Why optimize eCommerce KPIs with MMM? Part 2: Revenue metrics
September 05, 2023 | Juha Nuutinen, Paul Arpikari, Carmen Bozga
The rapidly changing digital commerce landscape demands a robust marketing strategy for businesses aiming for success. One of the main driving forces behind an effective strategy is understanding and utilizing your Key Performance Indicators (KPIs). But there's more to KPIs than just recognizing their definitions
Now that we've discussed in the first part of this series how Marketing Mix Modeling (MMM) offers solutions to the main challenges eCommerce businesses face with traditional tools, it's time to explore the integration of KPIs within the MMM framework. In this part, we will go into the specifics of Unit Economics KPIs (or Sales KPIs), focusing on essential ROI components such as "Revenue excl. VAT before and after returns," and the challenges and opportunities presented by those who opt out of analytics cookies.
These KPIs are interconnected and play critical roles in determining an e-commerce business's Return on Investment (ROI). Let's break down their interactions and their contribution to ROI:
1. Revenue incl. VAT before returns: This metric can be captured using GA, a standard CRM, or MMM. Typically, eCommerce platforms provide ready access to this data. The nuance of VAT is particularly noteworthy, as its rate can vary across countries and regions. For internationally-operating eCommerce businesses, accounting for these VAT fluctuations is indispensable.
This is the gross revenue that a business receives from sales, including the VAT. It gives a preliminary idea of the total earnings without any deductions. While this can serve as a starting point for ROI calculations, it doesn't account for other crucial factors such as returns, which can inflate the perceived profitability.
2. Revenue excl. VAT before returns: Though GA can measure this, it isn't quite straightforward. Both CRM tools and MMM can gauge this metric. To capture it accurately, data on the VAT% per country and product group over time is essential. While it may not be universally crucial, around 5% of eCommerce businesses, especially those with a B2B leaning, find this metric indispensable.
Removing the VAT component provides a clearer picture of the business's core earnings from sales. ROI calculations using this metric would be more accurate than the gross revenue, as they exclude tax components that the business doesn't retain. However, like the first metric, it doesn't account for product returns.
3. Including revenue from customers who did not accept analytics cookies: A metric growing in importance as cookies become increasingly obsolete. While GA can't track it, CRM and MMM can, provided there's a sync between CRM data and GA data. Its importance is underlined by the fact that, typically, 20-50% of orders might be missing from GA.
A missing piece in most eCommerce analytics, this metric ensures you're not undervaluing your ROI. If a significant portion of your revenue isn't being tracked due to customers blocking cookies, then your ROI calculations based on tracked data alone would be significantly understated. In a landscape moving towards greater privacy, this metric becomes even more critical.
4. Revenue excl. VAT after returns: GA falls short here, but both CRM and MMM rise to the occasion. To get an accurate figure, one must account for returned revenue, typically with a 30-day delay, sourced from CRM. The significance of this metric stems from the considerable return rate seen in some sectors, like fashion, where it can range from 20-40%.
This metric is crucial for understanding the net revenue that the business retains after factoring in product returns, minus the VAT. Considering product returns can be significant in sectors like fashion, this metric provides a much more realistic baseline for ROI calculations. ROI determined from this metric is a true reflection of business performance, as it accounts for both taxes and returns.
Sales KPIs: Impact on ROI
In eCommerce, the nuances between different unit economics KPIs can significantly shape a brand's understanding of its ROI. The interplay among these metrics is intricate and demands meticulous attention for accurate measurement and interpretation.
From Gross to Net: The transition from 'Revenue incl. VAT before returns' to 'Revenue excl. VAT after returns' is more than just a move from a gross to a net revenue perspective. It provides a clearer picture of the actual income once all the externalities like VAT and returns are accounted for. By distinguishing these two, businesses get a clearer insight into their profit margins, which are pivotal for ROI calculations.
Uncovering the Hidden Revenue: Not all customers accept analytics cookies, and their data remains untracked in most standard analytics platforms. But this 'hidden' segment could hold a significant portion of the revenue. Recognizing and accounting for this revenue from customers who didn't accept analytics cookies can adjust ROI metrics, sometimes substantially.
Strategic Decision-making Through Metrics: By analyzing these metrics collectively, brands can pinpoint inefficiencies or opportunities in their operations. A discernible gap between 'Revenue incl. VAT before returns' and 'Revenue excl. VAT after returns' might signal potential issues like product quality concerns or misalignment in product descriptions, leading to returns. Addressing these matters not only enhances customer satisfaction but also optimizes ROI.
Holistic Understanding for Better ROI: To truly comprehend ROI, brands need to integrate various costs – the expenses linked to returns, the diverse VAT rates across regions, and the revenue from the segment not tracked by analytics. By doing so, they achieve a comprehensive understanding of how their investments convert to tangible returns, allowing for more informed decision-making.
To visualize the interactions and impacts on ROI, consider the table below:
So, can marketing optimization trully be done with limited marketing measurement?
Diving into the digital realm, it's easy to be lulled into a sense of security by the abundance of data we're privy to. Tools like Google Analytics and native insights from platforms like Shopify give us an immediate glimpse into our performance. However, is this snapshot enough? Is looking at immediate conversions and user behavior on these platforms an adequate representation of your marketing effectiveness?
Frankly, it's not.
While freemium platforms and social platform insights provide an initial peek into user behavior, they only reveal the tip of the iceberg. They often miss out on crucial pieces of the puzzle, especially when you're aiming for a holistic view of your marketing strategies.
Firstly, these tools are inherently siloed. Google Analytics, for instance, might tell you about website traffic and on-site behavior, but it doesn't always effectively map out the entirety of a customer's journey or touchpoints. Social platform insights may showcase engagement metrics, but they don't necessarily translate directly to tangible business results or provide a comprehensive ROI picture.
Secondly, traditional marketing measuring tools are reactive rather than proactive. They're great at telling you what happened but not so good at suggesting what should happen next. For a brand seeking to evolve, adapt, and grow in an ever-competitive market, this reactive stance can be a hindrance.
Unlike these isolated tools, MMM is designed to give a panoramic view of your marketing efforts. It's not just about looking at what's working, but also understanding why it's working and how different strategies interplay to influence results. With MMM, eCommerce brands can go beyond the basics, weaving together a cohesive and comprehensive strategy that fills in the gaps left by traditional tools.
So, when confronted with the question, "Are we doing right things in marketing?" – if your answer is solely grounded in the insights from traditional tools, it might be time to rethink. MMM isn't just another tool; it's a philosophy, one that takes you beyond the superficial layers and delves deep into the core of marketing effectiveness, ensuring that every decision made is data-driven, precise, and geared for long-term success.
- Don’t settle for easy metrics that free tools can provide.
- Go beyond ROAS and revenue with your marketing KPIs
- Focus on Revenue KPIs that will take into account customer behaviour and “cookie decliners”
The subtle interplays between these metrics not only reveal the actual financial health of a business but also offer critical insights into operational efficiencies and areas of improvement. As brands strive for growth in an increasingly competitive digital landscape, harnessing the power of these KPIs, backed by tools like MMM, becomes indispensable. In essence, for businesses to truly thrive, they must move beyond surface-level metrics and dive deep into the comprehensive data that these KPIs provide, ensuring that every decision made is rooted in clarity and strategic insight.
In the next article will focus on KPIs that will take you from doing rights things towards profitability.
Check out Part 3: Profitability
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