Last week, we posted what qualitative characteristics we look for when evaluating eCommerce companies. This week, we thought we'd get to the real fun and talk about the quantitative stuff.
The Quantity:
When looking at financial projections, the earlier the deal, the more likely the projections will be wrong. Thus, we put most weight in you understanding your financial model, not just your projections. Within that, you should know what your key performance indicators (KPIs) are and which are most critical to the success of your business.
Key metrics to track as an eCommerce company:
1. Cost of customer acquisition (CAC)
How much do you have to spend to get one new customer? You should take into account anything you spend to bring in new clients, including share partnerships, paid marketing and cost of direct sales.
2. Conversion rate (CR)
Of your site traffic, how many are actually buying? Depending on source, this varies from ~0.75% from social media to ~2% from search and ~3% from email. Desktop and tablets get double or triple the CRs than smartphones.
3. Shopping card abandonment
How many potential customers put products in their shopping cart but didn’t place the order? The average is 67 percent of shopping carts are abandoned.
4. Average Order Value (AOV)
What’s the average size of a single transaction? Of course, this is variable, but we see averages between $80-$120.
5. Life time value (LTV)
How much profit will a single customer generate over the entire span that they are a user? Use this formula:
(# of months they will be a customer x average order value/month) – customer acquisition cost
6. Churn
What is the rate at which you are losing customers? If you have 100 customers in April but only 80 in May, that means 20 percent of them have churned. Churn rates below 5-8 percent are ideal, but the lower the better. By dividing 100 by your churn rate, you can also estimate expected number of months as a user. For instance, a churn rate of 20 percent indicates your customer will only stick around for five months (100/20), which is not very long.
For our rules of thumb we use when evaluating metrics, finish the post here.
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