E-commerce and marketing are highly competitive fields. To ensure a suitable revenue businesses must have a strategic edge over their competitors. Companies must set realistic goals and have a measurable way to monitor their progress.
Key Performance Indicators (KPIs) are these measurable values that allow you to compare the current state of your business against a standard scale. Through KPIs, you can know whether you are reaching your goals or not.
What Are KPIs?
KPIs are data-based measurements used to evaluate a business’s progress. These analytics provide helpful insight into your business’s health and growth. The software helps prioritize goals, make decisions, and minimize risks.
The importance of KPIs is evident in an organization’s decision-making and management. Decision-makers in large organizations need analytical data to set strategic goals for the company.
Even when considering multiple opinions, the recommendation must be supported by proper analysis of the available data, which allows them to make accurate predictions for future outcomes.
Choosing The Right KPIs For Your Business
When assigning KPIs to various departments, you must understand the relevant department’s work. Since there are many different types of KPIs, you must efficiently allocate them to monitor growth.
They come in a wide range, with separate functions for each department in your business.
For example, the KPIs for accounting will be different from sales and SEO KPIs.
A business can also use a kpi tracker to overview the progress of specific products, activities, and campaigns in which your business is involved. Every KPI can not be applied to every business, but some play an essential role in every company. Here these KPIs are explained.
1. Gross Revenue
The gross revenue of your business is crucial in identifying improvements you can make to boost the average revenue your company generates. The formula for calculating Gross revenue is as follows:
Gross Revenue = Number of Customers x Conversion Rate x Average Order Value
After looking at the factors involved in revenue generation, it is easy to identify where you can improve. You can invest the least in the conversion rate and take minimal risk to increase your revenue. You can calculate the conversion rate by using this formula:
Conversion Rate = (Number of sales in a Month) / (Number of Visitors in the same Month)
After successfully increasing your revenue, you can use the money generated to improve other business operations to expand your company further.
2. Gross Profit
Many people ignore the gross profit produced by a business and instead only focus on the gross revenue. The truth is that the gross profit is equally important, just like the gross revenue. You can calculate the gross profit made by your business by using the following formula:
Gross Profit = Gross Revenue – Cost of goods sold
It is important to note that apart from the Cost of your merchandise, many other factors affect the gross profit, like supplies, wages, rent, and shipping costs. However, the main goal of increasing your gross profit is to reduce the cost of goods you acquire and increase your conversion rate. Another vital metric to keep in mind is the Gross Profit Margin which is as follows.
Gross Profit Margin = [ Gross Profit / Gross Revenue ] x 100
Gross profit margin shows the percentage of revenue remaining after cutting production costs. It tells you the amount of profit generated per dollar of revenue collected.
3. Sales Volume By Location
Sales volume is an essential KPI for your sales department. Suppose you sell your product in multiple locations or via different methods such as in-stores and online. In that case, you must evaluate the total sales made at each location to identify the demand for your product.
After identifying the places where your product is low in demand, you can allocate more marketing budget to that site to try and improve your sales. These results will also help you decide where to take certain risks, such as customizing some products and launching newer ones.
If the sales made at both locations are roughly the same, you can also use them for A/B testing. A/B testing means having a discount sale or giving coupons at one site and keeping the other location the same. Once you re-evaluate the total sales at each site, you can decide whether an idea is suitable for your business based on the results.
4. Inventory Turnover
A vital finance and inventory KPI is inventory turnover. The Inventory turnover metric tells you the average balance of your inventory sold in a year. You can calculate the inventory turnover with the following formula:
Inventory Turnover = (Cost of Goods Sold) / (Average inventory balance for the time)
If your inventory turnover is too low, it suggests that your business is buying more than it needs, or your sales are weak. A high inventory turnover indicates that either your sales are too strong or you must improve your inventory capacity to sustain higher possible sales.
You can prevent over-expenditure or generate more profit by making the correct decisions with the inventory turnover metric.
KPIs like gross revenue, gross profit, sales volume, and inventory turnovers are crucial in monitoring the health of your business. As your business grows, you will need more metrics to evaluate its progress.
It is helpful to always look for other analytics that can be shared and discussed with your team. This practice will help you set well-defined goals and keep track of your progress with minimal risk. As a result, you can optimize business operations and expand your company further.