Analytics for Ecommerce Beginners
You will be learning about many analytics indicators in this guide, but if you’re beginning your journey as an ecommerce entrepreneur, this is where you should start.
As a beginner in ecommerce, your top priority should be to achieve Product/Market Fit, which is an indication that you are providing real value to your current customers (we’re going to breakdown Product/Market Fit in detail shortly). Your focus should be on getting this right. Nothing else matters.
You are only ready to scale once you have achieved Product/Market Fit. “Scale” means investing time and money in marketing to grow sales and make a profit. Scaling prematurely is a very dangerous practice, one that can lead to losses and even bankruptcy.
One of our ecommerce clients (I work at Compass, the #1 Rated Reporting App on Shopify), for example, saw that their number of visitors was growing well and that their first customers were really enjoying their products. They viewed this as a sign that they were ready to start scaling growth. So they launched a massive increase in advertising spending.
But they didn’t pay enough attention to other metrics, such as Bounce Rates and Returning Visitors (more on these below), which indicated that they were not as well positioned for growth as they thought.
Because their landing pages, overall design and navigation still needed work, the cost for acquiring each customer became too expensive, which resulted in big losses. To correct it, they had to scale back down, look closely at the right metrics, and improve hem. Then they started investing in marketing again.
The stage in your company’s evolution where you pursue Product/Market Fit is called the Validation Phase, because it is where you validate if you have a store with the qualities to safely start scaling.
In essence, a store that has achieved Product/Market Fit is one that offers a successful solution to a customer's problem or unmet need. If the product truly fits the market, people are willing to exchange money for it. Moreover, Product/Market Fit stores have:
- Products that their customers really like
- A great shopping experience, so customers come back to the store over and over again
- A big enough customer base so that they can scale growth around it
You now must be wondering how will you know if your store satisfies any of the above criteria. If you’re buying into the idea of analytics and data-driven decisions, you won’t be happy with such vague terms as “products customer really like.” You need concrete data.
The good news is there are five metrics you can objectively follow to make sure that your store fits the criteria, avoid the problems faced by the example above and know when you are to scale. They are:
- Customer Lifetime Value (LTV): Lifetime value is how you will profit from your average customer during the time they remain a customer. For example, if your average client comes back to your store three times to buy something, spends on average $100 per purchase and your profit margin is 10% ($10), their LTV is $30. This is important because LTV is directly linked to profitability, since a company with high LTV will be able to spend more to attract customers and will have a higher margin. Read more about LTV here. Compass calculates your LTV instantly, in your Revenue Report.
- Returning Visitors: The percentage of users who return to your site after their first visit. It’s a clear indication that people liked what they saw. According to Compass’ studies, a good ratio of returning visitors to new visitors is above 20%.
- Time on site: The average amount of time users spend on your site per visit. It depends on the product (as we saw in chapter 1), but in general, spending time on a website shows that people have a good experience. According to our analysis, a good average time on site is above 120 seconds.
- Pages per visit: The average number of pages that users navigate on your site in a single visit. A high number of pages per visit (around 4) indicates that people are interested in what you are selling.
- Bounce rate: The percentage of users who visit a single page on your website and then leave before taking any action. A high bounce rate (usually above 57%) means that your site is not giving a good first impression. High bounce rate was the primary cause of the losses in the example above, and it’s especially harmful when you’re investing in advertising. A user may bounce because of poor design, unmet expectations, or slow page loading time.
Aside from LTV, which you need to calculate yourself, the metrics above can be easily accessed via your Google Analytics. They appear on the first page of your Google Analytics, as soon as you login:
While Google Analytics will give you the absolute numbers, Compass will compare these numbers with the average of your peers and indicate if they are performing well enough to scale or if they still need work (e.g. fix high bounce rates).
If any metrics are below average, try putting yourself in the shoes of your customer, brainstorm ideas on what can be improved, and test solutions until you see those numbers improving.
It also helps to talk to customers. They may provide insights that you otherwise couldn’t see.
When all of the above metrics are looking good, you can move on the next phase of your company’s evolution, the Efficiency Phase.