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CR, ROAS, LTV: Understanding KPIs in eCommerce
August 30, 2024
15 mins
ROMI, CR, LTV, - what are they?
Today, we'll take a close look at the main eCommerce KPIs, their meaning, calculation formulas, and benchmarks for businesses to achieve marketing success.
eCommerce key performance indicators (KPIs) should not be confused with metrics.
Metrics are specific numerical indicators used to track the effectiveness of multiple aspects of business performance. While they provide data for analysis, they do not indicate success or failure in achieving strategic goals.
KPIs are indicators that measure success in achieving strategic goals.
KPIs vs. Metrics
Metrics
KPIs
What do you need to implement to measure and track KPIs in eCommerce?
Defining the goal. The first step to implementing key performance indicators for eCommerce is to define clear and measurable goals, including general business goals and specific marketing objectives.
Selecting indicators. After defining the goal, you need to choose the most informative key performance indicators for eCommerce to measure your progress by channel. For example, ROAS and CAC are important for online advertising, while organic traffic and conversions are important for content marketing.
Monitoring and reporting. Regular monitoring of the selected marketing indicators and the creation of reports will help you adjust your strategies promptly.
CR, AOV, CAC, and LTV are among the major key performance indicators in eCommerce that provide insights into sales performance, marketing effectiveness, and the health of your business.
Setting KPIs for eCommerce monitoring helps companies optimize their strategies to drive growth and increase profits.
Essentially, there’s total traffic and traffic by channel. Total traffic is the aggregate number of visitors to your website over a certain period. For example, if 10,000 people visit your website per month, that’s your total traffic.
Suppose you need to analyze traffic by channel. In this case, you’ll break down the total traffic by sources like organic search, paid advertising, direct traffic, social media, referral traffic, or email marketing.
How to calculate traffic by channel?
Traffic by channel = Organic traffic + Paid traffic + Direct traffic + Social media traffic + Referral traffic + Email marketing traffic
Organic search: visitors who come to your website through organic search engine results.
Paid advertising: visitors who come to your website through paid ads, like Google Ads or Facebook Ads.
Direct traffic: visitors who enter your website URL directly into a browser or follow a bookmark.
Social media: visitors who come to your website through social media platforms like Facebook, Instagram, or Twitter.
Referral traffic: visitors who come to your website through links from other websites.
Email marketing: visitors who come to your website through a link in an email newsletter.
Tracking total traffic and traffic by channel allows you to understand which marketing channels perform best and optimize strategies for each channel.
Conversion Rate (CR) is the overall conversion rate of your website, i.e. the percentage of visitors who performed the desired action (e.g. purchase) out of the total number of visitors.
For example, if 1,000 people visited your website per month and 50 made a purchase, your overall conversion rate is 5%.
CR is also segmented by traffic sources and marketing channels. The formula for calculating CR by channel is the same as for the overall conversion rate, though it is applied to each specific channel individually:
Organic search. If you get 500 visitors from organic search and 25 conversions, your conversion rate is 5%.
Paid advertising. If you get 300 visitors from paid advertising and 15 conversions, your conversion rate is 5%.
Email marketing. If you get 200 visitors from email campaigns and 10 conversions, your conversion rate is 5%.
Direct traffic. If 75 out of 1,500 visitors came to your website directly and made a purchase, the CR for direct traffic is (75 / 1,500) * 100% = 5%.
Social media. If out of 1,000 visitors who came to your website from social networks, 50 made a purchase, the CR for social networks is (50 / 1,000) * 100% = 5%.
Referral traffic. If out of 700 visitors who came to your website from referral traffic, 35 made a purchase, the CR for referral traffic is (35 / 700) * 100% = 5%.
Do we take a single KPI and say “Our CR is bad, which means it's not working well? No, because we need to consider all eCommerce KPIs. Why? To understand how they work and interact with each other: weekly, quarterly, etc. It all depends on your goal. If you target sales, you need to track it weekly. For example, if you notice a drop in sales, the problem may be a traffic decrease from the main channel or an increase in the number of bounces on landing pages. In this case, you need to analyze which channels show a drop and optimize your landing pages to reduce bounces. You may need to A/B test multiple versions of your pages or adjust your ad campaigns to attract more relevant traffic. There are a lot of options, and it all depends on your understanding of the funnel, the audience, and what a “good indicator for your business” is. Maria Shevchenko Brand Manager.
The Bounce Rate measures how many people leave your website immediately without taking any action on it. For eCommerce retailers, the goal is to keep your bounce rate as low as possible. There’s usually a strong correlation between bounce rate and conversion: a higher bounce rate means lower conversions.
A high bounce rate affects sales and your page ranking on Google. If many visitors leave your site quickly, Google will consider it less relevant for search results.
Cost of Customer Acquisition (CAC) allows you to understand the cost-effectiveness of attracting each of the company's customers.
CAC is how much you spend on every new customer. It's wise to calculate CAC for various marketing channels to assess their effectiveness properly.
CAC is often confused with CPA (Cost Per Action). While CAC measures the cost of acquiring a customer, CPA measures the cost of a specific action taken by a user.
The total cost of customer acquisition (CAC) is the total cost spent on customer acquisition, including all marketing and sales costs. This includes advertising costs, marketing team salaries, tools, and software, as well as total costs associated with customer acquisition.
Let's say, we have a company that spends $150,000 on marketing and customer acquisition to attract customers for its SaaS business. The marketing effort resulted in 8,000 customers. The calculation looks like this:
Customer acquisition cost (CAC) = ($150,000 / 8,000) = $18.75
In this case scenario, the marketing team was able to acquire each customer at $18.75.
CAC by Channel
CAC by channel - allows you to see which channels are the most profitable and which may be too costly compared to the attracted number of customers.
Organic search. You've invested $2,000 in SEO and have attracted 40 customers through organic search. Your CAC for organic search is $50.
Paid advertising. You spent $5,000 on PPC campaigns and got 50 customers. Your CAC for paid advertising is $100.
Email marketing. You invested $1,000 in email marketing and got 20 customers. Your CAC for email marketing is $50.
Social media marketing. You've spent $2,000 on social media campaigns and have acquired 25 customers. Your CAC for social media is $80.
CAR (Cart Abandonment Rate) measures the percentage of visitors who add products to their carts but do not complete the purchase. This is an important metric for detecting problem areas in the buying process.
CAR marks the percentage of online customers who add items to their carts but do not complete the purchase. This figure varies by industry, but the average CAR is around 68%.
Among the main reasons why customers abandon their shopping carts are
Reducing the abandoned cart rate is important for e-commerce businesses because it can lead to increased sales and higher customer satisfaction. The suggested ways to mitigate CAR:
CAR formula:
Average Order Value (AOV) indicates and reflects the average value of one order on an eCommerce website. It is used to monitor and optimize the overall performance of an online store.
To calculate AOV, divide the total revenue of the store by the number of placed orders. For example, if an online store earns $100,000 from 1,000 orders, its AOV is $100.
AOV is critical for eCommerce businesses because it shows how much each customer spends on average. This information helps you make strategic decisions about marketing, product pricing, and other business aspects.
Customer Lifetime Value (LTV) is the profit generated by a user throughout the interaction with your business. This is the basic indicator for marketing strategies aimed at attracting and retaining customers, especially in eCommerce. While the LTV formula may have multiple names, its essence is the same. You can find alternative abbreviations like CLV or CLTV (customer lifetime value) that all stand for the LTV. The only difference is that LTV considers all users, while CLTV takes into account only the solvent ones.
Lifetime Value (LTV) and Average Order Value (AOV) are key indicators. LTV determines the total revenue from a customer over the entire period of interaction, while AOV shows the average order value per purchase.
For eCommerce, the CAC must be significantly lower than the AOV, as the margin per product may be lower.
CAC < AOV and CAC < LTV is relevant for all types of businesses, regardless of the niche.
To stay in the black, the profit brought in by your customers should exceed the cost you spend to attract them. CAC is one of the most important metrics for social media marketers. If your CAC is higher than the average revenue per customer, it’s high time you reconsidered your marketing strategy to reduce the cost you need to acquire new customers
LTV = Lifetime × ARPU
For a subscription service where the average duration of use is 10 months and the monthly revenue is 400 USD, LTV = 10 × 400 = 4000 USD.
LTV = AOV × RPR × Lifetime
For an online clothing store with an average check of 1500 USD, three purchases a year, and a customer’s lifetime of 4 years, LTV = 1500 × 3 × 4 = 18000 USD
Purchase frequency is how often a consumer buys from a store over time. The indicator helps store owners track customer loyalty and repeat purchases.
The frequency of purchases is calculated by dividing the total number of purchases over a certain period by the number of unique customers who made purchases during the corresponding period.
For instance, if an online store has registered 500 purchases made by 400 unique users during a month, the frequency of purchases will be as follows:
Purchase frequency = 500 / 400 = 1.25
This means that customers have made 1.25 purchases during the specified period.
Understanding the frequency of purchases allows store owners to make strategic decisions to improve their business and ensure customer return.
Return on Investment (ROI) is the KPI that measures how much revenue a campaign generates compared to the cost of running it.
There are various ways to measure ROI:
Net profit is the total revenue generated by an eCommerce business minus the total costs associated with generating the revenue, including marketing, production, and operating costs.
Total investment is the total amount of money invested in an eCommerce business over a certain period.
Let's say you have USD 5,000,000 in revenue for the year. During this period, you spent USD 3,500,000 on marketing, production, and operating costs.
Let's calculate the net profit:
Net profit = Total revenue - Total costs
Net profit = 5 000 000 - 3 500 000 USD = 1 500 000 USD
Let's calculate ROI:
ROI = (USD 1 500 000 / USD 3 500 000) × 100 = 42.86%.
So, the ROI for your eCommerce business in this example is 42.86%. This means that for every dollar invested, you earned 42.86 cents of profit.
Description: Measures the return on investment in marketing activities.
Formula: (Revenue attributable to marketing / Marketing costs) × 100
Benchmark: 500% ROMI or higher is considered excellent in many industries.
We received 100,000 USD and invested 20,000 USD in advertising
(100 000 - 20 000) / 20 000 = 4 USD
ROMI = 400%.
1 dollar invested in advertising brings 4 dollars minus advertising costs
Based on the ROMI value, paid search is more profitable than other channels.
Return on Advertising Spend (ROAS) is a marketing metric that measures the effectiveness of a digital advertising campaign. ROAS helps online businesses evaluate which methods are working best and how they can improve their advertising campaigns.
ROAS measures the revenue generated for every dollar spent on an ad campaign.
If you earned $10 for every dollar spent on an ad campaign, the campaign's ROAS would be 10:1.
Example
We have created a Search DSN (PPC) & PMax (PPC) advertising campaign and an email campaign throughout the customer database.
Costs
Search DSN - 60 000 USD
Performance Max - 20 000 USD
Mailing list - 10,000 USD
Income
Search DSN - 130 000 USD
Performance Max - 90 000 USD
Mailing list - 30,000 USD
It is worth increasing spending on PMax campaigns as they bring more profit
Average Order Value (AOV) and Return on Marketing Investment (ROMI) are crucial metrics for CMOs. It is vital to distinguish between ROI, ROMI, and ROAS. ROI, considering all investments, including rent. While ROMI reflects the effectiveness of marketing investments, ROAS embraces ad investments:
Track ROAS weekly and ROMI monthly or quarterly. When estimating ROMI, it is important to account for the agency commission. ROAS shows the effectiveness of advertising, while ROMI shows the effectiveness of ad investment.
The Cost Revenue Ratio (CRR) is the inverse of ROAS. It measures the percentage of revenue spent on advertising; the lower this figure is, the more effective your ad campaign is.
CRR calculation formula:
CRR = (Advertising costs / Advertising revenue) ×100
Calculation example:
If you spent 50,000 USD on an advertising campaign and received 200,000 USD of revenue, your CRR = (50,000 USD / 200,000 USD) ×100 = 25%.
This means that 25% of your income was spent on advertising.
What does it mean?
Successful eCommerce marketing campaigns require comprehensive tracking of key metrics and understanding their impact on overall business performance
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