Data-Driven Decision Making: How To Calculate Ecommerce Growth
As an ecommerce retailer, you know that there are no small decisions. You have to dig into the analytics and granular details that give you the information you need for data-driven decision making.
That’s where your key performance indicators (KPIs) come in. Between year-over-year growth and net profit to retention rate, these values give you a way to evaluate your company’s performance and indicate whether your business is reaching its goals — and show you where you need to improve if not.
While it seems like common sense to know your numbers, a Geckoboard survey found that 49% of small and medium-sized business owners have failed to identify any KPIs. That’s unfortunate, because those who do track those important metrics are about twice as likely to reach their target numbers.
Which metric are most important for understanding your growth – and how do you calculate them?
Looking for a specific metric? Jump to the right section here:
- Total sales
- Average daily sales
- Year-over-year growth
- Sales growth rate
- Repeat purchase rate
- Net profit
- Gross profit
- Conversion rate
- Average order value
- Lifetime value
What is data-driven decision making (and why is it so important)?
Think of all the decisions you make for your business on a weekly – and even daily – basis.
- What channels to advertise in and what campaigns to run (and what creative to include in those campaigns)
- Which products to market to which customers – and how to price those products
- When to run promotions, and for how long
- Where to increase – or decrease – your advertising spend
- How much to charge for shipping – or whether to offer free shipping
- What kind of return policy to offer
Overwhelmed yet? That’s just scratching the surface. Now, imagine making those decisions without data to guide you – to help you understand which products are most profitable, which channels drive the most revenue or customer acquisition, which customers have the highest LTV, what your shipping costs are, how returns affect your business and more.
Without that data at your fingertips, chances are (in most cases, at least), you wouldn’t make the smartest decisions that would drive the most growth.
With the right data, though, you can gain insights, identify issues and opportunities and ultimately make decisions that put your business on the right trajectory and maximize growth.
How to implement data-driven decision making
In today’s world, the problem most merchants face isn’t too little data – it’s having too much data and not knowing what to do with it. The key to data-driven decision making is knowing how to gather the right data, analyze it for the right insights and determining the right conclusions and strategic decisions based on your business and goals.
Here’s how to get started:
1. Know what you’re looking for
The main purpose of data-driven decision making? To lead you to the right conclusions and help you make the right strategic decisions for your business, depending on your goals. That means the first, most important step is to take a moment to understand what you’re looking for in your data analysis.
Think about what your goals are and what questions you want to answer. Are you trying to acquire more new customers, improve retention or make your marketing activities more profitable? That will help you narrow down the right data sources to evaluate and understand which KPIs to focus on.
2. Connect your sources and gather data
Once you know what you’re looking for, identify the right data sources and make sure you’re able to pull the metrics you need – whether that’s your ecommerce platform and advertising channels, email marketing and automation, additional sales channels, order management and fulfillment, customer loyalty and reviews, customer support and more.
You can gather data by going into each individual platform – but if you have an analytics platform that allows you to connect multiple data sources in one place, it will make it a lot easier to analyze and visualize your data without spending time logging into multiple accounts and calculating metrics manually in spreadsheets.
Did you know?
Glew helps you connect, analyze and visualize data from across your tech stack in one place, with 65+ integrations with the most popular tools for ecommerce and multichannel retailers. Start a free trial to check it out:
3. Analyze the data
Once you’ve connected your sources and gathered the data you need, you’ll want to analyze your data to calculate the specific metrics you need. (Again, an all-in-one analytics or business intelligence platform can help here – adding useful visualizations and flexible period-over-period comparisons on top of static metrics.)
What should you look for here? Go back to number 1 – that depends on what your goals are. The metrics you should look for if you’re trying to increase customer acquisition are different than the metrics you should consider if you’re trying to improve profitability.
4. Look for insights to guide strategic decisions
Here’s the exciting part: looking at the data you gathered and the analysis you’ve performed, what insights can you draw that will help guide your decision-making?
Maybe your analysis helped you uncover that one of your products helps you acquire more new customers than any other – you can use that to inform future acquisition campaigns and product placements. Maybe you discover one of your marketing channels is driving more revenue – with a better profit margin – than the others. You may want to adjust your spend accordingly.
No matter the metrics you’re looking at and the insights you find, make sure you’re doing this on a regular basis – data-driven decision making is an ongoing process.
10 metrics you need for data-driven decision making
There are hundreds of different metrics that you can track, depending on your business’s priorities and goals, but the ones below will give you the information you need to understand your ecommerce growth.
One of the best ways to gauge how your online store is doing is by calculating your total sales (which typically refers to the revenue brought in by sales). How much you’re making in sales – in a given day, week, month or year – can help measure the overall growth and direction of your business, and gives you a clear look at how much you’re selling and how much it’s adding to your bottom line
How to calculate total sales
Total sales is one of the easiest metrics to calculate (and your ecommerce or analytics platform will usually do it for you). Total sales (also sometimes called gross sales) is calculated by multiplying your total number of sales in a given period by the price per unit of the items sold. Have multiple items with different price points? You’ll want to calculate the total sales for each, then sum them for the period you’re looking at.
For example – say you sell a t-shirt for $10 and a pair of pants for $20, and last week you sold 25 t-shirts and 10 pairs of pants. You’d calculate total sales by multiplying $10 by 25 ($250) and $20 by 10 ($200) and then adding those numbers up to get $450 in total sales.
Why it’s important
Total sales is a valuable figure because it puts a monetary value behind the effort you’re putting into your ecommerce activities – everything from product development and marketing to generating traffic and website optimization. By keeping an eye on your total sales, you can see weekly and monthly growth and make sure that you’re headed in the right direction for long-term success.
There are several things you can do to increase your total sales, starting with increasing traffic to your site. If you can boost your site traffic, you have the opportunity to convert that traffic more effectively, which can help you both acquire new customers and retain the existing customers you have for a longer period. Take advantage of as many traffic sources as possible – social, search, and direct — and look for trends. Is there a traffic source that’s more successful? Is there a particular day of the week that’s slow that you could use to run a promotion? Find the trends, optimize the traffic, and you can increase your total sales.
Also look at which products are driving the most sales, which customers or customer groups are buying most frequently, and which channels are driving the most acquisition. Then, use that information to inform your strategy moving forward.
Average daily sales
While total sales is important, it’s equally important to know how your business is doing on a day-to-day basis. Average daily sales measures how much money you’re making each day selling your products and services, giving you a baseline by which to compare.
How to calculate average daily sales
It’s easy to calculate average daily sales: just divide your total sales in a given period by the number of days in the same period.
Here’s an example: You’ll start by determining the number of total sales your business generated during an accounting period (like a month or a year). Let’s say your annual sales last year were $50,000. Then, divide that figure by the number of days in the period. $50,000 divided by 365 is $136.99 in average daily sales.
Why it’s important
While your sales may fluctuate during different times of the year, your average daily sales help you have a baseline figure that you can use to compare to different periods.
If you have high and rising average daily sales, you have a great chance of competing in your industry. If you have decreasing daily sales, you’ll know you have to evaluate your strategies and possibly look for new, additional ways to bring in revenue.
You can also calculate average daily sales for different periods and compare – if you’re a seasonal business, how are your average daily sales in summer versus winter, or in April versus October? You can even layer in other metrics like average daily expenses to get a deeper look at how well your company is performing.
This metric evaluates your financial progress over a longer period, allowing you to compare your growth over the previous year and evaluate the longterm impact of your strategies.
How to calculate year-over-year growth
Year-over-year growth typically refers to revenue (although it can be calculated for any metric), and it’s fairly simple to calculate – it’s a simple percentage growth calculation.
First, subtract last year’s earnings from this year’s earnings, using whichever revenue metric you want to evaluate. Then, divide that number by last year’s earnings. Finally, multiply the resulting figure by 100, giving you a percentage.
One thing to remember? You can use this same method to calculate this for any period – week-over-week, month-over-month or quarter-over-quarter – but make sure the periods you’re comparing are equivalent to ensure you’re calculating an accurate figure.
Why it’s important
It’s important to know your company’s year-over-year growth because it helps you better understand your business at the highest level, showing you at a glance if you had a strong financial year and whether you’re going into the next year with that same momentum.
One of the advantages of this metric is that it negates seasonality – which is helpful given that the holiday season of November and December generally accounts for around 20% of most retail sales. Since this metric spans the entire year, it helps smooth out the volatility of monthly figures. Once you have this information, you can make any necessary tweaks to your overall business strategy to keep your growth rate on an upward swing.
Sales growth percentage
Sales growth rate typically refers to the net sales of your ecommerce company from one fiscal period to another. For this metric, net sales means revenue from your total sales, minus any discounts or returns, and you’re comparing sales from two periods of time to see your growth rate between the two. (Note: similar to when measuring year-over-year growth, the two periods should also be a corresponding length of time, such as a quarter or a fiscal year.)
How to calculate sales growth rate
To calculate your sales growth rate from one financial period to another, subtract the net sales of the prior period from that of the current period. Then, take that result and divide it by the net sales of the prior period. Multiply the result by 100 and you’ll have sales growth percentage.
Why it’s important
As an ecommerce business owner, sales growth percentage is important because it informs you about your financial performance over a period of time. If sales rose between two periods, you know the strategies you have in place are working. If you find that sales stagnated over time, you know you need to adjust for the future. You want to know that there will be a demand for your products or services going forward.
What’s a good sales growth percentage? While these numbers will vary depending on the industry and the size of the company, sales growth of 5-10% for large companies is usually considered good, while sales growth over 10% is more achievable for medium to small-sized companies.
Repeat purchase rate
This metric quantifies the number of new buyers you’re able to turn into loyal, repeat customers – in other words, how well you’re able to retain them as customers over time.
How to calculate repeat purchase rate
You can calculate repeat purchase rate in a few different ways. Many ecommerce businesses consider retention rate as repeat purchase rate – out of all your customers, how many of them have come back to make a second (or more) purchase? To calculate this, just divide the total number of customers who have made two or more purchases in a period by your total number of customers in that same period (then multiply by 100 to get a percentage).
You can get a little bit more granular and look at which of your customers are coming back to make repeat purchases after a certain period has elapsed, but you’ll need a bit more historical data to calculate this number (and it involves a bit more math).
You can start by taking the number of customers who shopped 12-24 months ago who have shopped again in the last six months. Then, divide that by the total number of customers who shopped 12-24 months ago. You’ll have arrived at your repeat purchase rate using a six-month window.
Note: Glew’s repeat purchase rate calculation is similar to the one above. We consider repeat purchasers as customers who made their second or more purchase in a specific period, but whose first purchase happened before that period.
Why it’s important
We’ve all heard that it can cost five times more to attract a new customer than it does to retain an existing one. But did you know that increasing customer retention rates by just 5% can increase profits by 25% to 95%? The key to increasing retention (and profit) is to nurture the relationships you have with your existing customers.
This means implementing a loyalty program that rewards them for their business and making sure you optimize it. Treat these customers like gold, as 93% of customers are likely to make repeat purchases with companies who offer excellent customer service. The goal is to build on loyalty to increase your repeat purchasers, and not just aim for one-time conversions.
Customer segmentation can help you identify who your most frequent customers are so you can focus your loyalty-building efforts on the right people. Find your customers who have made the most purchases, who frequently make high-dollar purchases and who always engage with your marketing and communications, and ensure they are treated like VIPs.
Did you know?
Glew has more than 30 prebuilt customer segments, including VIP, high AOV, repeat customers, recent purchasers, big spenders, and more – plus the ability to create your own segments using more than 40 filterable fields. Start a free trial to check it out:
Want to understand your true bottom line? Net profit is the difference between the revenue and the cost of a business. It’s the money that you’ll have leftover once all your bills and expenses are paid, and it’s one of the best ways to measure the success of your business.
It’s important to note that this metric is not how much you’ve earned during that period, because the income statement can include non-cash expenses like depreciation and amortization.
How to calculate net profit
To calculate your net profit, take your total revenue and subtract your total expenses. For example, your company made $400,000 in revenue, but the products you sold cost $75,000. That leaves a gross profit of $325,000. Subtract another $75,000 for salaries, $50,000 for operating expenses, and $10,000 for taxes. When you subtract that from the gross profit, you’re left with $190,000 net profit.
Note: You’ll see net profit metrics in Glew. Our net profit calculations take into account your cost of goods sold and your advertising expenses, but not expenses like salary, rent, overhead or supplies, since those are outside the scope of your ecommerce store and integrations.
Why it’s important
Net profit is the best way to tell just how profitable your business is, and it’s an important indicator, given that increases in revenue don’t always translate to increases in profits for a business. This metric takes into account many different variables — your markup price, taxes, overhead and cost of goods — and is ever-changing.
However, as an ecommerce merchant, your goal should be to achieve consistent net profit every month. This is a sign that your business is operating at a sustainable pace, and that you can expect continued growth. You can improve your net profit by implementing smart pricing strategies, replacing unprofitable products and services, managing your inventory, and working to reduce overhead.
Gross profit is the revenue a business brings in after subtracting just the expenses required to make a sale (so, unlike net profit, it doesn’t account for costs like salary or operating expenses). Put another way, it’s your total sales minus the cost of goods sold. Increasing your gross profit directly impacts the bottom line of your e-commerce store.
How to calculate gross profit
You can calculate gross profit by day, week, or month, and by product or channel – you just have to make sure you know the cost of goods sold for all the products you’ve sold.
Just add up your total sales by product for the period in question, find your cost of goods sold for the same products for that period, and subtract your costs from your total sales. Keep in mind that the cost of goods sold is the price of all inventory sold – so if your product cost for a given item is $5 and you sold 10 of that item, your cost of goods sold is $50.
Note: If you use Glew, your cost of goods sold data is automatically stored and calculated in Glew, making it easy to find gross profit, profit margin and other profit-centered metrics automatically.
Why it’s important
Knowing your gross profit helps you figure out where you should allocate your resources for future growth, where you should try to cut costs or raise prices, which channels of revenue are producing the greatest margins, and identify any problems. For example, if your business has high sales numbers but gross margins are low, that might be a sign that there’s a kink in the supply chain, that prices are too low, or that your direct costs are too high.
It’s critical to increase growth profit to stay competitive, and this can be done by raising the prices of your products, increasing your sales volume, reducing material costs, optimizing promotions, and implementing dynamic pricing — changing prices in response to real-time movement in supply and demand.
For e-commerce retailers, conversion rate is a critical metric, and for good reason. It measures the percentage of visitors to your website that “convert” — meaning they visit your website and take a desired action. Depending on your business, that could mean they make a purchase (the most common measure of conversion), submit a form, download an asset or sign up for your newsletter.
How to calculate conversion rate
To calculate your conversion rate, take the number of conversions you get in a given period (typically the number of people who made a purchase), then divide that by the total number of people who visited your site in the same period. Then, multiply that number by 100% to get your rate.
For example: If your site had 18,000 visitors and 1,574 purchases last month, your conversion rate is 8.75%. What’s a good conversion rate? While Amazon has a whopping 13% conversion rate and while it can vary by industry, the average ecommerce conversion rate is close to 3.
Why it’s important
You can get all the traffic in the world to your website, but if those users aren’t converting and making purchases, it won’t do much for your bottom line. Knowing your conversion rate gives you an idea of how much of your website traffic you’re really capitalizing on – and what opportunity you have to improve.
To optimize your conversion rate, you have to optimize your website. That means improving site speed – it’s been shown that if it takes more than three seconds for a page to load, more than half of visitors will leave. Make sure your website is easy to navigate, directing users to the products they want to find and making it easy for them to purchase. All your pages — product pages, home page, cart pages, checkout forms — should have clear calls-to-action that stand out. Still brainstorming how to improve conversion? Consider offering free shipping and add reviews to product pages when possible, as displaying reviews can increase conversions by 270%.
Average order value (AOV)
This metric is exactly what it sounds like — the average value of a purchase (of one or more items) that a customer makes from your store. It tells you about how much your customers tend to spend with you on an individual order.
How to calculate average order value
To get your average order value, divide your total revenue in a given period by the total number of orders you received in the same period. For example, if you were tracking sales for the month of March and found a total revenue of $50,000 with 800 orders. The revenue ($50,000) divided by the total orders in the same period (800) equals an average order value of $62.50.
Why it’s important
To understand the lifetime value of a customer — and to better align your growth strategies — it’s imperative to know your average order value. It’s pretty simple: the higher your average order value, the more money you’re making from each sale, which adds to your bottom line. Boosting your AOV will increase your overall sales, and there are some simple ways to do that.
First, offer product bundles that give the customer a discounted price if they purchase multiple complementary products. For example, if you sell skincare, offer items like cleanser, moisturizer and serums in a pack that costs less for the customer than if they were to buy them all separately.
You can also upsell and cross-sell, displaying related items, add-ons, and complementary items on product pages and cart pages as your shoppers approach check-out. Finally, consider offering a discount for ordering in bulk, like buy one, get one half off.
Customer lifetime value
Customer lifetime value (often denoted as LTV or CLTV) is arguably one of the most important metrics for ecommerce retailers to track, as it represents how much overall revenue a customer could potentially bring to you during their time as your customer.
How to calculate lifetime value
Finding your lifetime value is easy. You just multiply two metrics: average order value, which we explained above, and purchase frequency, or how many times your customers tend to purchase from you over their relationship with you.
For example, let’s say the average value of a purchase on your store is $50, and customers make an average of seven purchases over time. To calculate your LTV, you would multiply $50 by 7 to get $350.
Why it’s important
Lifetime value is critical when it comes to understanding your longer-term performance. It’s not only concerned with the revenue from a single order or customer, but with all the revenue that customer is likely to generate over time – helping you better plan for the future, understand the impact of customer retention, evaluate your marketing costs and more.
Here’s a real-world example. Say your cost to acquire a new customer is $35, and your average order value is $37. If you were looking at just those two metrics, you might think you’re not seeing a great return on your marketing dollars. But when you consider the fact that your average customer makes 6 purchases over their lifetime for an LTV of $222, it makes that $35 acquisition cost look a lot better.
Plus, it makes sense to focus on improving lifetime value from a profit perspective. 61% of small businesses report that more than half of their revenue comes from repeat customers, rather than new business, and on average, loyal customers are worth up to 10 times as much as their first purchase.
How can you drive lifetime value up? Figure out what you can do to keep loyal customers purchasing, and how to retain more of the new customers you’re acquiring. That can look like a loyalty program, optimizing user-generated content, or targeted promotions and special offers for your loyal customers. At the end of the day, it’s just about showing enough value to your customers that they keep coming back.
Did you know?
Struggling to calculate lifetime value? Glew calculates it for you, using your store’s historical data to give you the LTV of your business as a whole, plus individual customers, products, channels and more. Start a free trial to check it out:
Moving forward with data-driven decision making
One thing most successful ecommerce retailers have in common? They’re obsessed with data, making sure their strategic decisions are driven by key metrics. Without understanding the data, you won’t know what’s working, what’s not working, and how you can adjust your strategy to maximize future growth.
Don’t forget these tips:
- Know what you’re looking for: Understand what you’re trying to achieve and what questions you’re trying to answer through your data analysis. This will help you narrow down the right sources and KPIs to focus on.
- Connect your sources and gather data: Next, identify the unique sources you need to pull data from – whether that’s your ecommerce platform, Google Analytics, your social media platforms or any other tools you use. A business intelligence platform can help you connect all of this data in one place.
- Analyze the data: After you’ve gathered your data, calculate the metrics and comparisons you need in order to find meaningful insights. (Again, a business intelligence platform can help here with more complex, automated calculations and data visualizations.)
- Look for insights to guide decisions: The most important step: look at your data to draw the insights and conclusions that will help you make smart, data-driven decisions. Be sure to go back to the first step to remember what questions you were trying to answer in the first place.
By looking at these metrics on a regular basis, you’ll be better equipped to run a data-driven ecommerce business that has a smart strategy behind every move — and a business that experiences continued growth.
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