Many ecommerce sites have fallen into a trap, according to Jerry Marks, director of business analytics and project management at Revival Parts(opens in new tab), a vintage motorcycle parts retailer. Retailers have become overly focused on how much traffic and conversion a site gets, losing sight of what products customers actually want.
Marks advocated getting back to retail basics, saying that metrics like conversion rates(opens in new tab), traffic and customer service tickets become meaningless if you don’t have what customers want or need,” Marks said during a session at the recent SuiteWorld conference.
Marks detailed three alternative metrics that he thinks better gauge ecommerce success and influence higher ROI: Lost sales, gross return on investment and return on ad spend.
Metric #1: Lost Sales
The lost sales metric examines how much money a company is losing when it doesn’t have the right inventory in stock. To calculate this, take the average profit margin for every day the item is in stock then multiply that by the number of days the item was out of stock. Lost sales demonstrates the financial impact of a partially or fully out-of-stock item.
Stockouts are sometimes beyond the control of the purchasing team, like when supply chain disruptions cause shipping delays. However, you can take action, like following up with the vendor or recommending a comparable product on the site.
“Try to focus a little bit less on results and focus more on activity,” said Marks. “What are the things that you can have people within your organization do that can actually affect change? There are processes that can be put into place that can affect the conversion rate.”
For Marks, that meant setting up an automated daily report using Revival’s NetSuite platform. The report informed staff of exhausted inventory items, as well as their respective days out of stock. When Revival started this process, the company had about 220 items that were out of stock. Today, that number is under 20.
“In September 2021, even with all the supply chain disruptions that happened, we were just below $30,000 in lost sales. When we started in August 2019, we had over $50,000 -- sometimes even $60,000 to $70,000 -- in lost sales,” Marks said.
Businesses tend to be good at putting metrics around front-end activities, like making sure customer service agents are handling enough tickets per hour or ensuring shipping is efficient. But you should also put metrics around backend activities, like cataloging and purchasing, he said.
“When you put these metrics . . . in front of your purchasing team, there are things that they can do that influence conversion rate,” said Marks. “You're not going to convert anyone if your product is out of stock.”
Metric #2: Gross Margin Return on Investment
Gross margin return on investment, or GMROI, is one of the most important profitability metrics in retail, Marks said. It evaluates a company’s ability to turn profits on inventory. It is calculated using the following formula:
Gross Margin Return on Investment = (Annual Gross Profit / Average Inventory Cost) x 100
What constitutes a “good” GMROI will vary. However in most retail sectors, a company will need a GMROI of 300-500% Marks said. A ratio higher than 100% means the organization is selling products for more than its acquisition costs.
GMROI also gauges whether purchasing agents are achieving the tricky balance between buying too much stock and buying too little. Too much and the cost of inventory will run too high. Too little and you are prone to stock outs and a subpar customer experience.
Many times companies fail to mind this metric, Marks said, and then find that they are only achieving about 90-100% GMROI, resulting in a less profitable business model. He added:“You don’t want to buy deep. You don’t want to buy shallow. You want to buy your products at the best return on investment.”
Margin #3: Return on Ad Spend
The final metric revolves around getting a return from digital ad spend. In ecommerce, where ads on platforms like Google Shopping reign supreme, marketing campaigns that neglect tracking return on ad spend (ROAS) not only impacts the bottom line, it also doesn’t allow for fine tuning to achieve the result you actually expect.
The traditional formula for ROAS is:
Return on Ad Spend = (Revenue from Ad Campaign / Cost of Campaign)
On the surface, this formula falls into the trap of many metrics displayed on a standard marketing dashboard, according to Marks: it fails to take into account all relevant costs. For example, a company might put $400 towards a Google Ads campaign. It ends up selling 12 products for $200 each, meaning that $2,400 was earned from that initial investment of $400, a 6x return.
But Marks expressed a different way of looking at ROAS. If each product costs $100 to produce, pack and ship, he said, the actual revenue is only $1200, for a 3x return. In other words, it’s more accurate to use the contribution margin of an ad campaign(opens in new tab), which factors in variable costs like COGS (opens in new tab)and shipping, Marks said.
Return on Ad Spend = (Contribution Margin of Ad Campaign / Cost of Campaign)
“You need to be asking yourself, ‘Based on what my margins are, I need to be getting this return on ad spend,’” Marks said.
“Good” ROAS again depends on the sector, which makes keeping a close eye on ROAS is even more important. A successful campaign depends on a multitude of factors, such as profit margins, fulfillment and labor costs, typical benchmarks of an industry, average cost-per-click and the size of the business. Failure to examine ROAS in these contexts can lead to overestimating the success of the ad campaign.
Tracking this metric can also help surface incremental market and buying changes that might occur, or the impact of tweaks you make to aspects of your ad campaign, like targeted keywords.
“That's why you need to be reviewing this every week—whether it be internally or through a marketing consult—to see how your campaigns are trending,” Marks said. “When you’re constantly reviewing, as opposed to just quarterly, you can see what works and adjust for factors like seasonality.”
Reviewing those three metrics, according to Marks, becomes significantly easier with tools like the NetSuite Data Warehouse(opens in new tab), which allows companies to consolidate both NetSuite and third-party data. Custom fields, configurable metrics and KPIs, and personalized dashboards allow companies to delve into the trends behind their ecommerce operation -- and figure out how to deliver what the customer actually wants in the most profitable way.
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