If only your business could talk and let you know how it’s doing. Fortunately, numbers are just as good (if not better) at explaining things.
Online retailers, for all their entrepreneurial instincts, have to make decisions that are data-informed. These four metrics — conversion rates, average order value, churn and customer lifetime value — will determine just how well your business is doing, giving insights to inform your strategies moving forward.
Conversion
You’ve definitely heard of this one before, and it’s a biggie. Conversion rates are all about getting site traffic to perform some sort of action. For many merchants, that action is purchasing a product.
Simple equation: X / Y
X = how many site visitors completed the action you’re measuring, Y = the amount of traffic you’ve had in a given period of time
Let’s say you’re measuring how much of your unique traffic this month converted into a customer. If you had 9,000 site visitors over a month, and 300 of them ended up buying a product. That’s a conversion rate of 0.0333 (repeating); 3.33% of your traffic actually buys from you. Simple stuff, right? The best part is that most sales channels and third-party apps have the capability to do all the math for you depending on what you’re measuring.
Keep in mind that conversion rates aren’t restricted to sales alone – they can be applied to a variety of things like a visitor clicking a link, or a someone handing over their email address to you via a pop up screen. It’s all about measuring how much traffic actually acts on something.
Also, just to get an idea of where you stand, the average conversion rate in ecommerce fluctuates between 2 and 3 percent according to Montetate Ecommerce Quarterly.
Average Order Value
Want to be more profitable? There are two ways to make this happen; convert more traffic into customers or grow your average order value. The latter is a fundamental part of your bottom line because it gives you an idea of the average amount of cash you’re making per transaction. That makes it pretty important.
Calculating your average order value goes like this: Total revenue / Total number of orders
If you sold 2,500 orders within a quarter and made $37,500, then you’re average order value is $15. But if that average order value doesn’t satisfy your thirst for profit, then there are plenty of tactics to boost it. Merchants often try to raise it by offering a price threshold for free shipping, which encourages customers to dump more products into their cart. Product kitting or bundling often does the trick as well.
Churn
Churn rate, sometimes called attrition if you want to be fancy, is how many new customers purchase from your store, only to never purchase again. Needless to say, a high rate makes merchants’ stomachs churn.
It should be said that, typically, churn rate is associated with B2B, service or subscription revenue models, rather than the B2C, product-to-consumer models that the vast majority of ecommerce merchants use. But it still applies.
To get a better idea of how to develop your churn rate, you need to set a cutoff time that establishes whether or not a customer has churned. It can be whatever timeframe you’d like – base it off gut instinct or the period of time by which your repeat customers normally buy again. Once you’ve got that cutoff time figured out, caluclating the rate is as easy as finding conversion rates.
Generally, the equation goes like this: X / Y
X = the amount of customers that don’t return for another purchase within the cutoff time, Y = the amount of new customers
As an example, let’s say you have a cutoff time of three months before a customer is officially labeled as “churned.” You gained 300 new customers last month. Fast forward three months from now, and only 30 return for another purchase. That’s a churn rate of 0.81 (repeating), or 81%.
Best part about that cut-off date? It allows you to get a better idea of exactly when to start targeting churn-nearing-customers with promotional efforts that get them spending again. Consider boosting your rates by implementing a loyalty program that offers recurring shipments of an order, if possible. Or just go the traditional route – maintain strong customer satisfaction, and retarget customers to stay on their spending rader.
Customer Lifetime Value
Some customers may hit your business and quit it; they’ll buy an item from you, never to return. But all merchants, large and small, want commitment, and that means throwing some marketing the customer’s way in hopes they return. Some may return, some might not.
Question is, is it worth marketing to them?
Customer lifetime value helps you make that decision. It determines just how much money you’ll be making off a return customer over their lifetime as a customer of yours, thereby giving you an idea of how much you’ll be spending on marketing to get ’em. Plus, it’ll assist in figuring out which customers will be the most profitable over time.
It can be calculated in a variety of ways, and it’s a little more complicated than the other other metrics due to the factors involved, like retention, and your margins. For the real nuts and bolts of how to calculate it, here’s a fantastic infographical tool on Customer Lifetime Value by Kissmetrics.
Image: morebyless, Flickr
