How to Use a Metrics Hierarchy to Drive Ecommerce Success

When running an ecommerce business, data isn't just a byproduct—it's a crucial asset. However, with a plethora of metrics available, it's easy to get overwhelmed or focus on the wrong numbers. To navigate this sea of data effectively, implementing a metrics hierarchy can provide clarity and direction. This approach allows you to gain a clear snapshot of your business performance and dig deeper to optimize your strategies.

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Understanding the Metrics Hierarchy

Think of your ecommerce metrics as layers of insight, each building upon the previous one to form a comprehensive understanding of your business health. At the top of this hierarchy are the overarching metrics that offer a quick read on overall profitability. As you delve deeper, you'll uncover more granular data that can inform specific actions.

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Top-Level Metrics: The Big Picture

Contribution Margin sits at the pinnacle of the metrics hierarchy. Unlike revenue or sales figures, the contribution margin accounts for variable costs like advertising spend, providing a more accurate reflection of profitability. It answers the crucial question: Are we actually making money after accounting for the costs directly associated with generating sales?

Using contribution margin as your primary profitability metric offers several advantages:

• Accuracy: It includes variable costs, giving a true picture of profitability.
• Comparability: It allows for fair comparisons over different periods, accounting for fluctuations in expenses like ad spend.
• Actionability: It highlights the actual profit contributing to covering fixed costs and generating net income.

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Mid-Level Metrics: Components of Profitability

Once you have a grasp of your contribution margin, it's time to peel back the layers and examine the components that influence this top-level metric. These mid-level metrics include:

• Return on Ad Spend (ROAS): Measures the effectiveness of your advertising campaigns.
• Conversion Rate: Indicates the percentage of visitors who make a purchase.
• Average Order Value (AOV): Represents the average amount spent each time a customer places an order.
• Customer Acquisition Cost (CAC): The cost associated with acquiring a new customer.
• Churn Rate: The rate at which customers stop doing business with you.
• Customer Lifetime Value (LTV): The total revenue you can expect from a customer over the duration of your relationship.

These metrics help you understand:

• Efficiency: How effectively you're converting interest into sales.
• Customer Value: How much customers are worth over time.
• Cost Management: How much you're spending to acquire and retain customers.

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Granular Metrics: Deep Diving for Insights

If you notice trends or anomalies in your mid-level metrics, it's time to dive even deeper. For instance, suppose you observe a stagnation or decline in your AOV. You can analyze:

• Traffic Sources: Identify which channels are driving high or low-value orders.
• Landing Pages: Assess how different landing pages influence purchase amounts.
• Target Audiences: Examine demographic or psychographic segments for spending patterns.
• Devices: Compare performance between mobile, desktop, and tablet users.

By conducting this granular analysis and comparing different segments against a metric, you might discover, for example, that mobile users have a lower AOV compared to desktop users. This insight can prompt actions like optimizing the mobile shopping experience or offering mobile-specific promotions.

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Tailoring Metrics to Roles Within Your Business

Different roles within your organization will find value in different layers of the metrics hierarchy:

• CEO/Executive Leadership: Focus on top-level metrics like contribution margin to understand overall profitability and business health.
• CMO/Marketing Managers: Pay attention to mid-level metrics such as ROAS, conversion rate, and CAC to guide marketing strategies.
• Executional Team Members: Dive into granular metrics to implement specific tactics, like A/B testing or UX improvements.

By aligning metrics with roles, you ensure that everyone has the data they need to make informed decisions without getting lost in unnecessary details.

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Turning Data into Action

Collecting data is only half the battle; the real value lies in translating that data into actionable strategies. Here's how to make your metrics work for you:

1. Identify Trends: Regularly monitor your metrics to spot positive or negative trends early.
2. Formulate Hypotheses: When you notice a change, hypothesize potential causes. For example, a drop in conversion rate might be due to a recent website redesign.
3. Test and Learn: Use tools like A/B testing, heatmapping, and session recordings to validate your hypotheses.
4. Implement Changes: Based on your findings, make data-driven adjustments to your strategies.
5. Measure Impact: After implementing changes, continue to monitor your metrics to assess the impact.

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Case Study: Addressing a Decline in AOV

Let's revisit the earlier example of a declining AOV. Here's how you might tackle it:

• Analyze Data: Break down AOV by device and discover that mobile users have a significantly lower AOV.
• Investigate User Experience: Use session recordings to observe mobile user behavior.
• Identify Barriers: Find that the mobile checkout process is cumbersome, causing users to abandon higher-value carts.
• AB Test Solutions: Streamline the mobile checkout process and introduce mobile-friendly payment options. AB Test these to gain a solid reading on if the changes are really making a positive impact.
• Execute Changes: After validating fixes/improvements with testing, implement the changes that worked and continue to track AOV to ensure the improvement among mobile users is locked in.

Metrics are not static; they fluctuate due to internal actions and external factors. By maintaining a well-structured metrics hierarchy and ensuring that the right people are engaged with the appropriate data, you create an environment of continuous improvement.

• Regular Reviews: Schedule periodic reviews of your key metrics at all levels.
• Collaborative Analysis: Encourage cross-department collaboration to gain diverse insights.
• Stay Agile: Be prepared to adjust your strategies in response to data-driven findings.

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By understanding and leveraging the different layers of metrics, you empower your teams and organization to make informed decisions that drive profitability and growth.