eCommerce 101: Lagging and Leading Indicators
Here at Yaguara, we build our platform for eCommerce teams across the spectrum of start-ups to established and scaling companies. And while we respect the great minds and business leaders we work with and the years of experience under their belts, sometimes everyone needs to hit the refresh button on cream-of-the-crop industry knowledge. Even someone who has voted many times in the presidential election needs to look up how the electoral college works when that November 4 year mark rolls around.
Introducing: eCommerce 101. A resource for your growing company to learn the ropes that make up data-driven decisions and forward thinking actionables. A lot of business leaders these days are skipping the 101 level of building their eCommerce company, even if they are running with the 102 and 103 levels at top of mind.
So You Want to Hit a Revenue Target?
In this first installment, we’re going to be breaking down how to hit a revenue goal by looking at a few exemplary metrics. Tracking eCom metrics is a seemingly complex concept that can be broken down into simple elements, especially when data is on your side, and if you’re utilizing it correctly and abundantly.
It’s important to note that the following metrics are heavily contingent on a time frame, because they exist in the present moment. There are hundreds of metrics to choose from when looking for insight from your data to make actionable projections, and data is always coming in, of course. We hope by breaking down these 5 foundational and broad metrics, you can understand how to make use of your data better in order to hit an actionable goal, like a revenue target.
Let’s break down the most important Key Performance Indicators (KPIs) for hitting a revenue goal in eCommerce. These consist of lagging and leading indicators.
While lagging indicators provide useful information on growth and customer retention, they are not actionable. These indicators are indicative of the past, which allows you to make educated hypotheses on future projections. Leading indicators provide insight into actionable decisions. They are made up of metrics that allow you to project future performance.
5 Lagging and Leading Indicators for Revenue Goals in eCommerce:
1. Revenue: the total amount of revenue
2. AOV: (Average Order Value) the average dollar amount spent each time a customer purchases
To find your company’s AOV, divide Revenue by Orders
3. Orders: the total amount of orders
To find your company’s order target, divide Revenue by AOV
4. Conversion Rate: the percentage of website visitors that make a purchase
5. Sessions: the total number of site visits
In this sample case, let’s imagine it is the beginning of Q4, and you want to hit a revenue goal of say, $10,000 by the end of Q4.
To hit a revenue goal, you are going to look at conversion rate and AOV. The industry standard for conversion rate falls somewhere between 2-3%. In this case, let’s imagine that the AOV is around $36.00. If we divide the revenue goal of $10,000 by the AOV of $36.00, we will find the order target of about 277 orders.
Conversion rate and AOV are the two leading indicators in this context, the “Ol-Faithful”s. By tracking them and keeping them at a constant rate, or increasing them, it will lead to an increase in revenue. To keep those 2 leading indicators constant, then you must look for an increase in Sessions. By hitting the gas on this leading indicator, you will be able to keep your other leading indicators at a constant rate.
A common misconception for DTC companies is placing all the eggs in one basket of website traffic. In a company’s first year, increasing revenue by just tracking sessions is not actionable. Revenue is actually a lagging indicator for business performance in this context. The above example serves to take a macro or broad concept of pulling the correct levers by looking at the right metrics and indicators to make informed decisions and meet your goals.
Key Takeaways
As Taylor Holiday mentions in our latest Good Company podcast episode: one of the most important things you can do as an emerging eCommerce company is pay attention to what metrics to track. The lagging and leading indicators above are the basic foundation for hitting revenue goals, but there are others more useful for alternate goal reaching.
Furthermore, building the right systems gives you visibility to that data. And then when you have visibility, you can have insights that bring you actionables. Holiday breaks it down into: crawl, walk, run.
This is where data and strategy merge together. Our philosophy at Yaguara is to enable eCommerce teams to make better data-driven decisions for their companies. We advise to be hyper-conscious about the metrics to track, pull, and push. And if the goal isn't being met, pull a different lever. If sessions are not making an increase, make an informed change and decision by recognizing patterns in your data. Put an increase on Twitter ads, or change your product price points to alter the AOV.
Understanding which metrics are lagging and leading will allow your company to scale and excel. By the end of the day, if we can’t help your problem specifically in increasing revenue, what we can do is educate and inform the correct ways to aggregate and utilize data for future projections.
Scale away, we’re right here with you.
