October 25, 2022
Adam Hoeksema
There are as many online marketplace metrics as there are businesses. From vanity statistics to indicators of fiscal turmoil, it might be hard to know which ones to pay attention to. Even understanding which metrics are most useful can still leave you with questions about how to use them or how to merge them into actionable KPIs.
To help you along, we’ve picked out four useful metrics to track to get a feel for your company’s financial future. The details are down to you, but the formulae are simple enough, and once you get these down, you’ll be a lot closer to painting a picture of your long-term profitability and potential for growth.
We’re going to get into some examples and go over why it’s so important to track them. First up though, let’s take a look at the difference between a metric and a KPI, and how one can lead to the other.
Marketplace KPIs vs Marketplace Metrics
There’s a lot of overlap in terminology when it comes to metrics and KPIs. And for good reason. KPIs are metrics, and some metrics are KPIs. Yet, they are distinct terms with their own usages. Here’s how they differ and why you should be tracking both.
Metrics are a measure of the health of a company. These are any measurements that can help paint a picture of the state of the company but aren’t necessarily solely or significantly responsible for its success. Metrics come in every shape and form and can be categorized under several different focuses. For example, the number of followers your social media pages have is unlikely to translate to anything meaningful in terms of business success but works well as a vanity metric – something to make you feel good!
Then, more complex metrics may build the foundation for some of your KPIs, like the cost of acquiring a customer. This can be used to form a bigger picture, as we’ll see shortly. While they work together towards business health, none of these should be taken alone as a key indicator, as they may not paint the full picture. That’s where KPIs come in.
Key Performance Indicators, or KPIs, are a subset of metrics that relate to the performance of the business. These are metrics that are significant contributors to the goals or objectives of a company, and therefore are drivers of company success. Of course, these metrics will shift, depending on the company goals, so what may be a KPI for one company may not be for another, yet may be a useful metric to follow to determine other aspects of company health.
Marketplace KPIs may be calculated using several metrics, but they can all generally be relied upon for a fairly accurate portrayal of how things are going. Selecting the right ones will depend on what you’re trying to assess, so for example, if you’re looking to increase sales, you may be following churn, or upselling success rate, while if you’re looking for brand awareness, you’ll perhaps focus on impressions or clicks.
Since metrics and KPIs are only as good as the target they’re supporting, it’s important to know what you’re looking for before focusing on any particular one. Then, you’ll want to know how to track it, how it fits into the bigger picture, and what do to about the results. Next, we’ll discuss a little about how keeping track of these metrics can help.
Why Keep Track of Online Marketplace Metrics and KPIs?
So, as we established, a metric is a contribution to an overall tracking of business performance. They’re used mainly as a means to establish progress towards a certain business goal. These can be long or short-term goals, usually surrounding limiting expenditures or promoting growth.
Tracking these metrics effectively is necessary for businesses with certain stakeholder demands. They can be metrics that the entire company commits to maintaining, or they can be subdivided into smaller goals that different departments use to manage their targets. Departments all over the company benefit from tracking metrics:
- Marketing can follow the success and failures of different campaigns or elements of campaigns by tracking relevant metrics.
- Sales can follow leads, evaluate the efficacy of the sales funnel and investigate new opportunities
- C-Suite can pay attention to the ongoing financial health of the company and any projected changes or improvements that come with it.
- Shareholders may also be interested in seeing where their investments are going and will follow metrics like free cash flow and debt-to-equity to get a handle on these.
So, business metrics are important, and combining multiple metrics into KPIs is a great way to paint a quantifiable picture of the future. This allows for realistic targets to be designed and strategies to be developed.
Again, metrics alone aren’t much use. In order to make the most out of them, you need to track the right ones and measure them against the correct benchmarks. There are key examples of these for each segment of the company, as well as some that work best when measured against company-wide targets.
The best metrics should provide insights, of course, but they should also be actionable. They should also give the viewer an understanding of what’s important and how their behavior contributes; whether this is among employees or among decision-makers. Most importantly, they should also provide a vision of the future health of the organization.
Your best metrics and KPIs are case-specific and help individuals, departments or the company as a whole identify whether they’re on the right path, where and what to adjust, and what kind of state the current trajectory will lead them toward in the future.
They’re also great at running simulations on these changes; by entering in an adjustment to a projected KPI, companies can see the projected outcomes of potential decisions before they’re made.
To give you an idea of how that might look, let’s take a look at four of the most powerful metrics to track, and how to track them.
Top Online Marketplace KPIs or Metrics to Track
It’s worth repeating that the most appropriate metrics for you to track are the ones that will tell you about your specific goals. This means that not only are there probably many more than four metrics you should be tracking but there are others that may even be more specific to your goals.
We’ve selected these four metrics to follow because they relate to most companies. All of them tie into one another for a wider scope of the company’s health and are some of the most commonly necessary metrics for any company as they relate to profitability, so they are likely to be relevant to all readers. Take a look.
1. Gross Merchandise Value (GMV)
GMV is a metric to measure scale. It’s commonly used to identify the value of sales over a period of time. The volume and value of your sales are measured with this metric so it’s a really handy one to use for assessing growth. It’s typically calculated each quarter but can be used less frequently, and the formula is simple:
GMV = Sales price x number of products sold
Both sides of the equation represent the same period, and the result is essentially gross revenue but will differ if the seller is a different entity than the selling platform. For example, eBay will have a different value of goods sold than their gross revenue, as the sellers will be taking a portion of that revenue.
Regardless, this metric is not a good indicator of net sales or total profit and should be combined with some of the following metrics to get closer to a KPI in that regard. One of the reasons for this is that it doesn’t include ad spend, or marketing costs associated with selling and has no reflection on these profitability metrics.
Therefore, while GMV is a powerful metric to track, it’s usually a means to an end, and should be combined with things like your Customer Acquisition Cost and Customer Lifetime Value, which we will discuss next.
2. Customer Acquisition Cost (CAC)
Customer acquisition cost is a great KPI to use if you want to know how much you’re spending on each customer. This can be used as a benchmark itself, as a means to establish the health of your marketing and sales. It’s also a necessary component of the Customer Lifetime Value KPI coming up.
Keeping track of your CAC allows you to see which parts of your marketing are working, where your high-performance revenue streams are likely to come from, and what your prospects are in relation to scaling up your business.
Your target CAC will depend on a lot of things, such as the price of your product, the lifetime of your customers, and how many there are going to be. Usually, the more expensive your product, the more you can afford to put into your CAC.
CAC is also a simple thing to calculate:
CAC = Marketing cost/number of new customers
It’s important to note that new customers are not returning customers, or repeat customers, and the cost of the marketing side of the calculation is likely to change depending on the complexity of the result you need. In simple cases, the salaries of the people doing the marketing are left out. For more detailed and high-resolution cases, they’re divided by the time spent on the campaign.
When used in conjunction with your order value, or your GMV, your CAC can tell you whether you can afford to spend more on customer acquisition, and as such, helps guide marketing strategies. In some cases, Cost Per Acquisition would be a similar metric that could be handy for this too.
As you might be starting to gather, these metrics aren’t usually expected to paint the full picture. Instead, they’re components of a bigger calculation. For example, what you gather from your CAC is also going to provide you with a good target for your customer lifetime value, which is the next of our KPIs.
3. Customer Lifetime Value (CLV)
In general, your customer lifetime value should be higher than the cost of their acquisition. Simply put, if it costs more to onboard a new customer than the amount you’ll be getting out of them, you’re doing something wrong.
The customer lifetime represents the moment they start paying you to the moment they stop. Growth is only sustainable if the revenue you receive over this period is higher than the amount you spend, so calculating this value as an average across each customer can be really useful when projecting into the future and assessing your growth potential.
You may find your customer retention metrics are a bit all over the place, so it can be hard to establish an average lifetime, but in many cases, an estimate is good enough. There are a couple of approaches to calculating your CLV.
One of the many ways you can calculate your average order value is by dividing your GMV by how many orders are received. This figure represents your order value metric, and once you know that, you can average them out by multiplying them by the number of repeat purchases you get on average, per customer.
Whichever way you choose to calculate CLV, the basic formula is the same:
CLV = Average yearly income from customer x average retention in years
For example, an average customer lifetime of 5 years multiplied by an average customer income of $1000 will net you a CLV of $5000.
There’s a problem if your CAC is higher than your CLV, and this should help you identify weak points in your marketing, where either you’re not getting the most out of your spending or you’re spending in the wrong places. This is where it’s really useful to have a KPI for LTV:CAC ratio.
4. LTV: CAC Ratio
Our final metric is the best indication of your potential for growth as a company. It’s also a measure of your current health and profitability. This is possibly the single most important metric to track when it comes to financial KPIs. LTV stands for Lifetime Value, and it’s an aggregate of your CLV metrics. This means that you’re assessing the overall lifetime value of all your customers combined.
The groundwork needed to get the data for this KPI is a lot more complex than its outcome. This metric will tell you very simply whether you’re profitable, breaking even, or functioning at a loss. As such, it’s perfect for long-term projection and sales/marketing analysis.
As you may have gathered, an LTV:CAC ratio of 1:1 shows that you’re breaking even on the cost to acquire new customers. Keep in mind, this says nothing about maintenance costs, so it will suggest that your company as a whole may be operating at a loss.
If your CAC is lower than your LTV, you’re spending more to gain new customers than they’re giving you. This is almost always a bad thing, but there are some exceptions to this rule. For example, if you’re starting out and you want to aggressively gather your market share, you may endure periods where you spend more than you’re making on acquiring your customers.
It’s also common in the learning phases of starting a company, at a time when you’re still trying to mold your product to the market, to ignore this ratio in favor of trial and error and reaching your product-market fit.
There’s no general rule for what’s good when it comes to this KPI, but in general, 4:1 is considered very healthy. This ratio should cover the other associated costs incurred by your company while leaving a little left over as profits.
If you’re looking for investment, this is the KPI to have. Venture capitalists will want a ratio of at least 3:1, and you’re not likely to get a good deal with anything lower.
While we’re on that topic, check out the Marketplace Financial Projections here at ProjectionHub. These are professional-looking reports, designed to get the attention of investors, and can also help you define your financial future using some of the metrics listed in this article. They come with additional support, are customizable to your needs, and are designed specifically for 2-sided marketplace financial models.
Conclusion
There are countless important metrics that you should be tracking in your business. The right ones are the ones that give you insights into your specific goals, and when combined, can form some powerful KPIs that you can use to project the health of your company well into the future, analyze the effect of changes you want to make, and create an appealing prospect for investors.
Not only do these metrics and KPIs give you an overview of your company prospects, but they can also be used at a much higher resolution to identify successes and failures in every department and help drive decision-making based on real-life data. Your most useful marketplace metrics are the ones that reveal information on your specific targets and function together to create a wider scope.
Whichever you choose, ProjectionHub can help you factor them into specially-designed templates to make professional-level projections based on your unique scenario!
