It’s easy to lose track of which metrics really matter to your business, with many analytics platforms presenting a large variety of metrics that leave most people in a state of analysis paralysis. Knowing which key performance indicators to track for your website, not only saves you time when analyzing data, it also gives you the keys to understanding where your business is going and what is needed to realize your business goals.
The goal of this article is to give you a clear idea of how to identify these KPI’s. It is more focused on making you think critically about your business and understanding how to formulate relevant KPI’s, more than presenting a readymade copy paste solution.
What are KPI’s?
Key performance indicators are metrics used to measure performance of activities,
in fact any activity that can be quantified can be meassured via KPI’s. With
emphasis on “key” as those activities that you desire to measure have to be key
to development. In business terms this could be used to keep track of a key
aspect of your business such as transactions, number of visits, return on ad
Macro Conversions and Micro Conversions
All metrics can essentially be split into two categories, macro or micro conversions. It’s usually much easier to understand these concepts if they are viewed in light of a customer journey.
The savviest businesses, in digital marketing, track multiple micro conversions on their websites, ranging from signups to newsletters, downloading whitepapers or registering for webinars. All these conversions have mainly two things in common:
- They are not directly generating any revenue
- They facilitate future revenue generating conversions
Macro conversions on the other hand, are directly revenue generating conversions. Think of them as the ultimate goal of your website, to convert users into customers.
Many companies unfortunately treat micro conversions like KPI’s, which should be avoided. Obviously, there’s nothing wrong with measuring these metrics to understand how users are interacting with your website. Working on improving these metrics can also potentially increase your chances of converting more users in the future. Just keep in mind, that these are secondary metrics, because whether someone spends more or less time on your website, is much less important than how your sales are doing. “Visitors are important — no visitors, no sales — but they aren’t as important as sales. There are many metrics that aren’t key to the business, so we need to pay less attention to those.” – Jared Spool.
The metrics you should care about
So now that we have set the stage for KPI’s, let’s now take a look at some of the KPI’s that I consider as being most critical for online businesses to track.
It’s important to note, that you shouldn’t only rely on the metrics that are mentioned, here in this post, to meassure performance. Rather what you should do is have them as top-level meassurement metrics that give you an overall sense of performance and then surround them with supporting metrics, that are able to give a deeper view into how things are going.
First up, is conversion rate. This one is probably one of my favorite metrics to track. It can be used for tracking a variety of different interations and objectives. So if you are wondering how good you are at convincing users into purchasing from you or signing up to a newsletter, well this is where you should be looking.
Conversion rate is defined as the percentage of visitors who complete a conversion action, whether that be purchasing a product, downloading an e-book or signing up to a newsletter. I like to call it, a litmus test of your persuasive skills. CR is also at the root of CRO (conversion rate optimization) which in itself is a vast topic area, that I will be covering extensively in future posts.
A key benefit of tracking CR as a KPI, is that it allows you to measure the performance of non-revenue generating actions like newsletter signups or whitepaper downloads.
Customer Acquisition Cost
In order to convert people, you first need to acquire traffic, ie. get users on to your site. There are variety of ways you can do this but for most websites this will involve paying for traffic, either via ads through advertisement platforms like Facebook and Google or maybe paying for influencers through via blogs, vlogs and Instagram, to name a few.
Once the traffic, that you have spent your hard-earned money on, starts converting on your site, the next step is to find out how much each channel is costing you per conversion. This will effectively provide you with an objective starting point, to start assessing the merits of each channel, in terms of value generated versus costs incurred. At this point you will probably be ahead of a large portion of your competition, that are mindlessly pouring more and more resources into overly expensive channels.
I’ve made this example to give you a quick and easy example into how you can go about calculating CAC. So supposing your monthly expenditure and acquired leads per month, on each channel, looks like this:
- Facebook: $1.500 – 25 leads
- Google Ads: $2.250 – 12 leads
- Referrals: $500 – 17 leads
Then after doing some simple math we come up with the following acquisition costs per. channel:
- Facebook: $60 per lead
- Google Ads: $188 per lead
- Referrals/Influencer Marketing: $29 per lead
As you can see here in this example, we find Google Ads as clearly having the highest cost per acquisition, in fact 6 times as expensive as the cheapest channel, in this case being referrals/influencer marketing.
Interestingly this example shows us, that not only are we getting more leads from referrals, but we are also getting those leads at a significantly lower price. Wow such an amazing thing to discover, imagine we didn’t know this, and decided to pull the plug on referrals because someone told us it was a bad idea. Instead of doing that, we can now choose to allocate more resources to referrals, to try and scale them even more. Maybe even go out and look for new ones, because apparently, we are getting much higher quality traffic from this one source. What I would also do in this case, is I would dive even deeper into Analytics reports looking at things like, what landing pages users are landing on within each channel, because it might not even be a channel issue but in fact a UX issue within each channel inhibiting the conversion from taking place. But let’s leave that for a future post on, how to find conversion optimization opportunities via Analytics reports.
An important rule of thumb, when looking into CAC is: The initial cost per customer should be less than the profit made once they’re converted (or be lower than LTV if you know it). – Lindy Tolbert (Link)
Getting this information requires that you have properly setup your Analytics tool, making sure the right data is being collected, which can be a tedious process (link). But once you’re done with that, it enables you to extract valuable information that can really move your business further.
Customer Lifetime Value
Having gone through the cost side of customer acquisition, lets now turn our attention to the value side, because these two go hand-in-hand and I’ll try to show you why this is true.
But first, what is customer lifetime value (CLV), how do we go about measuring it and why is it even important?
CLV is defined as a prognostication of the net profit contributed to the whole future relationship with a customer. Meaning the expected value generated from the entire customer relationship. If for instance a customer signs up for a Netflix subscription and pays $7 per month for a total lifetime subscription period of 12 months. Assuming this subscriber never comes back after those 12 months, this would result in a CLV of $7 x 12 = $84. Compare that to a subscriber who only stays for 2 months ($14) or 6 months ($42). The point here is that customers do not provide you equal value, and the sooner you are able to predict who is a high LTV customer, the better.
Unfortunately calculating CLV is never as easy as this example might suggest, and only 42% of companies are able to measure it for a variety of reasons. The most obvious of which being, the fact that we are not able to know exactly how long a customer relationship will last. It could easily be the case, that this customer chose to resume the subscription in the future, which would then increase the CLV.
Luckily there are ways to determine this using predictive models. According to Peter Fader, Professor of Marketing at The Wharton School, the challenges in determining CLV of a new customer stem from the absence of historical transaction data, but those challenges can be, somewhat, mitigated by looking into the nature of the acquisition process i.e. the channel, campaign and info about the first transaction (item purchased, price paid, any discounts applied etc.) “Using this information, you would be able to assess customers acquired with these characteristics and come up with a decent “guesstimate” about the CLV of new customers that share these same characteristics.” – Peter Fader
But building a predictive model using all these variables, is not all that simple. Most businesses simply lack the technological infrastructure and technical competencies to be able to create these models. Not everyone has an in-house data scientist, who is able to collect data from different sources, organize it and apply mathematical formulas.
Luckily there are tools that can help with this – like Kissmetrics – simplifying the process for small businesses that don’t necessarily have the resources to perform this on their own. Obviously, this comes with its own set of limitations, but I believe it is much better to get started with an imperfect model, then not get started at all.
Understanding where value is being created is a critical aspect of running, not just an online business, but any business. Being an online business though provides us with an even bigger opportunity to truly dig into your business data to ensure the right decisions are being made at each step.
This starts with differentiating between micro and macro conversions and knowing the role each one plays within the overall customer journey.
Next step is identifying key performance indicators by looking at the most critical metrics for the growth and success of your business. In this article, we have identified the following KPI’s as being the most impactful for growth:
- Conversion Rate
- Customer Acquisition Cost
- Customer Lifetime Value
Each one plays an important role in diagnosing the health of your business along with identifying potential pitfalls as well as growth opportunities.