While most marketers today are measuring actions such as clicks, opens and shares, it’s also critical to understand the key metrics related to revenue and profitability. Without incorporating these metrics, it’s impossible to understand if your clicks and opens are creating profitable, long-term customers.
Understanding these metrics will give you deeper insights into the different levers that drive long-term profitability for your business. In addition, you’ll be able to use these metrics to build out sophisticated marketing plans that will impress the most data-driven CMO or CFO.
Here are five key ecommerce metrics every data-driven marketer should know:
1) Cost of Customer Acquisition
With marketers under constant pressure to grow sales, the cost of bringing new customers into the fold can get lost in the race to add revenue. That’s why cost of customer acquisition is so pivotal. This metric calculates the fully loaded cost of acquiring a new customer, including any marketing- and advertising-related expenses.
Activities such as Google Adwords (or other advertising), marketing automation, trade shows and other marketing-related expenses should all be included in this cost.
2) Lifetime Value
Lifetime value is the profit the average customer generates over their entire lifetime. Calculating and understanding this metric can help you make better decisions regarding acquisition costs, discount promotions and retention strategies.
Typically, lifetime value is calculated over a reasonable period such as two to three years.
In simpler terms, lifetime value is determined as follows:
Let’s say the number of average purchases from a customer over three years is 1.4. And, the average purchase amount is $45 with an average purchase cost of $25. Your lifetime value is:
Latency is the average number of days it takes a customer to make a repeat purchase. This metric helps you understand how long it takes to create a profitable customer. For example, let’s look at a sample latency report:
- 1st purchase – Day 0
- 2nd purchase – Day 59 (59 days)
- 3rd purchase – Day 96 (37 days)
- 4th purchase – Day 126 (30 days)
- 5th purchase – Day 152 (26 days)
Based on this data, you now know how long it takes customers to make a repeat purchase. In this case, it takes 59 days, on average, for a customer to make a second purchase. You can then use this data to plan your advertising spend and marketing campaigns accordingly. For example, you may want to send special offers to a customer that has not purchased within a normal latency period.
4) Payback Period
How long does it take your business to recover the cost of acquiring a customer? The sooner you can pay off the cost of customer acquisition, the sooner your business can start generating profits. Latency and average purchase amount are critical to determining payback period.
Let’s say your average cost of customer acquisition is $60, and your average profit per order is $20. Based on this data, it takes an average of three purchases to pay back the cost of acquiring a customer.
Having previously run latency reports, you know that it takes an average of 96 days for a customer to complete their third purchase. In addition, calculating the payback period makes it clear that the first purchase is just the start and that it’s critical to drive upsells to existing customers!
5) 12-Month Lapsed Customers
All retailers rely on repeat purchases to drive profitability. Yet while software companies that sell subscriptions (Spotify, Netflix) have adopted lapsed and churned customer metrics as key performance indicators, retailers overall have been slow to embrace these metrics.
If you’re among the retailers that have neglected this metric, you might want to reconsider. Identifying lapsed customers who have not made a purchase within the last 12 months can be critical to understanding profitability and lifetime value.
For starters, identifying these lapsed customers can help you understand what percentage of your customers you’re losing every year. Then, you can identify factors such as marketing campaign or products that may be contributing factors to losing these customers.
Furthermore, now you also know how many new customers you need to acquire just to replace those customers that you lost. Based on our other metrics such as customer acquisition cost, you can build forecasts on how much it will cost to acquire those customers.
Using These Metrics to Drive Revenue
These ecommerce metrics are just the tip of the iceberg, but they’ll give you a solid foundation for using data to evaluate the long-term profitability of your marketing department. These concepts also provide a framework for experimentation and optimizing your marketing strategy. Which campaigns can you launch that increase lifetime value? How do you decrease latency? These are all levers that marketers can pull to create new profit opportunities.
What else? What are the concepts and data you use to make decisions? Send me a note @adams472.
1) White Paper: “Revenue Attribution: How to Measure the Impact of Your Marketing Efforts”
2) Blog: “How to Identify Lapsed Customer for Re-Engagement”
3) Ebook: “Ultimate Guide to Assessing Your Digital Marketing Program”