EDITOR’S NOTE: Many of our blog posts address “big picture” issues, such as ensuring a successful eCommerce launch, selecting an eCommerce solution, or integrating your CMS with an eCommerce solution. But it’s always fun to change things up and look at issues from new perspectives. There are lots of people here at ten24 who are responsible for making the magic happen every day. From time to time, we’re going to hand them the mic and ask them to talk about the issues that are near and dear to them. Everyone in this company has unique talents, strengths, and insights – we hope you’ll enjoy learning a little more about the topics that our team members are so passionate about.
Today’s post is based on a discussion we had with Todd Hatcher, Application Developer.
If you’re running a product-based eCommerce website, it’s so easy to get wrapped up in day-to-day activities like answering customer inquiries, filling orders, and staying on top of inventory. But step back and look at the bigger picture for a moment: Just about everything you do is tied to your website. Do you often wonder how your site stacks up to the competition? What kinds of tweaks can you make to your site to gain a competitive edge and be more successful? Knowing and understanding three key metrics of eCommerce – your average order value, conversion rate, and lifetime customer value – can go a long way toward helping you ensure that your site is everything you want it to be. Here’s a closer look at each metric, along with some ideas for enhancing each one.
1. Average Order Value
As Hatcher explains, determining your average order value is nothing more than simple math. “Start with a basic time period, like the past year or the past quarter,” he suggests. “Now look at your total revenue over that period and divide it by the total number of orders you received. That’s your average order value.” Obviously, the higher the number, the more dollars you’re making per visit or customer.
The same people aren’t necessarily visiting your website day after day. And when they are visiting, they’re not always purchasing something every single time. They may just be window-shopping or doing price comparisons. Your job, therefore, is to maximize the revenue per order, so that you can have a higher average order value. Here are some great ways to do that:
Use product bundling. Go through your product catalog and take a close look at what you have. Instead of simply selling piece-wise (which results in lower overall revenue), group several complementary products together and offer them as a bundle. For example, instead of selling customers a single bottle of perfume only, create a bundle that includes the perfume along with shower gel, body scrub, and body lotion, in the same fragrance. Explain to visitors how the products in the bundle work better together, and then make it easy to get that purchase by having your eCommerce platform enabled for one-click ordering (instead of making your customers place each item in the bundle into their shopping cart individually).
Encourage cross-selling and upselling. Every time someone visits your site and makes a purchase, you should be thinking about what else that person can add to their cart. Let’s say a customer has just selected a book by a top-selling mystery author. Your eCommerce site could then prompt the visitor with a message that says, “Customers who bought books by Author A have also purchased books by Author B.” The idea here is to make suggestions and plant seeds for additional sales opportunities that the customer might not immediately think of.
Offer promotions and discounts. There are plenty of special deals you can come up with that will encourage people to spend more and thus increase your average order value. You could offer a discount that rewards customers who hit a predetermined spending target on their order. Or you could create attractive volume discounts that people receive when they buy multiple units of one product (selecting that five-pack of water filtration cartridges, for instance, instead of just a single cartridge).
Understanding and increasing your average order value becomes even more important when it’s tied to paid advertising. Imagine you’re selling your widget online for $100 each and someone else is selling a different widget for $10 each on another site. It stands to reason that you are probably going to have vastly different average order values. If both of you are paying the same rate for online advertising, then your higher average order value means you’re getting more bang with your advertising buck. (And the person with the $10 item will have to sell many more widgets to justify that same cost of advertising.)
2. Conversion Rate
“In terms of eCommerce, ‘conversion rate’ means orders,” says Hatcher. “Many people are surprised to learn that the average conversion rate for eCommerce is usually in the 1.5 – 2.5% range. In other words, for every 100 people who visit your site, only about 1½ - 2½ people will actually end up placing an order.” But what if you could bump that rate up a little, or even double it to 4%? The following things can help:
Have a professional-looking site. Having a polished website is a huge contributor to your conversion rate. This alone can influence people to go from just visiting to purchasing.
Offer good content. Posting useful, relevant, and interesting content to your website warms people up and adds value. It’s an especially great way to build rapport with a cold customer.
Include product listings, details, and reviews. If your website has nothing more than a price list when it comes to your products, then you can take huge steps to boost your conversion rate. Romance your products and tell their stories so that people can learn about them before taking the next step and committing to a purchase. Describe your products thoroughly and include all of the important details. Then address specific questions. What do the products do for the customer? What kinds of problems do they solve? How are they different or special? Finally, remember to harness the power of “social proof” – reviews that include what other people are saying about your products. “This is particularly important if you’re selling a high-dollar item,” Hatcher notes. “People are more likely to purchase a product that has lots of reviews, as opposed to an item with no reviews at all.”
Maximize convenience. Making it easy for people to shop with you improves your conversion rate. You can start by streamlining your ordering process. How? Avoid distractions and disruptions like annoying pop-ups. Integrate payment options (such as PayPal or Amazon Pay) so that visitors don’t need to stop and create a new payment account with you during the checkout process.
Minimize cart abandonment. According to Hatcher, anywhere from 65% to 75% of eCommerce website visitors end up abandoning their shopping carts, meaning they never complete their purchase. Anything you can do to address this will pay huge dividends. So in addition to getting rid of pop-ups and making it easier to pay, why not reduce the number of steps in your checkout process? The more steps you have, the more places there are where people can drop off and abandon their carts.
Depending on the eCommerce platform you’re using, you can put analytics in place that will let you pinpoint exactly where people are dropping off in the checkout cycle. You can see how many visits someone makes to your site before placing an order. You can even implement a cart abandonment recovery strategy, by configuring your eCommerce platform to send automated emails to people that will remind them there’s something in their shopping carts and prompt them to complete their purchase. The emails can contain a link that will take people back to the checkout step they were last on.
One of the major contributors to cart abandonment is when people see a shipping charge. To remedy this, take a look at your order numbers and the total shipping charges that your customers pay over a given period. Now calculate your average shipping price and work that average into the price of your products so there’s no longer a separate shipping charge. “Minimizing card abandonment and raising your conversion rate has a lot to do with psychology,” Hatcher says. “It’s all about providing a positive experience.”
As with average order value, having a higher conversion rate impacts your paid advertising spend. Imagine you’re spending X amount per ad and only 2% of the people who see that ad are ordering something from you. But what if you could double that conversion rate to 4%? Your cost of advertising per visitor just got a lot more effective. (And conversely, if you want to justify an increase in your advertising budget, having a higher conversion rate gives you a pretty compelling argument for it.)
3. Lifetime Customer Value
Being successful in eCommerce requires striking a fine balance between acquiring new customers and keeping the ones you already have. Knowing your lifetime customer value lets you see exactly how much value your customers are bringing to your business. Calculating this number involves knowing your average order value, conversion rate, and reorder rate (at the end of this blog post we’ve included a link that explains the math in more detail).
If you don’t think lifetime customer value is important, think again: Look at Amazon. It has enormous lifetime customer value. Can you name anybody who’s only ever placed a single order from Amazon and then never placed another one again? You may not be the world’s biggest online retailer, but you can still take concrete steps to increase your lifetime customer value, boost your profitability, and advertise more economically. Here’s how.
Focus on customer retention and repeat orders. Do you belong to one of the many meal-prep subscription clubs out there? These companies do a terrific job of building loyalty with existing customers, encouraging repeat orders, and rewarding referrals. After you’ve bought a certain number of meal boxes from them, they typically provide you with email codes that you can share with family and friends. When people use your referral codes and sign up for the service, they get a generous discount on their first meal box and you get a thank-you discount for sending the company new customers (who will, in turn, earn email codes that they can share with their own social network). It’s a win-win. You can do similar things on your own site, and a customizable eCommerce platform will enable you to track and report on your efforts so that you can see what’s working and what isn’t.
Harness the power of email. We already mentioned in the meal box example that email is a powerful tool for retaining customers and attracting new ones. Of course, you can also use social media tools like paid ads on Facebook, as well as Google ads. The humble email, however, is still the single most cost-effective referral tool out there. Which brings up the next tip…
Minimize your customer acquisition costs. As noted earlier, it’s critical to keep getting reorders from your existing customers, but you always need to be bringing in new ones. Using cost-effective referral programs, particularly ones that are email-based, will control the per-customer cost of attracting new business. If you’re doing a good job of keeping those costs to a minimum, then that helps you keep an eye on your marketing budget and your bottom line. And that means you can make more informed decisions about where you advertise, how you do it, and how much you can afford to spend.
Suggested Resources for Further Reading
Interested in learning more about some of the metrics and topics discussed in this blog post? Here are some good places to start.
What do you think about the three eCommerce metrics we’ve addressed here? Are there others that you’d like us to discuss in future blog posts? Get in touch and let us know!