e-commerce Business Overview

Basic e-commerce overview with the trends, business terms, and KPIs

E-commerce

e-commerce is powered by the internet, where customers can access an online store to browse through, and place orders for products or services via their own devices.

e-commerce (electronic commerce) is a business model that lets firms and individuals buy and sell things over the internet. e-commerce has helped businesses establish a wider market presence by providing cheaper and more efficient distribution channels for their products or services. These business transactions occur either as business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C) or consumer-to-business (C2B).

How does e-commerce work?

e-commerce is powered by the internet, where customers can access an online store to browse through, and place orders for products or services via their own devices.

As the order is placed, the customer’s web browser will communicate back and forth with the server hosting the online store website. Data about the order will then be relayed to a central computer known as the order manager - then forwarded to databases that manage inventory levels, a merchant system that manages payment information, and a bank computer - before circling back to the order manager. This is to make sure that store inventory and customer funds are sufficient for the order to be processed. After the order is validated, the order manager will notify the store’s web server, which will then display a message notifying the customer that their order has been successfully processed. The order manager will then send order data to the warehouse or fulfillment department, for the product or service to be successfully dispatched to the customer. At this point tangible and/or digital products may be shipped to a customer, or access to a service may be granted.

Platforms that host e-commerce transactions may include online marketplaces that sellers simply sign up for, such as Amazon.com; software as a service (SaaS) tools that allow customers to ‘rent’ online store infrastructures; or open-source tools for companies to use in-house development to manage.

Types of e-commerce

1. Business-to-business (B2B) e-commerce refers to the electronic exchange of products, services, or information between businesses rather than between businesses and consumers. Examples include online directories and product and supply exchange websites that allow businesses to search for products, services, and information and to initiate transactions through e-procurement interfaces.
2. Business-to-consumer (B2C) is the retail part of e-commerce on the internet. It is when businesses sell products, services, or information directly to consumers. The term was popular during the dot-com boom of the late 1990s, when online retailers and sellers of goods were a novelty.
3. Consumer-to-consumer (C2C) is a type of e-commerce in which consumers trade products, services, and information with each other online. These transactions are generally conducted through a third party that provides an online platform on which the transactions are carried out. This form of e-commerce could also be called C2B2C, consumer-to-business-to-consumer.
4. Consumer-to-business (C2B) is a type of e-commerce in which consumers make their products and services available online for companies to bid on and purchase. This is the opposite of the traditional commerce model of B2C.
5. Direct to Consumer (D2C) is the newest model of e-commerce. D2C means that a brand is selling directly to its end customer without going through a retailer, distributor, or wholesaler. Subscriptions are a popular D2C item, and social selling via social media platforms is being used for direct-to-consumer sales.
6. Business-to-administration (B2A) refers to transactions conducted online between companies and public administration or government bodies. Many branches of government are dependent on e-services or products in one way or another, especially when it comes to legal documents, registers, social security, fiscal, and employment. Businesses can supply these electronically.
7. Consumer-to-administration (C2A) refers to transactions conducted online between individual consumers and public administration or government bodies. The government rarely buys products or services from citizens, but individuals frequently use electronic means in the following areas:

• Education - Disseminating information, distance learning/online lectures, etc.
• Social security - Distributing information, making payments, etc.
• Taxes - filing tax returns, making payments, etc.
• Health - Making appointments, providing information about illnesses, making health services payments, etc.

Mobile e-commerce (M-commerce) is a type of e-commerce on the rise that features online sales transactions made using mobile devices, such as smartphones and tablets. M-commerce includes mobile shopping, mobile banking, and mobile payments. Mobile chatbots also provide e-commerce opportunities to businesses, allowing consumers to complete transactions with companies via voice or text conversations.

The e-commerce trends

• Personalization: Delivering in the moment and understanding preferences is key to growth
• Service: Customer service must be part of modern e-commerce platforms
• Search: SEO and search results are where the brand and product experience start
• Omnichannel: Always-on, data-driven efforts will boost engagement, sales, and loyalty across all sectors and industries
• Purpose: Sustainability, equality, environmental, and political stances are all now part of what makes a brand appealing, or not
• Customer Experience: The entire customer experience must be seamless, from search to handing off between screens, to customer service
• Payment and delivery options: Click and collect, curbside pickup, simple payment provide ease to customers
• Direct to Consumer: More and more brands are extending their go-to-market with DTC businesses
• Creative wins: To gain attention online, the marketing strategy must be unique

e-commerce business terms

Abandonment: when a user visits your site but does not fulfill the desired action (e.g. making a purchase, signing up for a newsletter).

Affiliate: An affiliate is a type of inter-company relationship where one firm sells other merchants’ products on its own website. An affiliate can be termed as a commercial partner of the merchant who promotes the merchant’s products and services on his website using different visual tools.

Affiliate Marketing: partnerships between e-commerce platforms and online publishers, where the publisher endorses/reviews/features a product and is compensated based on e-commerce performance. Some affiliates are paid for a mention, some are paid commensurate with traffic driven back to the eCommerce site, some are paid on actual sales generated.

Affiliate Tracking: software that tracks clicks, sales, or other performance measures to determine revenue sharing or commission.

Basket: part of shopping cart software that lets online buyers choose items to buy. At the checkout, the software calculates the total cost of delivery and taxes and takes the buyer to a payment procedure.

B2B: selling products or services to other businesses.

B2C: selling products or services to end consumers.

Bounce Rate: the percentage of people who view one page on your site, then exit without clicking through to a second. Can be calculated for all pages on your site.

Brick-and-click Store: A brick-and-click store for any business with at least one physical location and an eCommerce-enabled website. This is an upgrade to the brick-and-mortar we are so familiar with. As a business, this model gives the best customer experience, where they can enjoy the convenience of shopping online with the security and the human touch of visiting a store.

Buyers Persona: Buyers Persona is a semi-fictional representation of prospective customers based on market research and real data of the existing customers. While preparing buyers' persona, it’s important to consider their journey, behavioral pattern, demographics, goals, etc.

Buyers' persona reveals insights about buyers’ decisions, their specific attitudes, concerns, and criteria. It is a research-based modeled representation of:

a. Who are the buyers and their goals?

b. How do they think and what drives their behavior?

c. On what terms are they making buying decisions?

Call-To-Action: These are words or phrases incorporated in a message or sales script that induces a viewer, reader, or listener to take immediate action. Typical CTAs used in marketing and advertising is ‘Buy Now’, ‘Call Now’, ‘Click Here’ etc. Such words prompt an immediate response or encourage visitors to make a purchase. CTAs have greatly proved their impact on conversion rates.

Cart Abandonment Rate: This refers to a ratio of the number of shopping carts in total versus the number of completed transactions. It is basically the rate at which visitors initiate the purchase by adding an item to their cart and leaving the site without completing the transaction. These statistics can help online shop owners to keep a track of abandoned carts and figure out whether it is a profitable eCommerce business or unsuccessful.

Churn Rate: It is the percentage of customers or subscribers who cut ties with the company or from the services in the given period of time. It’s the revenue or customers lost during a specific period (typically a month), by unsubscribing from the services. Churn Rate is also called Attrition Rate.

Cohort Analysis: It is an analysis of customer behavior who are separated into groups of people with the same attributes. It involves examining how specific characteristics of a cohort (group) changes over time. Cohort Analysis is one of the most powerful tools for marketers that helps them to assess long-term trends in customer relations.

Cookies: A cookie is a small amount of data generated by a website given to a web browser by a web server. This piece of information is stored on the client-side on the user’s own computer and is then used for future use. The main purpose of cookies is to remember information about you and record your preferences when using a particular website.

Cross-Selling: This is a practice of selling additional services or products to the customers who have already made a purchase. It involves encouraging existing customers to buy related or complementary products while buying the selected items. This is a marketing tactic most widely used by online retailers.

Commerce Service Provider (CSP): solutions partner that provides the system and services to establish the back-office infrastructure for online businesses.

Cost-per-click (CPC): an online advertising payment process where payment is based on qualifying actions such as clicking on a banner or search engine listing.

Cost-per-thousand (CPM): cost of an ad per thousand impressions.

Click-through: the act of clicking on an online advertisement (generally a banner) to the advertiser’s website.

Click-through Rate: total impressions delivered versus the people who clicked. Click Through Rate is a ratio that shows the number of clicks on a specific link or ad to the total number of visitors browsing through that page or ad. CTR is measured for a webpage, advertisements, or links in emails which helps to determine the success of an online marketing campaign. This can be measured for calls-to-action, product listing, and any other form of a link on the site.

Conversions: a percentage of users who complete an action divided by users who are presented with an opportunity to complete it. This is often tracked on all forms of Inbound Marketing (e.g. email open rates, PPC ads). Conversion rates can be tracked over a specific period of time (i.e. month to month) or on a rolling measurement.

Customer Acquisition Cost (CAC): CAC is an important business metric that refers to the cost associated with acquiring and convincing potential customers. This helps to determine how to allocate resources while gaining new customers. It includes expenses related to the product cost as well as research, marketing and incentives involved.

Customer Lifetime Value: the total value of a customer to an organization over the life of the customer. This metric is a prediction of the total value (Total net profit) an eCommerce company would make from the lifetime relationship with any given customer. Other marketing terms for CLV are Lifetime Customer Value (LCV), or Lifetime Value (LTV).

Dropshipping: Dropshipping is a type of eCommerce arrangement where the goods are directly shipped from the manufacturer to the retailer or customer. This retail fulfillment method deals indirect delivery of goods without having to store or stock them. Such fulfillment strategy opted by shop owners saves them from tracking inventory and incurs a loss if the items did not make a complete sale.

Email Marketing: the use of email to promote or market your products or services.

Email Spam: unsolicited commercial email.

Engagement Rate: Engagement Rate is a metric that is used to measure how much a visitor gets engaged to the given piece of content or ad. It shows a percentage of the people who came to the site, noticed the ad or content, and could engage with it.

Fulfillment: In eCommerce terminology, fulfillment is also called Order fulfillment and referred to as a sequence of steps a company undertakes to process the order from the point of sale to the delivery of goods with customer satisfaction.

Gateway: A computer that allows communications between networks. Used in e-commerce as an interface between merchant and bank.

Impression: any time a particular item, ad, or image is displayed to a user.

Inbound Link: a link from a site other than your own. Inbound link is referred to as a link on third-party websites that points to your website. In SEO terminology, it is also known as a Backlink. Inbound links are vital for SEO as Google and other search engines consider such relevant links as a sign that the content on that page is useful.

Inventory: Inventory is referred to as the stock of goods or items in the business. It is the current quantity of products on the retailer’s hand which is waiting to be sold. It is vital to keep track of inventory levels to make sure the goods which are not in stock are not being promoted in the store.

Key Performance Indicator (KPI): It is a value that helps organizations to evaluate the success of achieving the key business objectives. There are 2 types of KPIs, high-level KPIs that focus on the overall performance of the enterprise and low-level KPIs that look at processes in departments such as sales, marketing, or a call center.

Keyword: a word used to perform a search. Keywords are words or phrases that are used to trigger search results or describe the content. When a specific keyword is searched, the advertiser’s ad that uses that keyword automatically appears on top of the searched pages. One keyword represents a single search query, while keywords that use two or more words are called keyword phrases.

Key Phrase: a phrase used to perform a search.

Keyword Density: on a web page, the keywords as a percentage of indexable text on the webpage.

Keyword Research: the search for keywords related to your website. The analysis of which words or phrases are used by visitors to locate sites similar to yours. The analysis of which keywords or phrases will yield the highest return on investment.

Logistics: Logistics means the management of goods & services or resources between the point of origin and the point of consumption to meet the requirements of customers or corporations. This is a part of supply chain management where resources like physical items such as food, materials, animals, equipment, and liquids as well as abstract items such as time and information are managed.

Long-tail Keywords: keywords containing more than one word. Long-Tail Keyword is a type of keyword phrase that is more specific and usually longer than more commonly searched keywords. These keywords consist of either three or sometimes five words in the phrase and are mostly used to target niche demographics rather than mass audiences.

m-commerce: with the growth of internet usage, mobile commerce (m-commerce) has also seen significant growth. m-commerce also called mobile commerce refers to the use of wireless handheld devices for buying and selling goods and services online. These wireless electronic devices are mobile phones, smartphones, tablets, or personal digital assistants (PDAs).

Microsite: Microsite is referred to as a web page or a small cluster of pages that acts as a supplement to the primary website. It is a specific content site that is designed to live outside of the company parent website and has a separate URL than its homepage. A microsite is also called a Minisite and is used for branding or promotion purposes.

Mobile Optimization: It is a practice of ensuring that your visitors who are accessing the website through mobile devices have a brilliant user experience, both practically and visually. This is achieved by optimizing the website content in such a manner that the visitors can accomplish what they want to do on their mobile devices.

Navigation: generally referred to as the structure and process of moving from one page or section of a website to another.

Net Promoter Score (NPS): Net Promoter Score (NPS) is a metric that measures the willingness of customers to recommend a company’s products or services to others. This determines customer loyalty for a company’s brand, products, or services.

This metric was developed by management consultant Fred Reichheld of Bain & Company in collaboration with the company Satmetrix in 2003 to determine the customer satisfaction score.

News Feed: News Feed also called Web Feed is a service by which users are provided with the frequent transmission of data consisting of news updates. These are received by subscribers in XML format as summaries or links of updates about those people who are on your friend’s list as well as the odd advertisement.

Open Rate: The Open Rate is a percentage representation of the number of people on the email list that opened a particular email campaign. This percentage is calculated by dividing the number of email messages opened by the total number of email messages sent.

Order Fulfillment: It is a process that every organization undergoes for delivering goods to end-users. Order fulfillment refers to the steps involved in this process from the point of sale until the delivery of the order. Steps involved in this process are- Receiving, Inventory Storage, Order Processing, Shipping and Returns Processing.

Order Tracking: the process in which a customer views the progress of their order leading up to delivery. A tracking code is provided when a purchase is completed.

Organic Search Results: the non-paid listings displayed as a result of a key phrase search using a search engine. Featured, pay-per-click, and sponsored listings are generally used by less than 40% of search engine users. This means organic search placement is twice as effective as paid search results.

Pageviews: the total number of times a page on your site is loaded. Pageviews is a part of web analytics and is also called Page Impression. Whenever the visitor visits a page on the website, it is referred to as a Pageview. This is tracked by website monitoring applications to help website owners to decide on a strategy to result in more web traffic.

Payment Gateway: an internet service that connects your e-commerce site with your Merchant Account. A gateway accepts your order information and connects to your Merchant Account to authorize and transfer funds.

Pay-Per-Click: PPC is also termed CPC which means Cost Per Click, used to describe those search engine services that charge for creating visitors to your site. The cost of each visitor is determined either by a bid or flat fee that you are charged each time a search engine user clicks on a link to your site from these sponsored links.

Point-of-Sale (POS): It is also called Point of Purchase (POP) and refers to a place where sales are carried out. It is a point at which a customer makes a payment to the merchant in exchange for goods or after the provision of a service. A Point-Of-Sale (POS) terminal is a computerized replacement for a cash register that has the ability to record and track customer orders, process credit, and debit cards, connect to other systems in a network, and manage inventory.

Product Affinity: products that are usually purchased together.

Product Relationship: products that are viewed frequently by the same user.

QR Code: QR Code is short for Quick Response Code which is a machine-readable two-dimensional barcode consisting of an array of black and white squares. It is typically used for storing URLs and to provide easy access to information through a smartphone.

Responsive Web Design: a website design approach that is aimed at creating sites to provide an optimal viewing experience (easy reading, navigation, minimization of resizing, panning, and scrolling) across a range of devices (e.g. mobile phones, tablets, laptops, desktop computers).

Service Level Agreement (SLA): It is an official contract signed between the service provider and the customer that documents the services expected from the provider and defines the performance standards that are required to be met.

Shopping Cart: refers to the portion of an e-commerce site that maintains a list of the products selected by a visitor to purchase. Can be stand-alone or part of an e-commerce solution.

Single Sign-on: sign-in information for a particular site is stored locally or over the web so that a returning user does not need to re-enter login information.

Stock Keeping Unit (SKU): Stock Keeping Unit also commonly referred to as SKU, is a unique scannable specific bar code consisting of numbers and/or letters to identify products and/or services of vendors and store owners. It helps vendors automatically track the movement of inventory, also used for services and warranties. SKU is also useful for online store owners to determine which products require reordering and provides sales data also.

Software as a service (SaaS): Software as a service (SaaS) is a software distribution model that provides access to software and its functions remotely as a Web-based service. It is licensed on a subscription basis and is centrally hosted, thus removing the need for organizations to handle installation and maintenance.

Turnkey: This refers to software or a packaged product that is built, installed, and supplied by the manufacturer in its completed form, ready to operate. This is contrasted with build-to-order products where buyer’s exact specifications are taken into account and are made as per their expectations.

Unique Visitors: Total number of individuals who visit your site. This does not track the number of times an individual visits the site.

Upselling: It is a sales technique that persuades a customer to buy something additional or expensive while making a purchase. This business strategy makes the customer get exposed to other options that he perhaps had not considered, with an attempt to make a more profitable sale. Upselling includes selling better features or specifications of the selected product, an upgrade or more expensive version of what they are buying, or any add-ons.

User Experience (UX): This refers to the visitor’s overall experience about using a particular product, system, or service especially in terms of how easy or pleasing it is to use it.

User Interface (UI): User Interface is a way in which everything is designed to facilitate users to interact with an application or a website. This is also known as a Graphical User Interface (GUI). A user interface is considered good if it provides a ‘user-friendly’ experience by allowing users to interact with the software or hardware naturally and intuitively. A powerful program with a poorly designed user interface has very little value.

Web Analytics: Web analytics is a set of strategic methodologies that study the impact of a website on its users. Web analytics software is used to measure details like the number of visits, unique visitors’ count, their entry points, specific keywords used, their online session time, what did they search for, and when & why did they leave the site.

e-commerce KPIs

Ecommerce Key Performance Indicators (KPIs) determine how well an online business owner, team, or company at large is doing against their set goals and objectives.

Tracking the right eCommerce KPIs enables online business owners to make better-informed decisions regarding conversions and revenue, marketing, customer satisfaction, and operations.

1. Conversion rate - The percentage of visitors who take an action on the website. This action can be anything, such as signing up for an email newsletter or making a purchase.

Conversion Rate = [(No. of Conversions) ÷ (No. of Leads)] x 100

2. Customer lifetime value - Customer lifetime value - often referred to as CLV, CLTV, or LTV - is the average amount of net profit that each customer is predicted to contribute to a business over the entire length of the relationship.

Customer Lifetime Value = [(Average order value) x (Average number of times a customer buys per year) x (Average customer retention time in months or years)]

3. Average order value - Average order value - also known as AOV - is an e-commerce metric that refers to the average amount of money spent by customers per order.

Average Order Value = (Total Revenue) ÷ (Total No. of Orders)

4. Gross profit margin - Gross profit margin sums up how much money is actually made by presenting the difference between the revenue and profit as a percentage.

Gross Profit Margin in Percent = [(Revenue — Costs) ÷ Revenue] x 100

5. Net Profit - As eCommerce performance metrics go, net profit is often overlooked but it is a clear key indication of your eCommerce store’s overall health. Making a profit is a major milestone for organizations and knowing exactly how much you’re taking in will tell you how much you can spend on marketing, customer experience, and other growth activities.

Net profit = [(Total revenue) — (Total expenses)]

6. Shopping cart abandonment rate - Visitors placing items in their shopping cart, but then leaving the site without completing the purchase.

Cart Abandonment Rate Percentage =

1 — [(No. of Completed Transactions) ÷ (No. of Shopping Carts Created)] x 100

7. Cost of customer acquisition - Customer acquisition cost - also referred to as CAC - is the cost of winning a customer to purchase a product or service.

Customer Acquisition Cost = [(Amount of Money Spent to Acquire Customers) ÷ (No. of Customers Acquired)]

8. Cost per Acquisition - This is similar to the above CAC KPI. But, with Cost per Acquisition, you measure the cost of acquiring new leads and non-paying users, rather than just the cost of acquiring paying customers.

So if the business strategy aims to build awareness through free samples, newsletter campaigns, or gated content, this is a great KPI to monitor the progress.

Cost per Acquisition = [(Costs of conversion acquisition) ÷ (Number of conversions)]

9. Customer retention rate - Customer Retention Rate - also referred to as CRR - is the percentage of people who continue to use the service over a given period of time.

Customer Retention Rate = [(Customers at the end — New customer acquired during the measuring period) ÷ (Customers at the start)] x 100

10. Churn rate - The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity, it describes the rate at which customers stop subscribing to the services over a given period of time.

Churn Rate = [(Number of Subscribers Lost) ÷ (Number of Starting Subscribers)]

11. Cost of goods sold - Cost of goods sold (COGS) is an important metric for online retailers of all sizes. Sometimes known as ‘cost of sales’, it is an assessment of the direct costs associated with producing the goods that you sell. COGS is a retail performance metric that helps online retailers understand their manufacturing and production costs.

COGS = (Beginning Inventory + Purchases During the Period − Ending Inventory)

12. Net Promoter Score - Net promoter score is an important retail performance metric that takes a different perspective, measuring the customer experience. Customer experience is a difficult aspect of an eCommerce business to measure, as it’s somewhat intangible by its nature.

To calculate your NPS you need to find out how many of your customers are promoters, passives, or detractors. For this, you must ask a question, typically “how likely are you on a scale of 1–10 to recommend this company to a friend?” All answers of 6 and lower are considered detractors, 7–8 are passives, and 9–10 are promoters.

NPS = (Percentage of Promoters) — (Percentage of Detractors)

13. Gross Merchandise Value - Gross Merchandise Value (GMV) is the total value of merchandise sold over a given period of time.

GMV = (Sales Price of Goods) x (Number of Goods Sold)

14. Bounce rate - Bounce rate represents the percentage of visitors who enter the site and then leave rather than continuing to view other pages within the same site. It is defined as the percentage of visitors that leave a webpage without taking an action, such as clicking on a link, filling out a form, or making a purchase.

15. Customer Satisfaction - The most popular KPI for measuring customer satisfaction is the CSAT. With it, you directly ask your customers to rate their satisfaction with your business, product, or service.

CSAT is calculated by dividing the total of positive responses (very and somewhat satisfied) by the total number of responses, multiplied by 100 to give us a percentage.

CSAT = [(Total number of positive responses) ÷ (Total number of responses)] x 100

16. Website Traffic - Website traffic is one of the key performance indicators that an e-commerce site owner will want to watch. Generally speaking, the more traffic the site gets the better chance of turning those visitors into paying customers. Increasing website traffic is often a goal for e-commerce websites.

17. Pageviews per visit - Pageviews per visit refer to the average number of pages a user will view on-site during each visit. Generally, more pages usually mean more engagement. However, if it’s taking users too many clicks to find the products they’re looking for, site design needs to be revisited.

18. New visitors vs. returning visitors - New site visitors are first-time visitors to your site. Returning visitors, on the other hand, have been to your site before. While looking at this metric alone won’t reveal much, it can help e-commerce retailers gauge the success of digital marketing campaigns. If you’re running a retargeted ad, for example, returning visitors should be higher.

19. Email click-through rate (CTR) - While the open rate tells you the percentage of subscribers who open the email, the click-through rate tells you the percentage of those who actually clicked on a link after opening. This is arguably more important than the open rate because, without clicks, you won’t drive any traffic to your site.

20. Average session duration - The average amount of time a person spends on your site during a single visit is called the average session duration.

21. Traffic source - The traffic source KPI tells you where visitors are coming from or how they found your site. This will provide information about which channels are driving the most traffic, such as organic search, paid ads, or social media.

22. Hit rate - Calculate your hit rate by taking the total number of sales of a single product and dividing it by the number of customers who have contacted your customer service team about said product.

The article gives an overview of e-commerce business, the purpose is to help the readers to begin with a basic understanding of e-commerce world, as the domain itself is quite vast.