What is a customer engagement score?

A customer engagement score is a metric that quantifies how actively a customer interacts with a company’s products, services, or communications. This score can be based on factors like frequency of purchases, email open rates, time spent on a website, or social media interactions. The higher the score, the more engaged the customer is with the brand.

Why is customer engagement score important?

For ecommerce businesses, a customer engagement score helps identify highly engaged customers who are more likely to make repeat purchases or renew subscriptions. It also helps companies detect disengaged customers at risk of churning, allowing them to implement targeted retention strategies. For customers, engagement often correlates with satisfaction, so measuring and responding to engagement scores can lead to improved user experiences and product offerings.

What is product margin?

Product margin refers to the profit margin of a specific product. It is used to determine the markup of a particular product, which can help businesses identify which of their products are bringing in the most revenue proportionally compared to their production costs (including cost of goods sold, administrative costs, and other operating expenses). 

Profit margin formula & definition

Product margin is distinct from profit margin, another key measure of a company’s financial health. Profit margin represents business profitability in terms of the percentage of sales that has generated into profits. There are four main types of profit margin: gross profit margin (also referred to as gross margin), which factors out the cost of goods sold; operating profit margin (also referred to as EBIT, or earnings before interest and taxes, margin), which factors out selling, general, and administrative expenses; pretax profit margin; and net profit margin (also referred to as net margin), which is calculated by dividing net profits by net sales.

What is net revenue retention (NRR)?

Net revenue retention (NRR; also referred to as net dollar retention) refers to the percentage of recurring revenue generated and retained by a business from its existing customers over a set period of time. This includes expansion revenue, such as upsells and cross-sells. Typically, it is calculated on an annual or monthly basis. Along with monthly recurring revenue (MRR), customer lifetime value (LTV), average order value (AOV), and customer churn, net revenue retention rate is a key performance indicator for businesses that are fueled by recurring revenue (e.g. those following the SaaS business model, as well as curated subscription boxes and more). To calculate net revenue retention, divide the recurring revenue (including expansion) generated at the end of a period by the recurring revenue at the start of that same period.

NRR vs gross revenue retention, customer retention & revenue churn

Net revenue retention is distinct from gross revenue retention, as the latter measures revenue that is retained from a business’s existing customer base over a set period without factoring in revenue expansion. It is also distinct from customer retention, which tracks the retention of a business’s existing customers, rather than how much they spend. However, both are important metrics to track when it comes to determining customer success and satisfaction with your business and products. Revenue churn, meanwhile, represents the total revenue lost by a business due to customers canceling.

What is checkout conversion rate?

Checkout conversion rate is an ecommerce metric that refers to the percentage of shoppers who begin the checkout process, then complete it, over a given period of time. This differs from checkout abandonment rate and shopping cart abandonment rate, which each calculate the percentage of customers who do not complete a purchase. By monitoring their checkout page conversion rates over time, an online store can monitor for patterns and inconsistencies. In this way, they can gain a deeper understanding about what aspects of the checkout process are resonating with their customers and which might be worth optimizing.

Strategies for increasing checkout conversions 

In order to improve checkout conversion rates, it’s important to understand checkout abandonment rates, as well. Understanding why customers abandon the checkout process can help merchants understand the most effective parts of their checkout process. In general, it’s important to focus on simplifying and streamlining the checkout process. For example, having a single-page checkout process may increase conversions for certain types of purchases, particularly if a brand’s average order value (AOV) is low. Offering free shipping can also be a helpful strategy for those who sell physical products; if this is not possible, it’s important to clearly communicate shipping costs. Finally, it’s also important to make the checkout stage of the shopping experience as flexible as possible—for example, accepting a variety of different payment options.

What is checkout abandonment rate?

Checkout abandonment rate refers to the percentage of shoppers who begin the checkout process, but do not complete it, over a given time period. High checkout abandonment rates can indicate issues with the checkout flow, including unexpected shipping costs or an overly-complicated checkout process for online shoppers. 

To avoid checkout abandonment, online retailers should first establish a baseline for their business, determining their average checkout abandonment rate. From there, they can identify unique customer groups and compare the behavior of each against the larger company benchmark. It can also be useful to study patterns in customers’ behavior, identifying common traits of different groups who abandon the checkout page. The business can then channel those learnings into strategic actions to turn these lost sales into completed purchases.

Shopping cart abandonment vs checkout abandonment 

Shopping cart abandonment rate and checkout abandonment rate are very similar but distinct metrics when it comes to shopping online. In shopping cart abandonment, customers add products or services to their online shopping carts, but may not necessarily reach the final checkout page before they abandon the shopping process. In other words, digital shopping cart abandonment statistics provide a window into pain points in an earlier point in the shopping process. To know which metrics to track and pivot their strategies effectively, it’s important for brands to identify the point at which their customers are abandoning the shopping process.

What is net promoter score?

Net promoter score (NPS) is a customer experience metric for gauging customer loyalty and customer satisfaction. NPS is tracked by a variety of business types, from internet service providers to financial services, and can even be used to assess the satisfaction of employees at a company. Typically, net promoter scores are determined through single-question customer feedback surveys that ask how likely an individual would be (on a scale of 1–10) to recommend a business’s products or services to a colleague or friend. 

NPS categories

Customers who respond with an NPS score of 0–6 are referred to as “detractors”—unhappy customers who may pose a risk to the business through negative word of mouth. Customers who respond with a score of 7–8 are known as “passives,” indicating that they may be at higher risk of leaving the business for competitive offerings. Customers who respond with a score of 9 or 10 are known as “promoters”—a business’s most satisfied, enthusiastic, and loyal customers who may be more likely than others to refer new customers.

To calculate net promoter score, a business should subtract their percentage of detractors from the percentage of promoters.

Monitoring net promoter score

The net promoter score system is a valuable tool for measuring customer loyalty, which can ultimately be used to help predict business growth and improve customer retention rates. NPS surveys can be used at a variety of different stages of the customer journey, depending on a business’s unique goals. By using segmentation to separate the most enthusiastic customers from the least enthusiastic ones, businesses can gain a deeper understanding of the way that they are perceived by various groups within their target audience, then pivot their strategies more effectively.

What is GMV (gross merchandise value)?

GMV (gross merchandise value; also referred to as gross merchandise volume) is a metric that represents the total monetary value of all goods and services sold by a merchant in a given period. Typically, GMV is measured on a quarterly or annual basis. One simple formula to calculate gross merchandise value or gross revenue for an online store is to multiply the sales price charged to customers by the amount of merchandise sold.

GMV vs net sales

Because GMV does not account for accrued expenses like marketing and advertising costs, this metric alone will not give a complete picture of the health of an ecommerce store, its net sales, or its net income. For more accurate insights into a business’s performance, GMV should always be considered alongside other key metrics, such as customer acquisition cost, customer lifetime value, net merchandise value, and churn rate.

What is CAC (customer acquisition cost)?

CAC (customer acquisition cost) measures the amount of money a company spends to earn the business of a customer. The money spent by businesses to acquire new customers typically involves marketing, advertising, and sales costs, but can also include support costs, production expenses, and more. CAC is calculated by dividing the total amount of money a business spends acquiring new customers by the number of customers acquired. 

Comparing CAC to LTV

CAC is a key business metric for both companies and their investors. However, rather than being taken at face value, CAC should always be considered in context with other metrics for a holistic sense of a company’s health. One important metric that is important to track in tandem with CAC is customer lifetime value (LTV). This is particularly crucial for subscription businesses, who have the opportunity to maintain recurring relationships with their customers over a longer period of time.

What is the LTV/CAC ratio?

The LTV/CAC ratio compares a company’s customer lifetime value (LTV) to its average customer acquisition cost (CAC). To break each term down a bit further, lifetime value is the average dollar amount a person spends with a business over the course of their customer lifetime. Meanwhile, CAC indicates the amount of money a business spends to acquire customers on average—this includes sales and marketing costs and other expenses. If a company’s marketing and sales expenses and other acquisition costs are greater than its average customer lifetime value, the business cannot be viable. 

Subscription businesses & the LTV:CAC ratio 

Calculating and monitoring the average lifetime value to customer acquisition cost ratio is particularly important for SaaS companies and other subscription businesses, as they rely on lasting customer relationships to fuel their recurring revenue stream. As markets become increasingly competitive and the average cost of acquiring new customers continues to rise, a focus on customer loyalty has become more important than ever. Other important subscription metrics to track include churn rate, average monthly revenue, average annual recurring revenue, and average order value.

What is customer acquisition cost?

Customer acquisition cost (CAC) is an important business metric that measures the amount a company spends (typically referring to sales and marketing costs) to acquire customers. Examples of these sales and marketing expenses include the salaries of members of your sales team, your budget for social media marketing, additional professional services used for marketing campaigns, and more. Tracking CAC can help businesses optimize their sales and marketing efforts and discover the most cost-effective channels for converting potential customers into new customers. To calculate CAC, divide the amount of money spent on acquiring customers within a specific time period by the number of customers acquired in that same time period. 

Contextualizing CAC with other metrics

Customer acquisition costs should always be considered in relation to other metrics, such as customer lifetime value (LTV), customer churn rate, and customer retention rate, to provide accurate insights into the overall health of a business. In order for a business to be viable, the costs incurred by a company to acquire customers cannot exceed the amount that the average customer spends with the company over their customer lifetime.

What is ROAS (return on advertising spend)?

ROAS (return on advertising spend, or return on ad spend) measures the amount of revenue generated by a company for each dollar spent on marketing and advertising efforts. It can be used to assess whether or not the overall digital marketing strategy of an ecommerce business is yielding results, or can be used on a micro level to measure effectiveness of a particular ad campaign. To calculate ROAS for your business, divide the revenue generated from your ads by your total advertising costs.

Why is it important to track return on ad spend?

A high ROAS can be an indicator that a particular advertising campaign or marketing campaign is yielding positive results for a company. However, this marketing metric alone is not enough to assess a company’s profitability. Rather, ROAS should be considered in combination with other factors, such as profit margins and average customer lifetime value, for a holistic understanding of a company’s financial health. This means that every business is different when it comes to target ROAS goals. Also crucial is that businesses track their ROAS for different ad campaigns over time so they can measure trends in data, identify outliers, and continually hone their strategy for future advertising campaigns.

What is take rate? Take rate & gross merchandise volume 

Take rate has multiple meanings within the ecommerce industry. It can refer to fees that third-party sellers or service providers (for example, payment services providers like PayPal) and online marketplaces (for example, Amazon or eBay) collect on their transactions. Here, take rate plays a key role in calculating revenue, as total revenue is calculated by multiplying take rate by gross merchandising volume. In increasing take rate, these sellers charge greater final value fees. However, doing this can leave sellers vulnerable to competing marketplace services who are looking to lure cost-sensitive users to their service.

Payment services providers typically take a cut of transactions as part of their service to transfer funds. For example, if a customer purchases an item for $10, using a payment services company to complete the transaction, and the payment services company charges a $1 fee, this would be a take rate of 10%. In certain situations, a provider’s take rate will depend on the payment method that is used—for example, personal payments funded with a bank account versus paid with a credit card or debit card.

Other meanings of take rate: visitor-to-lead conversion rate

In another sense, take rate refers to the number of users that complete a certain action—also known as visitor-to-lead conversion rate. For example, food delivery or meal kit subscription services might compare the take rates of different meals, or the percentage of subscribers who purchased a particular meal within a specified period of time out of the total number of subscribers who purchased any meal in that period. In this case, accurately forecasting take rate can play a crucial role in inventory management and net revenue forecasting, as well as increasing average order value (AOV), testing the viability of new products, and more.