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258. What Metrics Matter in Your eCommerce Business

258. What Metrics Matter in Your eCommerce Business

It’s that time of the year friend. The time where we want to curl up on the couch and watch our favorite holiday movies. Home alone, Christmas Vacation, and Elf are my favorites.. In that order. 

But before you completely check out on your business please take some time to reflect on Q4, especially while it’s still fresh in your mind, and for the entire year. 

Prefer to listen to the episode? Click here.

Reviewing Your Q4 Results

When it comes to Q4 specifically, we’re not gonna go too deep on that here. You can learn more about my process for campaign reviews in episode 87 and there is a template for you inside the Resource library

What I really want to talk about is the data you should be looking at for the entire year in your business. The end of December and beginning of January is a great time to dive into every nook & cranny of your business as if it’s the first time you’re looking at it. 

Even if this is something you do on a monthly & quarterly basis like I recommend… I still think you should come at it with fresh eyes at the end of the year because we have a way of remembering things a bit differently than how they actually happened. 

Your Most Important Metrics

First you’ll want to start with your high-level numbers such as your traffic, conversion, AOV, gross margin, and your return customer rate. These are the base metrics you should always be looking at and they’re the first numbers you’re going to want to consider when it’s time to decide what the best next steps in your business are. I go deeper into my process for leveraging your KPIs to make business decisions in episode 93 of the podcast and it’s something we focus on heavily in the Lounge membership. 

But those aren’t the only numbers you’ll need to stay on track.

There are 3 others that aren’t quite talked about enough in the small business space and that’s what I want to walk you through today. Fair warning, we’re taking really broad strokes here. There are different ways to calculate these numbers, different cohorts of customers you’ll calculate them for, different time periods, etc. Unless you’re planning on going out and getting VC funding, these broad strokes are the perfect place to start. 

If you’re just getting started in business you might think you don’t have to worry about these numbers yet, or that you don’t have enough data at this stage to pay attention to these numbers, but even if that’s true… I recommend you learn these concepts now so that you’re ahead of the game as you grow. 

Customer Lifetime Value

First is customer lifetime value. Essentially, how much is the average customer worth to you over the course of being your customer. This is going to be unique to each and every business, because it’s based on so many different factors including your industry, product, customer, frequency of purchases, margin, etc. 

Let’s think about someone that serves the wedding industry. Anyone who has gotten married knows that as soon as the word wedding is attached to an event prices increase tremendously. 

A cake for a birthday party, is a lot less expensive than a wedding cake – even if it serves the same number of people. 

Now sure, it’s a really important high-stakes day… and the cakes, dresses, decorations you buy are more intricate and take more work to create – 

but it’s also a company’s one shot to make money off of you because the general idea is that you only get married once. 

Even the price of location is more when the word wedding is attached. There’s this roof-top venue in downtown LA I wanted to get married at… but the prices were just crazy. I’ll probably have an anniversary or birthday party there at some point because that was way more reasonable. 

Another example along these lines is if you sell something baby related. Sure, people have more than one child – but in many cases parents aren’t spending quite as much on baby #2 because they are reusing some of the items they got when they had baby #1. 

They also might age out of the products you sell. For example, a client I worked with back in the day sold cushion covers for breast pumps. They were consumable, and people do have multiple children but this phase is pretty short in the scheme of things so there’s gonna be a cap on the overall lifetime value they will build with any one customer. 

On the flip side of that is someone that sells coffee. Sure the individual product is much less expensive… but as long as the product is good and you create a great experience for the customer, and they see value in your product… they’re going to shop with you again and again, and again building that lifetime value year after year. 

Understanding this number is super important because it gives you insight into how much you can afford to spend on acquiring a new customer, something we’re gonna talk about in a moment.

Understanding your customer lifetime value also gives you insight into knowing whether you should focus more on acquisition or retention, we take a deeper look at that in episode 10 on the podcast, and monitoring it over time will show you how well your retention efforts are working. 

There does tend to be some confusion with customer lifetime value and customer lifetime revenue. A tool like Klaviyo, which actually has a CLV field and predicted CLV field when you export your list isn’t taking into account the costs associated with that sale to begin with – so it’s really giving you customer lifetime revenue. 

This is still a good number to understand in the abstract and for most of you will be pretty telling on its own. The true CLV calculation is gross margin over a certain period of time divided by the number of customers over the same period of time. 

Don’t get too caught up in these details if this is the first time you’re really looking at these numbers. Again, even just looking at customer lifetime revenue is a good place to start. 

Customer Acquisition Cost

Next up is your customer acquisition cost, often referred to as CAC. Customer acquisition cost often gets confused with cost per acquisition. Both include a consideration for your variable ad costs, ex. How much you’re spending on ads… 

but CAC also includes the cost of any platforms you’re using, your agency fees, team salaries, etc. 

Both of them are important and give you a bit of different insight into your business, but if you’re only looking at one of these, I would start with your customer acquisition cost that includes all of the expenses associated with acquiring customers. 

I don’t want to go too far down the rabbit hole here, but you’ll also want to consider how these numbers shift over the course of the year and any potential seasonality effects, and even how your different channels perform. 

Once you have these two numbers, customer lifetime value and customer acquisition cost, now you’ll really be able to tell if you’re profitable. That’s where the LTV:CAC ratio comes in. 

SImply, your goal is to have a higher lifetime value than acquisition cost… pretty simple right. If your CAC is higher than your CLV, then you’re technically losing money and you’ll want to avoid that. 

The benchmark here is a 3:1 ratio. So for every 1 you spend to acquire a customer, you’ll want to get $3 back in value. Of course that’s not a hard and fast rule, but it does give you something to shoot for. 

If you’re talking about customer lifetime revenue, which doesn’t account for your cost of goods, you’ll need that to be higher. 

Marketing Efficiency Ratio

The last number I want to talk about today is your marketing efficiency ratio, aka MER. 

This is a simplified, more holistic way to look at the efficiency of your advertising.

You calculate MER by dividing your revenue by your advertising spend.

Now, this isn’t going to help you figure out what channels to spend your money on, or whether or not you have to tweak your ad copy… you’ll have to get more granular for those kinds of insights but it will give you a high-level view of whether or not your efforts are paying off. This is especially important to understand as privacy laws make it harder to track ad results, and we increase our touchpoints with customers. 

Just because someone didn’t buy from an ad, it doesn’t mean it wasn’t an important touchpoint in their journey. For all we know, that ad was how they discovered us and if they never saw it, they never would have purchased from us. 

This can also be really helpful if you’re utilizing more traditional forms of advertising that can’t be measured as accurately such as billboard, radio, and print. 

In my previous day job, while we did have 30 physical locations, they were spread out across the US and the majority of our marketing was super localized and included a lot of traditional marketing activities. 

While we couldn’t necessarily calculate the exact value of a billboard, print, or radio… we did see that when we stopped any of them… foot traffic and ultimately sales in the store went down. 

While MER is traditionally used for paid advertising efforts, you can still use this concept to get a sense of how your organic marketing efforts are working as well. And like customer acquisition you can include all the expenses associated with your marketing efforts. That might be tech platforms, agencies, employees… or even your own time. 

Let’s touch on that for a moment… your own time. Because this is important in many facets of your business. 

Even if you are a one-person show.. It’s so important to put a dollar value on the time you spend working in your business. Because as you grow, it’s not always going to be you. You’re going to have to outsource at some point and you’re going to have to pay those people the going rate for their jobs, and whatever additional costs are associated with having employees. 

So when you are adding up how much it costs to run ads, make sure you’re accounting for what it would cost you to pay someone else to do that work.

In terms of what is a good MER, there isn’t really a hard and fast rule here. Typically a 3 is considered good. But there are other variables that go into determining what is and isn’t good for your business. 

For example, if you’re new to business and just getting started it would be normal for you to have a lower ratio because you’re really just focused on getting new eyes on your business and acquiring new customers who will eventually turn into repeat customers. You’re testing and trying, likely wasting a little money along the way as you collect data and learn. This is normal and to be expected. 

The margin on your products also matters here. Someone with a 60% gross margin doesn’t necessarily need as high a ratio as someone whose margin is only 40% because they naturally make more $ off of every sale. 

Ultimately, like much of what we’ve talked about today, your goal is to be better than you were yesterday.

Your Next Steps

Alright, I know we covered a lot today. And for many of you, even if you’ve heard these terms before, it might be the first time you’ve heard the actual calculation, or the first time you ever considered calculating them in your own business. 

For some of you, you might not have nearly enough data to calculate these numbers, or the numbers are going to look abysmal because you are in more of that getting started phase. 

All of that is okay. 

I teach you this not because I want you to become obsessive over these numbers. It’s just to give you new ways to look at and think about your business and marketing efforts. 

Honestly, even if you just calculate them this one time and don’t look at it again until next year. That’s okay too. These are higher level, more holistic numbers that are meant to just give you a quick pulse on your business and confirm if you’re going in the right direction. It’s also a signal to say, oh shit – I’m doing better than I thought or damn… something looks off here. 

To truly make change and improve, you’ll need to dig deeper.

Hey, I'm Jessica

I support scrappy female entrepreneurs with actionable steps & strategies to grow and scale the traffic, sales & profit in their eCommerce businesses. 

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