September 27th, 2018
Key Metrics DTC Brands Need To Be Measuring
Direct to consumer success is ultimately measured by revenue and profit. But, if you aren’t measuring smaller indicators along the way, you’ll never know what’s driving revenue and how to improve.
We’ve put this blog together to help you get started measuring the essentials. From average order value (AOV) to cost per acquisition (CPA), here are the metrics you need to know—and how to calculate them—to make sense of your financials and to keep your company moving forward.
AOV tracks the average dollar amount spent each time a customer places an order, whether that’s on your website or a marketplace.
AOV = Total Revenue/Number of Orders
Why should you care? AOV is a key indicator of what your potential customer habits look like. While many sellers spend their time focusing on increasing traffic to the website, focusing your attention on increasing your AOV can have a more direct effect on margins.
To improve your AOV, there are a few things to focus on:
- Add a free-shipping threshold that’s just above your AOV. For instance, if your average order is $45, set your free shipping threshold to $50 so the consumer adds one more product to their cart.
- Offer discounts for adding more items to the cart. Think 5% off at $50, 10% off at $100, and more.
- Bundle your products. Or consider cross-selling by including suggested product add-ons.
- Gift With Purchase. Similar to discounting at certain basket thresholds, you could also offer a free gift after the consumer meets a threshold level.
CR measures the percentage of people who performed some desired action on your website. Most of the time that desired action is placing an order, but you can also measure newsletter signups, preorders, survey completions, add to carts all via a conversion rate.
CR = Number of Conversions/Number of Sessions
You’re probably paying a lot of money getting visitors to your website, and you will want to ensure that your spend is in creating a positive ROI. Looking at conversion rate by different sources of traffic to your website can help you prioritize where you spend those marketing dollars.
Here’s how you can improve your CR:
- Run multiple A/B tests with your marketing, website, or product design. The only way to learn what works is to continue trying new things.
- Update your value propositions. Take a look at your competitors, find out what makes you different, and make that message clear. Don’t be clever—be transparent.
- Build pathways from what your customer wants to what you want. If your customer is looking to build a subway tile kitchen and you sell subway tile, create the steps your potential customers need to take to get from point A to point B with sales, videos, free reports, newsletters, and more.
- Provide an excellent customer experience. Positive reviews, fast shipping, and friendly return policies will make potential buyers feel comfortable purchasing your products directly from you.
We all know you’re losing money when your visitors don’t go ahead with a checkout after spending time on your website, which is why cart abandonment rate is such an important metric for DTC companies.
Cart Abandonment Rate = 1- total number of complete purchases / total number of shopping carts created
Why do people abandon their shopping cart? In 2017, the highest percentage of US shoppers abandoned their carts due to high shipping rates (54%). The next largest groups quit for a number of reasons: they were only browsing (40%), no free shipping (39%), and they were only researching (38%). What can you do about these figures? You can answer the problems specifically, such as lowering your shipping fees or eliminating them completely, or if those aren’t an option, you can try these tactics:
- Show stock availability to create urgency. It’s only natural—people don’t want to miss out on what they’re interested in. It’s also a great way to turn “browsers” and “researchers” into buyers.
- Get rid of your shopping cart delete button. Instead of letting people completely remove an item from their cart, have them redirect their unwanted products into a wishlist. It’s a more positive way to continue people through the checkout process, even if they aren’t buying as much. Plus, it gives them an opportunity to come back for the product later through email marketing.
- Automate your abandoned cart emails. Want to save time and make money? Set up automatic emails to your abandoned cart shoppers reminding them what’s on their wish list. Of the 45% of cart abandoned emails that are opened, 50% of them receive click-throughs, and 50% of those click-throughs turn into purchasers. Those are great odds.
As a manufacturer, you should already know how to calculate Gross Margin, however, you need to reframe your mind around what “good” looks like for a DTC Gross Margin. Since you are selling direct to consumers, you are achieving a higher revenue number relative to your cost of goods sold (COGS). This means a higher gross margin % compared to your B2B channels. Great! Right?
Gross Margin = (Revenue – Costs of Goods Sold)/ Revenue
Contribution Margin = (Revenue – Variable Costs)/ Revenue
Maybe. Gross Margin can be misleading in a DTC business. While it is important to keep track of, Contribution Margin is a far better measure of profitability. Contribution Margin accounts for variable costs like shipping, marketplace fees, payment processing fees, and fulfillment which are much higher as a percent of sales in a DTC business then a B2B business.
- Understand your new variable costs. Make sure you have a good understanding of how shipping and other new variable costs are affecting your profitability.
- Allocate inventory based on contribution margin. If you are inventory constrained, allocate inventory to the channels that have the highest contribution margin. This will ensure you are getting the most return on your stock.
CPA is an eCommerce term that stands for the cost it takes to get one paying customer from a campaign or channel. It’s vital to measure processes because while many metrics are indicators of success, CPA is a direct financial measure of how effective your marketing campaigns are on your bottom line. There’s no interpretation at all: If the CPA number is too high, then you know you need to get more bang for your buck.
CPA = Total Campaign Cost / Conversions
The right CPA looks different from business to business—there’s no one foolproof benchmark for everyone. But there are a few strategic ways to improve your CPA across the board, including:
- Eliminate no-sale zones. Don’t ship to Europe? Don’t even consider that market in your audience targeting.
- Identify high value customer segments. You can look for trends in the data to see when and where your highest value customers are purchasing. Sell mainly to businesses? Then you probably should focus on advertising during weekdays, and advertise on LinkedIn more then Facebook.
- Get mobile friendly, or don’t pay for mobile ads. Is your customer able to navigate your offerings easily on a mobile device? If the answer is no, there’s no need to spend money on mobile ads.
These metrics show you actionable ways to measure your success. Do you have questions about these metrics and how to improve them? We’re happy to help. Get in touch today.