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All Playbooks

The Financial KPIs Every eCommerce Business Needs

Table of Contents

Intro

Revenue

Cost of Goods Sold (COGS)

Gross Profit

Gross Profit Margin

Net Income

Average Revenue per User (ARPU)

Customer Lifetime Value (CLTV)

Gross Margin by Product Type

Average Order Size

Cost of Returns

Inventory Management Costs

All Playbooks

The Financial KPIs Every eCommerce Business Needs

Whether they sell holistic online yoga courses or custom pet accessories on Etsy, every eCommerce business owner craves insight that can help scale their business. They want to know how their investments, such as high-quality materials or marketing campaigns, affect their bottom line, and how they can capitalize on financial trends within their business.

It takes time and specialized expertise to analyze financial data. Between the countless responsibilities that eCommerce business owners juggle, it can be difficult to put the numbers into context and strategize for the future.

Over the last five years, Xendoo has had the honor of working with numerous eCommerce business owners across the country. Through years of partnership, we have compiled several eCommerce KPIs that help business owners make decisions for growth and plan for successful exits.

In this playbook, we will share those KPIs, so you can achieve deeper insight into your own business performance!

Revenue

What is it?

Revenue, sometimes referred to as Sales, is the money a business earns from selling goods or services during a specific time period., with no expenses applied. It is calculated by multiplying the number of units sold by the average price.

For example:

Sam sells t-shirts online, and wants to know what her Revenue was last year.

She sold 20,000 t-shirts at a retail price of $30 each.

Her revenue was: 20,000 t-shirts x $30 = $600,000.

Why is it important?

The trend of your Revenue over time provides a basic idea of whether your sales and business are growing financially. Be aware that because no deductions are made, Revenue does not indicate profitability. When Revenue is examined alongside other metrics, you can see a more complete picture of financial health.

Industry Benchmark. According to JungleScout, the average Amazon seller makes between $1,000 to $25,000 in monthly revenue. Generally, the more Revenue a business produces, the more money it has to cover expenses and reap a profit. Remember, high Revenue does not necessarily mean high profitability. To understand how your costs affect your bottom line, other factors should also be taken into consideration.

Cost of Goods Sold (COGS)

What is it?

Cost of Goods Sold, also known as COGS or Cost of Sales, refers to the direct costs of producing and purchasing goods or services. Some examples of Direct Costs include:

  • The cost of materials: The amount paid to vendors to purchase materials and products.
  • Shipping costs: The amount the business owner spends to have materials shipped to their location.
  • Labor costs: Wages paid to employees or contractors directly involved in producing the good or service.

Note that indirect costs, such as marketing and advertising, rent, insurance, taxes, and payroll, are considered Operating Expenses. They are not included in COGS.

For companies with inventory, COGS can be calculated using the formula:

Beginning Inventory + Inventory Purchases (during the period) – Ending Inventory = COGS.

For example:

Last month, Sam’s beginning inventory was $22,000, and she purchased $10,000 more. Her ending inventory was $2,000.

Her COGS for last month was: $22,000 + $10,000 – $2,000 = $30,000

Another way to look at COGS is the number of products sold, multiplied by their cost.

For example:

Last month, Sam sold 1,000 t-shirts at a Direct Cost of $30 each.

The COGS was: $30 x 1,000 (t-shirts sold) = $30,000.

Why is it important?

COGS guides pricing decisions. By knowing your COGS, prices can be set that produce a strong Profit Margin, which measures how much Revenue your business keeps after direct costs are applied. If your COGS for a product is $20, the final price must be higher than $20 in order to pay for other expenses and keep the business operational. This insight can determine whether prices need to be adjusted to increase profitability.

What if my COGS is too high?

The higher your COGS, the higher your selling price should be. COGS should always be lower than Revenue to maintain profitability. If COGS comes too close to, or exceeds Revenue, consider raising your pricing, or finding ways to decrease COGS, such as negotiating your pricing agreement with your supplier, or finding affordable alternatives to your materials.

Gross Profit

What is it?

What is it?

Gross Profit is the amount of money that remains after subtracting COGS (or Direct Costs) from Revenue. It is used to pay for Operating Expenses, such as marketing, rent, insurance, payroll, and taxes.

It is calculated using the formula

Gross Profit = Revenue – COGS.

For example:

Sam’s t-shirts are priced at $30, and it costs $10 to produce them.

The costs include $5 to purchase t-shirts from her supplier, $2 for vinyl, and $3 for labor.

Her Gross Profit is: $30 (sale price) – $10 (Direct Costs) = $20 per t-shirt sold.

Let’s calculate her Gross Profit for the year.

Her monthly COGS is $30,000, as illustrated above, with a Revenue of $600,000.

Her yearly Gross Profit is: $600,000 (Revenue) – $360,000 (yearly COGS) = $240,000.

Why is it important?

Gross Profit reveals how profitable your pricing is, relative to the costs of producing the product or service. This provides insight into your top expenses, and how they can be decreased in order to maximize Gross Profit.

What Should My Gross Profit Look Like?

The lower Direct Costs are compared to Revenue, the higher Gross Profit will be. If a decline in Gross Profit occurs, examine your COGS, discounts, and pricing. If the data suggests that too much money is being spent on supplies, consider negotiating lower prices with your supplier, or opting for more affordable materials.

Gross Profit Margin

What is it?

Gross Profit Margin is the percentage of money that remains after direct costs have been subtracted from Revenue.

It is calculated using the formula:

Gross Margin = Revenue – COGS / Revenue x 100.

For example:

Sam’s t-shirts are priced at $30, and it costs $10 to produce them.

The remaining Gross Profit on each t-shirt is $20.

Her Gross Profit Margin is: $30 – $10 / $30 x 100 = 66.67%.

Why is it important?

Gross Profit Margin helps business owners determine if their pricing is able to (and their costs are low enough) to provide the money needed to pay for operational expenses, such as rent and insurance. If you need to know if your products are producing enough profit, consult your Gross Profit Margin.

Industry Benchmark. According to Shopify, a good Gross Profit Margin for online retailers is around 45.25%. A simple way to increase your Gross Profit Margin is to raise prices, even by 3%, and to reduce costs by 3%. Check out our latest eBook, The Power of 3, to learn more about profitability solutions that will help you achieve long-term financial success!

Net Income

What is it?

Net Income, also known as the Bottom Line, is the total amount of money a business earns, after deducting all direct and indirect costs.

It is calculated using the formula:

Net Income = Gross Profit – Expenses.

For example:

As mentioned earlier, Sam made $600,000 in Revenue, with a COGS of $360,000. Subtracting COGS from Revenue results in a Gross Profit of $240,000.

$80,000 goes toward employee wages, $70,000 is used for operating expenses (rent, insurance, marketing), and she pays $20,000 in taxes. These numbers are then subtracted from Gross Profit to determine Net Income:

$240,000 (Gross Profit) – $80,000 (wages) – $70,000 (operating expenses) – $20,000 (taxes) = $70,000 (Net Income).

Why is it important?

Net Income is an indicator of financial health and business success. By tracking it year over year, business owners can see if they are making more than they spend. It also shows what the business’ biggest expenses are. With this insight, business owners can strategically reduce expenses, such as decreasing labor and operational costs, and drive up their bottom line.

What Should My Net Income Look Like?

A great goal is to grow Net Income steadily each year. If it remains stable or declines, consider working with an eCommerce bookkeeper. They will reconcile your expenses on your behalf, and provide you with monthly financial statements so you can enjoy financial visibility and make informed decisions and strategize for growth.

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Average Revenue per User (ARPU)

What is it?

The Average Revenue per User indicates the profitability of a product or service based on the amount of Revenue generated by each user. It is commonly utilized by subscription-based companies, because they rely on active users rather than buyers of physical items.

Average Revenue per User is calculated using the formula:

ARPU = Total Revenue / Total Users.

For this metric, we will examine Fresh Plates, a hypothetical online meal prep subscription service:

Fresh Plates had 200 users and generated $20,000 in Revenue last month.

The Average Revenue per User would be: $20,000 / 200 customers = $100

Why is it important?

When customers are broken down into demographics, the ARPC ratio can be used to track trends, such as which price points are the most popular among different types of customers.

For example, a business owner may find that their long-term customers tend to choose higher-priced plans or annual contracts, while those who cancel their subscriptions quickly choose lower-priced plans. Since long-term customers are willing to pay more each month, they likely find more value in the service than low ARPC customers.

This insight shines a light on who the most profitable customers are and guides decision-making. With this knowledge, the business owner can decide to put marketing efforts toward attracting loyal, high-revenue customers that boost business growth.

Industry Benchmark. Littledata surveyed 3,580 eCommerce stores in January 2022, and found that the average ARPC was $109. An ARPC of $276 or more would place you in the top 20% of stores they assess.

Businesses can also compare their APRC to competitors to see how well they are performing in their field.

Let’s revisit the illustration from above. Last month, Fresh Plates generated an ARPC of $100. Their competitors, Clean Eats and Green Box, generated ARPC of $90 and $85, respectively. In this case, Fresh Plates has a high ARPC, and is maximizing Revenue from subscribers compared to the competition.

Be aware that this metric does not always have a normal distribution. For example, if 2 customers pay $100 dollars per month, while the remaining 500 customers pay $20 per month, the data will be significantly skewed. ARPC is one factor of financial health, and should be considered with other metrics to understand your true financial position.

Customer Lifetime Value (CLTV)

What is it?

Customer Lifetime Value (CLTV) is the total Revenue a company expects to make over the span of their relationship with a single customer.

It can be calculated using the formula:

Average Purchase Value x Average Purchase Frequency Rate x Average Customer Lifespan = Customer Lifetime Value.

For example:

Sam’s average customer lifespan is 2 years.

One customer named Jessica works at a coffee shop with casual work attire. She makes 5 purchases each year, and spends an average of $40. Jessica’s Lifetime Customer Value is: $40 (average sale) x 5 (purchases each year) x 2 years lifespan = $400

Another customer named Daniel is a lawyer, and mostly wears suits during the week. He makes 2 purchases each year, spending an average of $30. Daniel’s Lifetime Customer Value is: $30 (average sale) x 2 (purchases each year) x 2 years lifespan = $120

Of the two customers, Jessica brings in the most Revenue. Sam can use this information to target more customers like Jessica who find greater value in her products and are likely to continue making purchases for an extended period of time. She can also create a customer loyalty program to retain lower-revenue customers like Daniel and encourage them to make more purchases.

Why is it important?

CLTV pinpoints the customers that bring the most Revenue to your business. By knowing how much certain customers spend on your business over a period of time, it enables you to develop strategies that draw in customers who will spend the most on your products or services. CLTV can also be utilized to increase customer retention. By offering outstanding customer service, or even a loyalty program, businesses can retain customers for longer periods, which directly impacts Revenue.

What Should My CLTV Look Like?

According to BigCommerce, the average Customer Lifetime Value for eCommerce brands is $168. To increase your own CLTV, consider offering loyalty rewards to customers, such as discounts or points, to encourage them to continue making purchases.

Another crucial component of customer loyalty is the product return process. Shopify states that 92% of customers return to stores with a positive return experience. By investing in customer service and streamlining the return process, you can increase trust between you and your customers, and they will be more likely to continue making purchases.

Finally, be sure to up and cross sell. Persuade customers to upgrade to premium options, and promote related products on your website and eCommerce sales platform. Both of these tactics encourage customers to make larger purchases and generate more Revenue for your business.

Gross Margin by Product Type

What is it?

What is it?

Gross Margin by Product Type is the total sales Revenue of a specific product. It is expressed as a percentage, and calculated by the following formula:

Gross Margin by Product Type = (Revenue – COGS) / Revenue x 100

For example:

Let’s return to Sam’s online t-shirt store. Last year, her Revenue was $600,000 for her cat-themed t-shirts, with a total COGS of $360,000. Her Gross Margin by Product Type Cat T-shirts would be:

($600,000 – $360,000) / $600,000 x 100 = 40%

This means that she retained $0.40 from each dollar of Revenue generated by the cat-themed t-shirts.

Why is it important?

The Gross Product Margin can be used to evaluate the performance of individual products, and whether those products need to be priced higher in order to increase profitability.

What Should My Gross Margin by Product Type Look Like?

The ideal Gross Margin by Product Type will vary from business to business. Some businesses experience high Gross Product Margins, but low sales. Others have low Gross Product Margins, but high sales. You can compare your Gross Margin to others in the same industry to get an idea of how well you are performing. Consider partnering with an eCommerce bookkeeper, who will help you achieve deeper insights into your own financial data and make informed decisions for

Average Order Size

What is it?

Average Order Size tracks the average amount a customer spends each time they make a purchase.

It is calculated by the formula:

Average Order Size = Revenue / Number of Orders.

For example:

Last month, Sam’s t-shirt sales totaled $30,000, with 1,000 orders.

Her Average Order Size was: $30,000 / 1,000 = $30

Why is it important?

Average Order Size delivers insight into customer behavior, which helps business owners adjust pricing and create marketing strategies that help retain current current and draw in more high-revenue customers. For example, with this data, business owners can decide to offer product bundles, or upsell complementary items. When Average Order Size increases, so do direct Revenue and business profitability.

Industry Benchmark. eCommerce Average Order Size has significantly increased since 2020. According to Statista, in Q2 of 2021, the Average Order Size on mobile phones was $134.39, up 42% from the previous year. In order to set a standard for your company, track your monthly Average Order Size and compare it to previous periods to pinpoint opportunities for growth.

Cost of Returns

What is it?

The Cost of Returns is the total value of products that are returned to a business.

Why is it important?

The Cost of Returns shows how much money is lost whenever a product is returned. It can be used to determine what changes need to be made, whether to the product itself or to business strategy, in order to reduce returns going forward.

Industry Benchmark. According to Shopify, 10.6% of all online purchases get returned. This KPI is meant to be kept as low as possible. The first step is to understand why your customers make returns. Provide a form in which they can give a reason for the return. Some of the most common reasons are:

  • The item did not fit
  • The item did not match the website description
  • The item arrived broken or did not work
  • The item arrived too lateNext, gather and analyze the data. For example, if the top reason for returns was that the item did not fit, review how product sizes are explained on your website and make adjustments as needed. By providing customers with the clearest explanation of the product before purchase will help decrease the Cost of Returns. Finally, include customer reviews on the product page. This will help to provide the clearest possible understanding of the product and legitimize your business to new customers.

Inventory Management Costs

What is it?

Inventory Management Costs consist of all the expenses of ordering, holding, and managing inventory. They are often broken up into three categories: ordering, carrying, and stockout costs.

  • Ordering Costs consist of purchase orders, invoicing, labor costs, and transportation and processing fees.
  • Carrying Costs are the fees that businesses pay to stock inventory in warehouses and distribution centers. Carrying Costs can vary, but usually consist of storage, labor, taxes, and insurance costs.
  • Stockout Costs represent the lost income and expenses associated with an inventory shortage. For example, if a customer wants to make a purchase but the item is sold out, the business loses the Gross Margin of that sale. Stockout Costs can also be incurred if a business needs to pay a rush fee to replenish their inventory overnight.
Why is it important?

Inventory Management Costs have a direct impact on the bottom line. They can be used to determine how much inventory should be kept on hand, in order to fulfill purchases and steadily grow profitability.

Industry Benchmark. According to Zentail, annual inventory issues total at $1.75 trillion.

How can you reduce your own Inventory Management Costs?

Consider utilizing a multi-channel inventory tracking software, which will enable you to track your inventory levels, orders, and sales as cost-effectively as possible. With it, you can assess how demand changes, and purchase the right amount of inventory at the right time, which drives down Inventory Management Costs.

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