You can’t manage what you don’t measure. This is especially true in today’s competitive ecommerce environment. A key performance indicator (KPI) is a metric used to evaluate factors that are critical to the success of a business. There are four critical KPIs every online seller should closely follow to build a flourishing ecommerce business.
Here are the brief descriptions of each KPI:
- Gross Profit: Gross profit is the difference between the revenue generated by sales and all related costs, most importantly, the cost of goods sold (COGS). When calculating the gross profit, all discounts and transaction related fees must be subtracted from the revenue. Examples are channel/marketplace fees such as the one applied by Amazon and shipping costs (or Amazon FBA fees).
- When looking at the gross profit, it is also important to calculate the gross profit margin, which is the ratio of the gross profit to net sales.
- Return-on-Investment (ROI): ROI is a metric which shows how much return you have made from your investment in an item, category or in general. It is calculated by dividing the gross profit to the cost of goods sold. ROI is shown in percentages and can be calculated for any period of time. We suggest that you look at it at least on a monthly basis and over each item, category and supplier.
- Some sellers choose to include other costs, such as item preparation and packaging, into ROI because these are also expenses incurred before the item has a chance to sell.
- The higher the ROI the better the investment. Therefore, in general, you would want to favor items with higher ROI, as long as you can sell adequate quantity fast enough. This is where the following two KPIs come into play.