Despite the endless possibilities of today and the transformative impact of e-commerce on the retail industry, many e-commerce companies still rely on superficial metrics to gauge their progress and performance. This misguided approach exposes them to significant risks of failure. In this blog post, I delve into vanity metrics and shed light on why they fall short in portraying a comprehensive picture of a company's success in the e-commerce arena.
And hopefully, I inspire someone out there to roll up their sleeves and focus on what truly matters, heeding the wise words of the legendary John Doerr: "measure what matters" before it's too late.
What are vanity metrics in e-commerce?
Vanity metrics are high-level metrics that give a false sense of understanding about what truly drives the important metrics for a business. When it comes to an e-commerce company, profitability, cash flow, and customer base are the real game-changers. However, tracking these metrics on a granular and daily basis has historically been quite challenging. That's where other metrics come into play, allowing businesses to optimize their daily efforts. In the world of e-commerce, I dare say that traffic and revenue are prime examples of vanity metrics. While more and more e-commerce companies are moving away from optimizing solely for these metrics, the majority remains fixated on what was considered standard two decades ago.
Are there more Vanity Metrics within e-commerce?
Metrics such as conversion rate, traffic, average order value, and revenue are all examples of vanity metrics that, if they're not combined with something more, they do not provide a clear picture of long-term success for an e-commerce business. Many might argue against this statement. I'm happy to prove you wrong. Keep on reading...
One of the biggest issues with using revenue growth as your guiding star is the short-sited focus on "top-line growth", rather than profitable, i.e., sustainable, growth. In this case, I define Sustainable Growth when you grow your Net Gross Profit 3 over time. Meaning Profit after returns, COGS, logistics, fulfillment, and marketing spend. That does not necessarily mean that you are profitable as a company, but you at least get out more money from your daily commercial activities than you put in, i.e., you have money left to pay salaries and other indirect costs.
So let's paint a clear picture of why, for example, conversion rate is a Vanity Metric:
Would you say that 4% conversion rate on a e-commerce site selling clothes are good or bad? What if I had a case with one business having a 4% conversion rate and the other having 2% - I might argue that when you measure what truly matters in e-commerce, you might prefer the company with 2%. Why?
Case 1
100,000 visits
4% Conversion Rate
= 4,000 orders
AOV: 800€
= 4,800,000€
Case 2
100,000 visits
2% Conversion Rate
= 2,000 orders
AOV: 950€
= 1,900,000 €
At first glance, Case 1 feels more attractive. Both revenue and amount of orders are much higher than in Case 2. But what if we had the possibility to look at our profitability data? The cases might have looked like this:
Case 1
Revenue: 4,800,000€
Gross margin 1 = 45%
Gross margin 2 (after all direct cost like shipping, transaction, fulfillment cost etc) = 25%
Gross margin 3 (after all the cost above and including marketing) = 5%
= 240,000 € in Gross Profit 3
Case 2
Revenue: 1,900,000 €
Gross margin 1 = 50%
Gross margin 2 (after all direct cost like shipping, transaction cost etc) = 35%
Gross margin 3 (after all the cost above and including marketing) = 17%
= 323,000 in Gross Profit 3
Now, the actual profits in the second case are way higher, and most likely, you are also building a more sustainable business long-term, since you acquire, or retain customers with much higher profitability levels.
So, even if you track the number of orders in this case, I would also consider that a “vanity metric” if you don't look at in the right context and enrich those orders with profit data. In the example above, you can see that the case with half of the orders is better for your business. But I understand why companies keep measuring their daily success based on vanity metrics - it's because they don't have the accurate metrics updated in real time.
That was also the reason I founded Dema in 2022. E-commerce businesses need control of all their data to get this right.
Focusing on the right metrics is even more essential in today's increasingly competitive e-commerce industry. The days are over when you could quickly raise investments on revenue growth and promise that "we can shift to profitability when we want to." Metrics such as Net Gross Profit 3, Customer Lifetime Value, repeat order rate, and customer satisfaction are far more essential than metrics like conversion rates. Companies that don't track and optimize for these metrics daily and are stuck on vanity metrics will soon be run over by competitors who control their short and long-term profitable growth.
Conclusion:
The e-commerce landscape demands an evolved perspective beyond traditional vanity metrics like traffic, revenue, and conversion rate. While these metrics may seem appealing on the surface, they provide a deceptive sense of understanding and fall short of painting the complete picture of a business's health and long-term sustainability. It's time businesses reevaluate their guiding metrics and focus more on parameters that truly depict profitability, such as Net Gross Profit 3, Customer Lifetime Value, repeat order rate, and customer satisfaction. E-commerce companies that neglect to track and optimize against these metrics risk being outpaced by their more data-savvy competitors. This paradigm shift in metric optimization could be the difference between simply staying afloat and realizing substantial, sustainable, and growth.