Updated: Jun 23, 2019
If I had a dollar for every start-up founder I’ve met who doesn’t have a robust framework for tracking very important business KPIs... Well, you get the point!
Think about someone who just quit his job as a retail fashion buyer to set up his own E-Commerce store; creating financial models and setting KPIs might not be the first thing on his mind.
And I get it, if what you’re good at is predicting the next big thing in fashion trends, you’re likely not going to be interested in crunching numbers in Excel Spreadsheets.
I’ll tell you right now, one of the most important things you’re going to do as a start-up founder is set up your KPIs from the get-go.
If you’re starting out with only an idea, you will define the KPIs and make forecasts/ predictions on how these KPIs will evolve into the future, and closely track them as you begin executing your business plan.
Founders cannot hope to grow a company in any meaningful way without an almost obsessive focus on its KPIs.
And if you want to raise money from investors without these KPIs and financial models, just forget it!
Your focus should be on the KPIs, the meaning behind them and knowing what impacts each one.
Let’s review some of the KPIs that are important for founders of E-Commerce businesses (in particular) to thoroughly understand and for which they should have a strategy, or set of strategies, for optimising.
Average Monthly Visits:
The Average Monthly Visits metric shows the average sum of all non-unique visits to your online store per month. This metric is important because it sits at the top of your sales funnel and allows you to begin formulating a strategy on how to convert these visitors into paying customers.
Your conversion rate is the percentage of visitors to your website that complete a desired goal (e.g. makes a purchase), out of the total number of visitors. You will want to track conversions for all your marketing channels, such as email, organic search, paid search & affiliates.
Number of Orders Per Customer:
This metric takes a count of the month’s total customers and total orders to find the average orders per customer. Using the resulting number, you can manage your inventory to avoid overflow or product shortage. Again, you will want to measure this per marketing channel e.g. organic search, email etc.
Number of Items Per Order
This metric measures the number of items ordered in one transaction by one customer.
A simple definition of markdowns is the difference between the original retail price and the actual selling price. Markdown is calculated by subtracting the actual selling price from the original selling price. Markdown percent is markdown dollars divided by sales.
Average Promotion/ Discount
This measures your average discount per product. Discount pricing is a strategy often used to generate more sales – typically by dropping the prices you ask for your goods or services.
Cost of Goods Sold
Cost of Goods Sold (COGS) refers to the direct costs attributable to the production of the goods sold in your store. This amount includes the cost of the materials used in creating the good along with the direct labour costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.
Average Order Value
Average Order Value (AOV) tracks the average dollar amount spent each time a customer places an order on your website or mobile app. To calculate your store’s average order value, simply divide total revenue by the number of orders. AOV is one of the most important metrics for online stores to be aware of, driving key business decisions such as advertising spend, store layout, and product pricing.
Customers who have bought from your store at least once in a 12-month period. Active customers are more likely (than the non-active or occasional customers) to buy again.
This metric measures the percentage of customers you lose in a given period of time. To determine your churn rate, take all the customers you lose during a time frame, such as a year, and divide it by the total number of customers you had at the beginning of the year.
Number of New Customers
The total number of new customers you gain in a given period of time.
Customer Acquisition Cost (CAC)
The CAC can be calculated by simply dividing all the costs spent on acquiring customers (e.g. marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.
Contribution Margin Per Order
Contribution margin (CM), or dollar contribution per order, is the selling price per item minus the variable cost per item. "Contribution" represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs. This concept is one of the key building blocks of break-even analysis.
Customer Lifetime Value (LTV)
Customer lifetime value is the metric that indicates the total revenue a business can reasonably expect from a single customer account. It considers a customer's revenue value and compares that number to the company's predicted customer lifespan. Businesses use this metric to identify significant customer segments that are the most valuable to the company.
Ratio of LTV/ Customer Acquisition Cost
The Customer Lifetime Value to Customer Acquisition Ratio (CLV:CAC) measures the relationship between the lifetime value of a customer and the cost of acquiring that customer. An ideal LTV:CAC ratio should be 3:1. The value of a customer should be three times more than the cost of acquiring them. If the ratio is close i.e.1:1, you are spending too much.
The CAC Payback Period is the number of months it takes for your company to earn back what was spent on acquiring your customers. Think of it as your break-even point and a great indicator of how much cash the company needs in order to continue growing…profitably.
So, if you run an E-Commerce start-up, and you’re not on top of the above KPIs, you are missing a significant opportunity to make better business decisions and to show investors that you deserve their money.
If you are a brand-new start-up, it’s also important to make forecasts / predictions on what these numbers should be, by applying financial modelling methodologies.
Your financial models help drive the inputs that go into your financial statements: Income statement, Balance Sheet and Cashflow Statement. It also helps with some of the inputs that go into putting a value on your business, such as applying a valuation methodology known as the Discounted Cashflow (DCF) methodology.
At MBTN Connect, our team of financial analysts have worked on hundreds of financial models for clients, which has in turn helped them grow faster and raise investor capital.
To learn more about how we can help you setup your KPIs, Financial Models and Company Valuation, book a FREE consultation with us here.