For the past 10 years, the rapid growth of ecommerce has masked a lot of poor online retailing.  Many online retailers have watched sales grow without needing to do anything clever.  But times are changing, growth has slowed, online has become much more competitive and retailers are focused increasingly on driving profit.   In this new environment, tracking the right measures of success moves from being a “nice to have” to fundamental to online success.

The challenge is that no-one can agree on the right KPIs. For example, many online retailers:

• Treat conversion rate and average order value (AOV) as KPIs. These are useful in context but miss the point that a “free delivery over £x” offer increases AOV and conversion but often at the cost of profitability. 
• Look to web analytics for all KPIs.  Analytics are great for forensic analysis of a website but include no relationship to profit, inventory or the end-to-end customer experience.
• Focus on over-generalised averages that miss, for example, the distribution of customer service response times to emails. 

The ecommerce industry is still at an early stage of its evolution so the definitive list of KPIs is yet to be set in stone.  Based on my 15 years in the industry, I believe that the following four are a good starting point.

1. Gross trading profit = gross profit less marketing, promotional costs, and delivery costs / revenue.

The key to growing an online business profitably is to understand the trade-off between order volume and profit per order. Online retailers have lots of levers to pull – increasing marketing spend, running promotions, flexing free delivery thresholds as well as the traditional retail toolbox of prices and promotions.   The challenge is that flexing these levers independently gives no insight into their overall impact on profit.    

2. Lost trading profit - profit due to lack of product availability, declined or cancelled orders, or fraud.

Good mail order retailers measure lost demand.  When a customer calls to place an order for a sold out item, this is captured. Online retailers have many ways to lose demand between order and net sales – cancellations, declined orders, fraud, returns or lack of availability - yet measure few.  Understanding lost profit is critical for a retailer to decide whether to focus on optimising profit or reducing lost profit.

3. Gross margin return on inventory.

All sophisticated retailers monitor stock turn and sell-through as key measures of inventory efficiency.  The online world has further subtleties.  Increasingly, retailers work with a number of drop-ship or just-in-time suppliers and can make more subtle trade-offs of inventory vs. profit.   Return on inventory exposes where best to hold stock in the supply chain.

4. Customer experience score – a compound metric measuring overall customer experience, including customer delivery to promise, customer service to promise, and Net Promoter Score.

The delayed gratification that is a feature of all online retailers selling physical goods means that monitoring customer satisfaction becomes critical.  One component of this is “delivery on promise” which systematically measures the distribution of orders that arrive before, after or as promised.  It is staggering how few retailers actually track it.  As retailers increasingly rely on drop-ship vendors or just-in-time suppliers, delivery on promise becomes ever more important.

Growing an online business necessitates a command of the data.  And there is a lot of it. Retailers applying traditional retail metrics online will at best sub-optimise, and at worst risk being outmanoeuvred by more sophisticated competitors.