Average Unit Retail and Other eCommerce KPIs You Should Know

If you've followed my blogs at all, you know that gross margin is always my first “go-to” metric for eCommerce businesses. It'll always be the place I start in order to see how a store is performing.

If you understand gross margin and are looking to dive a bit deeper, there are a few more eCommerce KPIs (key performance indicators) to keep an eye on.

In this article, I'll share information on three more, including the insights they provide and the standards you should be trying to achieve.

Inventory Days

Inventory days looks at how well you convert your inventory into sales. Here's how you calculate it:

Inventory Days = Inventory x Month Length in Days / Total Cost of Sales

This is an important number to watch because if the number is high, it's a sign that you have too much cash tied up in inventory that's not moving, therefore reducing the cash available for other business needs. If the number is too low, it likely means that you're in danger of running out of stock (and would benefit from using RestockPro!). As with all metrics, watch this number month by month to determine your sweet spot.

When we start working with our clients, we aim for 60 days as a generic number until we can determine the best metric for you (note that this metric assumes you're using accrual or modified cash accounting). Below is an example of the inventory days metric that we supply as part of our SmartStatement reports.

We also like to monitor the relationship between cash and inventory, which you can see in the graph as well. As we work with clients to implement Profit First, we want their inventory bank account to grow while they're selling. Ideally, it will increase as their stock decreases. As they reorder, the relationship brings the numbers closer together.

Media Efficiency Ratio

The media efficiency ratio reports how well your advertising dollars are working for you. This is the formula:

Media Efficiency Ratio (MER) = Total Revenue for the Period / Total Ad Spend

Unlike some of the other eCommerce KPIs out there, it doesn't really speak to a campaign or product's specific performance. This is more of a big-picture number. However, I've had many clients send me glowing reports from their ad agencies about how well their ads were performing, only to have their financial statements show that the dollars going out for advertising were significantly larger than any increase in sales.

Start here and look month by month. This number varies widely, so I won't give you a benchmark. The best practice is to monitor your performance, perhaps with a funnel graph like the one below that we provide in our SmartStatements. This will give you an easy way to see how your income relates to your gross margin and how much of that margin is going out for advertising and operating expenses.

In the example below, you can see that ad spend and operating expenses are so high in the early months of the graph that they were dipping into the negatives on several occasions.

Once you understand your macro numbers, you can start to dig in and understand the performance at a product level. One product can often be the source of the issue. Be sure that you're watching those inventory days numbers, too. You want to ensure that you slow down or stop ads on products that are low or out of stock.

Over the past few years, ad spend has increased significantly, and other costs have also gone up. Understanding these numbers will help you see the corresponding impact that they must have on your pricing.

Average Unit Retail

Average unit retail is the average selling price of a product. This is one of the more sophisticated eCommerce KPIs that will help you compare sales across different channels and compare products to each other. This is the average unit retail formula:

Average Unit Retail (AUR) = Total Sales Dollars / Number of Items Sold

As with all the other metrics, this one is best observed over time to understand the trends for your products and your business. This metric can help you plan your pricing and marketing, inventory buys, supplier relationships, and channel performance.

There are many tools available to help you monitor product-level performance. Many of these tools perform various functions such as tracking inventory, generating listings on Amazon, and providing general income statement-type reports. However, they have one limitation that can have a big impact on your business performance: they're not accounting systems and aren't reconciled back to financial activity that's validated through statements generated outside of the business.

Let me explain this more. In an accounting system, you have both an income statement, also called a profit and loss, and a balance sheet. The balance sheet accounts, such as bank accounts, credit card accounts, and loans, are all validated back to statements generated by the bank or lending company. With this type of reconciliation, you can have more confidence in your numbers.

With the tools that generate the product-level profitability information, there is typically no balance sheet and the numbers added in for costs are not reconciled. To avoid this type of problem, make sure that your revenue and cost numbers used in your accounting system are also tied to the numbers reported by the tool. They may not always generate the exact same numbers, but they should be close.

In Short: Stay on Top of Your eCommerce KPIs

Your eCommerce KPIs are clearly important for smart business management. Start with one key metric, your gross margin. Since inventory and advertising are likely two of your biggest expenses, add one or both of them to the mix next. As you gain confidence in your understanding of your numbers, then you can jump into the average unit retail and take another look at the product's performance.

If your eCommerce business isn't where you'd like it to be, check out my book or online course. You can also see if any of our eCommerce accounting and profit advising services will meet your needs!