMV is $10,000. This means that the company generated $10,000 in revenue from the sale of 100 goods.
2. Net Revenue
Net revenue is the total revenue a company generates after deducting returns and discounts. It is an important measure of a company's performance and is often listed on income statements. It is a more accurate depiction of a company's actual revenue than gross revenue.
Here is the formula to calculate the Net Revenue:
Net Revenue = Gross Revenue - Expenses
Let's say a company has a gross revenue of $100,000 and expenses of $60,000. To calculate the net revenue, we would subtract the expenses from the gross revenue.
Net Revenue = Gross Revenue - Expenses
Net Revenue = $100,000 - $60,000
Net Revenue = $40,000
In this example, the company has a net revenue of $40,000. This means that the company has $40,000 in revenue after all expenses have been paid.
3. Net Revenue %
Net revenue percentage is the percentage of revenue that remains after discounts, allowances, and refunds have been deducted. It can help identify strong and weak earning segments and areas that can be expanded or eliminated.
Here is the formula to calculate the Net Revenue %:
Net Revenue % = (Net Revenue/ Total Revenue)* 100
4. Revenue by traffic source
Revenue by traffic source is a breakdown of the overall revenue generated through the various marketing channels. By analyzing this data, businesses can:
- Identify channels that are successfully boosting sales and ones that need to be optimized
- Make the most of marketing spending and focus on traffic sources that have the highest ROI
Here is how you can calculate the Revenue by traffic source:
Google Analytics ->"Acquisition" tab -> "Channels".
💡This will provide you with an overview of your traffic sources and give you in-depth information about each source.
5. Revenue per session (RPS)
RPS, or revenues per 1000 sessions, is a metric that measures how much revenue a website generates for every 1000 visitors or sessions. It is an important indicator for businesses that generate revenue through website visits.
Also, note that If RPS is increasing over time, it suggests that the company is successfully drawing higher-quality visitors to its website or that the user experience on its website is improving. If RPS is decreasing, businesses may need to modify their marketing strategies or improve the user experience of their website.
Here is the formula to calculate RPS:
RPS = (Revenues / sessions) * 1000
6. Number of Orders
The number of orders is a crucial performance indicator that gives businesses insight into the total amount of transactions occurring on their platform. It helps businesses streamline their e-commerce strategy and track the success of marketing campaigns.
Here are some examples of how businesses can use the number of orders to improve their e-commerce strategy:
- Identify popular products and increase their inventory
- Offer discounts and promotions during slow seasons
- Target marketing campaigns to customers who have made multiple purchases
7. Average Order Value (AOV)
Average order value (AOV) is an e-commerce metric that measures the average total of all orders placed during a certain period. It is a key indicator to analyze important business decisions such as advertising spend, product pricing, and customer behavior.
Businesses can increase their AOV through upselling, cross-selling, offering discounts, and free shipping along with a good return policy.
Here is the formula to calculate AOV:
AOV = Revenue / Total no. of orders
Consider the following assumptions.
Revenue = $10,000
Total number of orders = 1,000
AOV = $10,000 / 1,000 = $10
In this example, the average order value is $10. This means that, on average, each customer spends $10 per order.
8. Cost of Goods Sold (COGS)
COGS, or Cost of Goods Sold, is the direct cost of selling products for e-commerce businesses. It includes labor, manufacturing, shipping, and other costs to make the product market-ready. COGS is a key metric for pricing, marketing, and growth.
By understanding COGS, businesses can set profitable prices, create effective marketing campaigns, and scale their operations.
Here is the formula to calculate COGS:
COGS = Beginning Inventory + Purchases – Closing Inventory
Consider the following assumptions.
Beginning inventory = $10,000
Purchases = $20,000
Closing inventory = $5,000
COGS = $10,000 + $20,000 - $5,000 = $15,000
In this example, the company had $10,000 worth of inventory at the beginning of the period, purchased $20,000 worth of inventory during the period, and had $5,000 worth of inventory at the end of the period. The COGS for the period is calculated by adding the beginning inventory and purchases, and then subtracting the closing inventory. In this case, the COGS is $15,000.
9. Gross Margin (GM)
Gross margin is a key business metric that measures how much money a company makes from each sale after deducting the cost of goods sold. A high gross margin indicates that a company is profitable, while a low gross margin suggests that the company may be facing challenges.
The average gross profit margin in e-commerce is 41.54%.
Here is the formula to calculate Gross Margin:
Gross Margin = Revenue − COGS
Consider the following assumptions.
Revenue = $100,000
COGS = $50,000
Gross Margin = $100,000 - $50,000 = $50,000
In this example, the company generated $100,000 in revenue and had $50,000 in COGS. The gross margin is calculated by subtracting the COGS from the revenue. In this case, the gross margin is $50,000.
10. Gross Margin Rate (GMR)
Gross margin rate (GMR) is a percentage of revenue remaining after deducting COGS. A higher GMR indicates a more profitable business, while a lower GMR suggests production or pricing issues. Businesses can use GMR to make informed pricing, manufacturing, and growth decisions.
Here is the formula to calculate Gross Margin Rate:
Gross Margin Rate = (Revenue − COGS) / Revenue
Consider the following assumptions.
Revenue = $100,000
COGS = $50,000
Gross Margin Rate = (100,000 - 50,000) / 100,000 = 50%
In this example, the company generated $100,000 in revenue and had $50,000 in COGS. The gross margin rate is calculated by dividing the gross margin by the revenue. In this case, the gross margin rate is 50%.
11. Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the total revenue a customer is expected to generate for a business throughout their relationship with the business. CLV can be used to make decisions about pricing, sales, promotion, and customer retention.
Here is the formula to calculate CLV:
Customer Lifetime Value = (Customer Value* x Average Customer Lifespan)
*Customer Value = (Average Purchase Value x Average Number of Purchases)
12. LTV/CAC
LTV: CAC is the ratio of a company's Customer Lifetime Value to Customer Acquisition Cost. It is a key metric for measuring the success of a company's marketing and sales efforts.
A 3:1 ratio is a common benchmark for a "good" LTV: CAC ratio. However, the ideal ratio will vary depending on the industry and the company's specific goals.
Here is the formula to calculate LTV/CAC ratio:
LTV/CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost
[Example 1]
Lifetime Value (LTV): $1,000
Customer Acquisition Cost (CAC): $250
LTV/CAC Ratio = $1,000 ÷ $250 = 4
In this example, the company is acquiring customers at a cost that is less than the value those customers will generate over their lifetime. This is a good sign for the company's long-term profitability.
[Example 2]
Lifetime Value (LTV): $500
Customer Acquisition Cost (CAC): $500
LTV/CAC Ratio = $500 ÷ $500 = 1
In this example, the company is acquiring customers at a cost that is equal to the value those customers will generate over their lifetime. This is a break-even point for the company.
13. Average revenue per session (ARPS)
The average revenue per session (ARPS) is the amount of money generated by each unique visitor to a company's website. Businesses can use ARPS to track the health and effectiveness of their brand. A rising ARPS indicates that the website is converting more visitors into customers. Similarly, a falling ARPS indicates that the website is converting fewer visitors into customers.
This E-commerce metric also gives information on client lifetime value, major traffic sources, and shopper drop-off. Because ARPS logs each session, it can provide data regarding the performance of every end-to-end customer experience.
Here is the formula to calculate ARPS:
ARPS = Total revenue / No. of sessions
14. Return/Refund rate
Return and refund rates are essential metrics for e-commerce businesses because they can significantly affect revenue.
High return and refund rates can be a sign of poor product quality, inaccurate product descriptions, or a negative customer experience. This can lead to lower customer satisfaction, loyalty, and revenue.
Businesses can reduce their return and refund rates by providing accurate product descriptions, high-quality products, and excellent customer support. The average e-commerce return rate is 30%.
The formula for return and refund rates:
Return Rate = (Number of returns / Number of orders) x 100
Refund Rate = (Number of refunds / Number of orders) x 100
[Example 1]
Return rate: If a company receives 100 orders and 20 of those orders are returned, the return rate would be 20%.
Return Rate = (20 / 100) x 100 = 20%
[Example 2]
Refund rate: If a company receives 100 orders and 15 of those orders are refunded, the refund rate would be 15%.
Refund Rate = (15 / 100) x 100 = 15%
15. Card chargebacks
A chargeback is when a customer disputes a charge on their credit card. This can happen for a variety of reasons, such as unauthorized use, fraud, or a product that was not received or not as described.
When a chargeback is filed, the merchant is charged a fee. Chargebacks can be costly for businesses, so it is important to take steps to prevent them.
Here’s how you can prevent them:
- Provide accurate product descriptions
- Deliver products on time
- Respond promptly to customer complaints and disputes
- Implement fraud detection and prevention tools
- Use secure payment gateways
- Establish clear return and refund policies
16. Processing fee
Payment processing fees are costs that businesses pay to process payments from customers. They can vary depending on the type of payment, the merchant, and the payment processor. Companies should be aware of these costs to manage their cash flow effectively. These costs are often 2-3% of the transaction but can vary depending on the business.
17. Shopping Cart Abandonment Rate (CAR)
Shopping cart abandonment is when a customer adds items to their cart but doesn't complete the purchase. It's a major problem for e-commerce businesses, as it can lead to lost sales and revenue. There are many reasons why customers abandon their carts, including
- High shipping costs
- Complicated checkout process
- Lack of trust on the website
- Unexpected extra fees
- Unclear or confusing pricing
- Lack of a sense of urgency
- Customer dissatisfaction with the product or service
E-commerce businesses can reduce cart abandonment by offering free shipping, simplifying the checkout process, and building trust with their customers.
Here is the formula to calculate CAR:
Cart Abandonment Rate = (1 - (Number of Completed Transactions / Number of Shopping Carts Created)) x 100
Consider the following assumptions.
Number of completed transactions: 100
Number of shopping carts created: 500
Cart abandonment rate = (1 - (100 / 500)) x 100 = 80%
In this example, the cart abandonment rate is 80%, which means that 80% of shopping carts created were abandoned before the customer completed the purchase. This is a high cart abandonment rate, and the business should take steps to reduce it.
18. Earnings before interest and taxes (EBIT)
EBIT, or earnings before interest and taxes, is a measure of a company's profitability from its core operations. It is calculated by taking a company's net revenue and subtracting its operating expenses.
It is a useful metric for investors because it gives them an idea of how well a company is performing without the impact of financing costs or taxes. A high EBIT indicates that a company is generating a lot of profit from its core operations, which can be a sign of a healthy business.
EBIT = Revenue − COGS − Operating Expenses
Or
EBIT = Net Income + Interest + Taxes
EBIT % = (EBIT / Revenue) x 100
19. Net profit margin
The net profit margin is the most accurate indicator of a company's profitability. It is calculated by dividing net profit by total revenue. A high net profit margin indicates that a company is making a lot of money from each dollar of sales. This is a good sign for investors and stakeholders, as it shows that the company is financially healthy and has the potential to grow in the future.
Here is the formula to calculate Net Profit Margin:
Net Profit Margin = ( ( Revenue - COGS - Operating expenses - Taxes - Interest ) / Revenue ) * 100
- 5% is a low-profit margin
- 10% is a healthy one
- 20% is an excellent profit margin
How Bluecopa helps e-commerce teams measure financial KPIs?
Key performance indicators (KPIs) are important for organizations of all sizes. They help them track their progress and ensure they are on track to achieve their goals. However, there are several challenges they face when it comes to measuring KPIs. These challenges include:
- Data quality: Data quality is essential for accurate KPI measurement. However, data can be of poor quality due to many factors, such as duplicate data, missing data, incorrect input, and data corruption.
- Data timing: KPIs need to be measured at the right time to be accurate. However, data can be delayed or not available at the time it is needed.
- Access to tools: There are several tools available for KPI measurement. However, these tools can be expensive and difficult to use.
- Deriving value from data: Once data has been collected, it is important to be able to derive value from it. This can be a challenge, as it requires a deep understanding of the data and the ability to use it to make informed decisions.
Bluecopa helps organizations overcome these challenges in numerous ways. Firstly, it integrates with many data sources, implementing data transformation and cleansing to make sure data is in good shape. Secondly, it fetches data in real-time, in turn measuring KPIs.
Lastly, it has an easy-to-use Excel-like interface making it a viable tool for finance users. With Bluecopa, you can manage thousands of transactions in an Excel-like interface yourself without having to depend on data teams and enjoy ad hoc analysis.
Some benefits of Bluecopa include:
- Improved data quality: Bluecopa's data transformation and cleaning capabilities help to ensure that data is of high quality. This leads to more accurate KPI measurements.
- Real-time KPI measurement: Bluecopa's real-time data fetching capabilities allow organizations to measure KPIs in real-time. This provides organizations with a more accurate picture of their performance.
- Easy-to-use interface: Bluecopa's Excel-like interface makes it easy for finance users to use the platform. This reduces the time and effort required to measure KPIs.
Why don’t you start measuring?
With so many variables to consider, it's easy to lose sight of the most crucial ones. Keeping track of these key e-commerce financial metrics allows you to uphold your business and produce profitable outcomes.
Finance observability platform, Bluecopa ensures that you are always up to date on business-critical metrics. So, what’s for the wait? Propel further by tracking these helpful KPIs today. Get yourself a personalized demo.
