Why Leading Indicators in Ecommerce Are the Key to Success & How to Find Them

Why Leading Indicators in Ecommerce Are the Key to Success & How to Find Them

Metrics and analytics can be confusing. So, amidst all the trends and jargon, let’s consider a very straightforward train of thought … clouds mean rain.

Of course, it’s not always a one-for-one equation, but clouds — whether you know the difference between nimbus, cumulonimbus, or nimbostratus — are what economists call a leading indicator of pending precipitation.

In countless ways, leading indicators enable us to predict or foresee events. As in life, so in ecommerce: even if you can’t articulate their technical names — correlative analytics, predictive metrics, common conversion clusters — you’re constantly predicting the future based on tell-tale signals to maximize time, resources, and revenue.

The question is: how can you bring those signals from the background to the fore, from a mere gut feeling into cold, hard data?

Leading Indicators in Ecommerce: A Definition

Growth and retention are great key performance indicators (KPIs), but there’s a problem …

They’re lagging indicators — indicative only of past results. Excellent for forming hypotheses about what might work, but as you plan for future success, what we really need are leading indicators — metrics that enable you to project future performance.

In case that sounds confusing let’s use a simple analogy.

In the weight loss world, lost pounds are a lagging indicator, and the number of calories consumed and burned are leading indicators. The two indicators are related, but only the latter sheds foresight into what’s to come.

So, what are leading indicators in ecommerce?

To find your leading indicators:

  1. Identify your goals (e.g., bottom-line KPIs), and then
  2. Work backward to identify the precipitating metrics

For instance, let’s say you have a goal to increase email-generated revenue by 10% in six months.

Goal attainment is easy to measure: in six months, you compare your email-generated revenue against today’s to determine whether or not you hit your goal.

During those six months, you can look to your open rates, your subscriber count, and frequency of campaigns as leading indicators that enable you to achieve that goal.

Some leading indicators are standard across businesses, regardless of the type of product you sell. For example, increased customer complaints or product returns can be a strong indicator of problems in production or distribution. After investigation, you might find that your product description is inaccurate, sizing is off, the materials are shoddy or the packaging doesn’t hold up during shipping. Monitoring those indicators would allow you to react quickly to improve satisfaction.

Image via: The Chronicle Herald

Ben Yoskovitz, co-author of Lean Analytics, writes:

“Finding a correlation between two metrics is a good thing. Correlations can help you predict what will happen. But finding the cause of something means you can change it. Usually, causations aren’t simple one-to-one relationships — there’s lots of factors at play, but even a degree of causality is valuable.

“You prove causality by finding a correlation, then running experiments where you control the other variables and measure the difference. It’s hard to do, but causality is really an analytics superpower–it gives you the power to hack the future.”

For example, Facebook knew that growing their monthly active users would be key to their monetization. And after going through the data, Facebook figured out that by having a user make seven friends in ten days, it was very likely that user would become much more active and engaged for the rest of their lives.

Facebook calls that an “aha” moment — the moment the user discovered the joy of Facebook — and the seven friends in ten days was their key leading indicator.

For social platforms like Facebook, Snapchat, and Twitter, these leading indicators typically involve attention (since that’s what they’re selling).

In order to become a top performing ecommerce company, you need to discover the leading indicators that matter to your customers.


To get to that level of understanding, Facebook’s former head of growth, Chamath Palihapitiya, asks three very simple questions:

  1. “What is the thing that people are here to do?”
  2. “What is the aha moment that they want?”
  3. “Why can I not give it to them as fast as possible?”

He also challenges technology companies to get that down to seconds, or milliseconds. With everyone’s very limited attention spans these days, that principle applies equally to ecommerce.

They’re three very simple questions. But there are so many different answers, even in ecommerce.

At the Hundreds, perhaps some of their visitors might start wanting to read stuff and discover new trends. Only after reading an article, aha!, they realize they want to buy into it.

Whereas at Chubbies Shorts, maybe visitors just want to — quickly — find the coolest pair of swimming trunks possible before they go off on vacation in a week.

You must understand your store’s core product value in order to go down this train of thought. But once you do, you’d be ready to grow your store drastically by figuring out the moments and points that matter most to your customers, and use them as the key leading indicator.

Now that we understand the what, the next question is how

Leading Indicator Discovery Process for Ecommerce

Andrew Chen, who works in supply growth at Uber, shares a very specific process for technology startups. The first step is to define what he calls the success metric, what we’ll call a leading indicator.

If you run an ecommerce company, you could start with a retroactive analysis (just like the one-two process above).

Point out the goal, or the lagging metric, that matters the most to you and work backwards from there: e.g., revenue, customer count, or retention.

Your lagging indicators probably won’t tell you what to do next, but they will suggest areas where you can focus your testing. How can you change or improve? Which campaign should you create next? Which customers should you focus on for the highest return for your business?

Because this is all about the big picture, let’s tackle the two of the most common leading indicators for (1) acquisition (i.e., new customer growth) and (2) retention (customer lifetime value).

Leading Indicators for Growth: Acquisition

If you’re interested in forecasting your company’s growth rate, dive into your reports and examine of these leading indicators to gain clarity into your business:

(1) Acquisition Source

What channels are your visitors coming from? Email, social (paid and organic), search (paid and organic), referral (e.g., PR), affiliates, influencers, etc. How can you optimize underperforming channels and invest more heavily in your best sources?

To focus your acquisition efforts, identify your top traffic sources and determine which of those lead to the most subscribers and leads. For instance, an offsite display ad may drive the most traffic to your site, but it may not lead to the most subscribers or customers. Conversely, a sweepstakes campaign may lead to more subscribers but ultimately erode your deliverability and engagement.

Examples of Leading Indicators

  • Subscribes per unique visitor
  • Subscribes per channel
  • Subscribes per page
  • Subscribes per device

Tactics to Increase Acquisition

Pop-up sign-up. For new visitors, pop-up sign-ups, or welcome overlays, are standard fare across the ecommerce world. But that doesn’t mean they have to be bland. Pura Vida Bracelets gamifies their pop-up.

Browsing overlays. Browsing overlays go one or two steps deeper than a welcome overlay. They are contextually driven by the product or collection a new visitor has shown interest in, or they include additional discounts that appear as exit overlays.

Transactional messages. Not all customers who order from you will create an account. For those who don’t, include a call to action in your transactional message (e.g., e-receipt, order confirmation or shipping confirmation) inviting them to subscribe. The incentive could be an additional coupon offer, tips for product use, access to a loyalty program or even a free gift.

(2) Conversion Rates

What are your “sticking points”? Where are visitors dropping out of the funnel? What are your most profitable channels (acquisition sources)?

The goal of engaging your customer is, of course, to convert them from leads to buyers and from one-time purchasers to lifetime customers. What do your conversion rates look like? What are your sticking points? Where are visitors dropping out of the funnel?

By examining where customers are converting – and where they’re not – you can determine where to make adjustments.

Examples of Leading Indicators

  • Sales by traffic referrer
  • Attribution data

Product recommendations. Think back to what sets your business apart for consumers. Why do people choose your company or product? What does the data you’ve collected tell you about the purchases shoppers are making – and ones they might make in the future?

Product recommendations help make shoppers feel like you know them – and the more personalized the recommendation, the more likely they are to convert.

Entertainment Magpie provides its 4 million customers with a fast and easy way to trade in their media and tech for cash. Email is a conversion powerhouse for them. Even so, when they compared the results from a standard marketing email with an email with personalized recommendations, they were impressed.

The open rate was 5% higher and the conversion rate almost three times higher than the standard marketing message.

 

Browse recovery emails. When a consumer browses your website but doesn’t add anything to their shopping cart – or does but fails to check out – it’s such a missed opportunity. But with a browse recovery email, it doesn’t have to be. Using the data you’ve collected about what they were browsing, you can send an email reminding them to come back and hopefully make a purchase.

Based on what you know about your shopper, you can perfectly time your browse recovery email for ultimate impact – and the best chance of conversion.

TTI — the floor care company behind the brands Dirt Devil, Hoover and Oreck — uses a variety of triggered messages and automated workflows to increase customer engagement and conversions. Their goal: Get as much information as possible about their subscribers so they can send messages that are relevant.

Two strategies have played a significant role in their success.

Their browse recovery emails consistently outperform promotional messages, with open rates as much as 150% higher than standard emails and conversion rates up to 60% higher. And their cart recovery messages see conversion rates three to four times higher than standard emails.

 

Cart recovery emails. Cart abandonment is a challenge for every ecommerce retailer. Sending a cart recovery email won’t just help increase conversions, it’s now an expected part of the customer’s shopping experience.

This email – or series of emails – can be a tantalizing reminder of the products they’ve left behind, a compelling offer, or a suggestion of other products that would pair well with the abandoned items.

ELOQUII is a trailblazer in producing fast fashion designed exclusively in plus sizes. The $18 billion market for plus-size apparel is woefully underserved, but ELOQUII wins customer praise and mentions in fashion magazines for tackling this niche. They use email to help educate, convert and retain customers, and SMS to encourage their most trend-conscious followers to buy hot items before they sell out.

Their Cart Recovery message, which is consistently a top performer in terms of email revenue, has open rates that are 273% higher than standard emails, and conversions are 166% higher.

Leading Indicators for Retention

In the wake of growth, retention rules. Choose one of these leading indicators to keep more buyers and turn them into customers:

(1) Customer Retention Rates

How often do you customers return to order (time period between purchases)? How many average orders do they place before churning? What are your average order sizes?

Examples of Leading Indicators

  • At-risk customers
  • Customer retention rate
  • Customer lifetime value
  • Number of purchases in the past 6–12 months
  • Unsubscribes

Post-purchase messages. If you are committed to getting a second order from your customers, post-purchase messages are the best automated tool in your arsenal. They build on the positive customer purchase experience and create an opportunity to promote new products.

(2) Customer Lifetime Value

What segments can you create based on the retention rates above: low-value (high-churn), average-value, and high-value (VIP) customers? How can you target these segments (namely, email marketing)?

For example, if you’ve defined your success metric as sales, you could have a look into what the top 10% of spenders are doing. Separately, have a look at what the most frequent customers are doing.

Then, figure out how you can reverse engineer how people from these groups behave, and get more people taking those same actions. For example, with each group, ask the following questions:

  • How soon did they make their second purchase after their first purchase?
  • How many times did they visit your site before they made a purchase?
  • Were they “reengaged” with retargeting ads?
  • Were most of them email subscribers? If so, how many emails did they open before making a purchase?
  • Did they come in through a certain promotion channel? Did they come from an existing customer referral?
  • Did they use the search bar? What terms did they search for?
  • Which categories are they buying from?
  • Did both groups have something in common?

Concentrate on the top tier segments of customers (top and most frequent spenders). From there, diligently work backwards to find trends and patterns that will quantify their behavior and the mix of actions that make sense of their customer journey.

VIP or loyalty programs. Roughly 20% of your customers have the greatest impact on your business. They open your email the most, purchase most often and have the highest AOV.

Keep this audience invested in your brand by giving them what they want. Take a good look at your customer base and the 20% cohort, and try to learn what best motivates them. Is it free shipping? Early access to special sales? Points toward future purchases? Make whatever it is the basis for your program incentives.

Fast-fashion brand Lulus knew its customers wanted to be the first to get the latest fashions. In a vertical that often offers Black Friday deals on the clothes that didn’t sell in the fall, Lulus offered their VIP customers newer, top-selling products at a discount throughout the month of November.

The goal was to double the subscriber list – and they more than doubled it.

In addition, the retailer’s VIP email click rates were above 20%. Email marketing was responsible for 10% of the revenue throughout November and, year-over-year, November revenue was 70% higher.

As Chen writes, “There’s no one-size-fits-all answer here- you need to tailor this based on what makes your product work.”

Open the Doors to the Lab

Really, growing your business and finding leading indicators — can be quite straightforward. At the end of it, it’s about trying, testing, and tracking experiments. But the possibilities are infinite …

Start by figuring out your store’s core product value (why people shop with you), how your most valuable customers behave and work backwards from there.

Once you unlock the leading indicator most important to your customers and develop systems to get visitors there as soon as possible, your store will see a dramatic improvement in growth.

By : Herbert Lui, Analytics

 

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