Methods of Measuring Ecommerce Financial Performance

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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The days of salivating about market share for most ecommerce businesses are mostly over. Looking at performance through the lens of attracting visitors is somewhat more meaningful: visitors can become customers; customers make online purchases; and purchases typically yield profits. Measuring financial results, not just marketing triumphs, can be crucial to understanding how and why your business is succeeding or floundering.

The building blocks of profitability are multifaceted. You can measure and analyze financial information pertinent to all aspects of your ecommerce business, but sifting through key performance indicators daily can be overwhelming. Stay on top of big-picture numbers and periodically dig into the nuances of what drives sales and profits.

Overview of financial performance

1. Profit per Employee

How much is your business making per employee? This number will reveal profitability and efficiency. Presumably, your online business is very efficient as an online storefront can produce sales 24/7/365 with vastly fewer resources than traditional counterparts.

Compare profit per employee of your ecommerce segment with offline divisions. Though revenue per employee may be higher, you might find that profits are not comparably strong because of ecommerce-specific costs. Spending may be lower for selling costs but notably higher for customer service, order fulfillment, and shipping.

Monitor this number as you grow your business. Make sure that marketing initiatives, site redesigns, product additions, and expansion of service offerings boost revenue and the bottom line.

2. Average Dollar Sale per Transaction

Tracking the average dollar sale per transaction can show how well the ecommerce business is managing and deepening its customer relationships. This number will typically increase when customers are presented with appropriate product recommendations based on keyword searches, items in the shopping cart, past purchases, and profile preferences.

The effectiveness of the website's navigation and product filtering tools can also be revealed. Customers are more likely to add items to their shopping carts when they can easily find what they want. A depth of product offerings is helpful but providing the tools to locate products is essential to driving average dollar sale per transaction.

3. Same-Channel Sales

Chart sales and sales growth (or declines) by channel. That is, look at sales generated directly from your website; storefronts associated with eBay, Amazon, and Yahoo; and other sources, such as sister websites or affiliate programs. Figure out whether new channels are generating incremental business or possibly taking away business from your main website.

Adding channels often boosts revenue. There are generally limits to the number of channel possibilities so that the option of adding new storefronts year after year is unlikely. By reviewing this measure of financial performance, you can evaluate whether sales increases are occurring through valuable but unsustainable channel expansion or sustainable, organic growth.

Detailed financial information to discover sales and profit drivers

Study financial performance in key categories. See what is working and what is not working by noting trends, comparing numbers within categories, and looking at actual results versus budgeted goals.

• Sales by category and item. Know your highest-volume product categories and best-selling items so that you can expand popular categories and find ways to replicate top-selling successes.
   
• Product margins. Calculate profit margins on individual products and product categories. Do a basic calculation: sales price minus purchase cost; or consider sales price less all costs incurred in bringing items to the marketplace and then to customers, including product development, regulatory approvals, quality assurance testing, keyword purchases, and shipping charges. Use this information to make decisions for setting retail prices and negotiating costs with vendors.
   
• Shipping. Small-package shipping is often one of the largest expenses of an ecommerce business. Keep track of expenses associated with shipping products to your customers as well as shipping and handling fees collected from customers. Your business can continue to offer deals on shipping but you will want to understand how these offers affect profits.
   
• Cost of customer acquisition. Consider expenses associated with landing new customers, such as costs of marketing campaigns and special offers. Divide these expenses with the number of new customers to determine how much it costs to acquire a customer.
   
• Sales per customer. Get a rough measure of customer loyalty by analyzing sales per customer. Note trends to determine whether your business is deepening relationships.
   
• Inventory turns. A standard calculation for inventory turns or turnover: cost of goods sold divided by average inventory. The faster your company can move its inventory, replenish inventory, and sell more inventory, the better. Some slow-moving items can be hugely profitable, but make sure that the inventory carrying costs (expenses to acquire and store these items) outweigh margins.
   
• Returns. Notice the volume of returns and pinpoint specific categories or items that tend to be returned. Analyze and address the reasons for these returns, which may vary from imprecise product descriptions on your website to inaccurate sizing provided by a manufacturer.

Financial performance is ultimately measured by your profit and loss statement. Look at what influences profits to set strategy and take actions that will elevate your results.