You’ve built your e-commerce platform, based on research and solid business and marketing plans, but how do you know how you’re progressing? Most people would assume that if you’ve got money in the bank from your hard efforts, they’ve been a success. While that is a good first sign, it doesn’t always indicate longer term results.
To build an e-commerce business is no easy task, so you want to be able to measure whether you’ve got a good foundation before looking at options to scale your business (which we will discuss in our next articles in the series).
To help, we’ve expanded on some key performance indicators below, including:
- Website performance
- Advertising engagement, and
- Financial statement metrics.
Analysing the performance of your business’s website will go a long way to measuring its success. You can find information on your website’s performance and audience behaviour in Google Analytics or via your website provider. Performance metrics for website traffic includes:
- Number of new visitors and returning visitors
- conversion rate of visits (i.e., do they make a purchase when they’re on your website)
- bounce rate (do they land on the website and then proceed no further)
- referral traffic
- click through rate
- page views, and
- average time spent on your site (or specific landing pages).
All this website performance jargon is probably a little confusing. But these are terms that you will need to understand as an e-commerce business owner. These metrics will help you understand whether your website is engaging your target customers and what their buying behaviour comprises.
If the statistics are not positive, then it is important to review your advertising performance. To Use a cliché accounting term, you want to ensure you’re getting return on investment of your advertising spend. Like with website traffic, the channels you advertise on, including Google, social media platforms and other third-party providers, will provide you with a snapshot of your performance. The items you want to monitor are:
- Impressions – or the number of times your advertising or content is presented to someone, whether via third-party advertising, search results (Google ad words) or social platforms.
- Reach – how many people is your content reaching. For example, the total number of social media followers or number of subscribers to your email database.
- Engagement – this metric indicates how people are interacting with your ad or content. For example, social media engagement is generally the sum of likes, comments and shares. Newsletter engagement is measured by opens and clicked links.
Despite performing well against these metrics, they may not actually lead to a sale. However, they demonstrate that visitors are engaging with your e-commerce business which means they’re already considering your products or services.
Financial statement metrics
As mentioned, the first key indicator of success is having cash in the bank (or currency in your crypto wallet if you’re that way inclined!). However, this could also be deceiving – how? If you’ve got money, you must be going okay, right? Wrong!
Firstly, if you invested money into the business to start with, you need to make sure that the cash you have is in excess of that amount. Secondly, have you paid for all your expenses at that point in time? Identifying future cash outflows can be tricky. It’s crucial when starting a new business to have a really good handle on what tax expenses you are likely to incur, and to make sure you have allowed for these accordingly.
For example, if a business is registered for GST, it is likely that some of the cash sitting in your business’s bank account relates to a future tax obligation, and it doesn’t represent profit that you have made.
Assuming you have recouped the money you invested, you’ve covered all the expenses, you’ve set aside your tax liability, and you still have money left in the bank, this is a fantastic sign. It is important however to continually review the financial metrics of your business, using some sort of software, i.e., Xero, MYOB, Intuit, Quickbooks etc. for insights into how you are operating.
A few important metrics we run through with clients are as follows:
- Gross Profit – this is strictly income less the cost of sales. For example, the variable expenses that fluctuate directly in relation to the number of sales you make. It shows you the profit margin you’re making on your products/services. This metric is a good one, but unfortunately a lot of clients come unstuck because while they make a good margin on their product/service, they have significant overheads that are not covered by their profits.In line with the gross profit analysis, an important exercise to go through after you’ve launched and are making sales, is to assess whether your price point is appropriate to cover the expenses that you may not have considered at the outset. For example, with an e-commerce platform, you might have to incur significant costs for the website or store, and these should be covered first to ensure your profitability and ongoing success.
- Net Profit – This is your gross profit less operating expenses which include things like rent, professional fees, electricity, telephone, interest on loans, etc.
- How much can you afford as the owner to pay yourself? In many circumstances, business owners in the startup phase are the last ones to get paid, as they are working hard on their passion to build their business before considering an income for themselves. But this isn’t sustainable. It is vitally important to assess how much your business can afford to pay you and whether this aligns with the income that you need to fund your lifestyle and living expenses (another one that sometimes trips people up as they withdraw more from their business than they can afford).
If you have considered all of these items, you have done a fantastic job at launching your e-commerce business. Even if you haven’t, there is still time and there are a lot of factors that come into play when building a successful business. It may not be a failure if it doesn’t succeed at first. You just need to do more research and analysis!
These are just a few examples of how to measure your success and progress. If you would like more advice in this area, please contact a William Buck Advisor.