How to Choose Which KPIs to Track: A Step-By-Step Guide for Ecommerce Sellers
With so many metrics to choose from, how do you know which ones truly matter to your business? Here’s a step-by-step guide to help you determine the most relevant KPIs for your unique goals and business model.
Step 1: Define Your Business Model
Your business model plays a key role in shaping which KPIs are most important. The right KPIs can vary depending on whether you’re running a dropshipping business or managing warehouse-based fulfillment.
If you’re dropshipping and not handling the physical inventory, your focus should be on KPIs related to order fulfilment and supplier performance, such as sell-through rate, lead time and order fill rate. If you stock inventory in a warehouse yourself, you’ll need to track more inventory-specific KPIs such as inventory turnover, carrying costs and your reorder point.
Step 2: Identify Your Business Challenges
The next step is to take some time to evaluate any ongoing challenges your business may be facing. If you notice recurring issues, tracking the right KPIs can provide insight into the root cause and help guide your decision making.
For example, if you’re struggling with lost sales and stockouts, you’ll want to track your reorder point and order fill rate. But if you’re holding onto too much unsold inventory and tying up cash, you should focus on inventory turnover and carrying costs.
Step 3: Factor in Your Growth Stage
The growth stage of your business directly influences which KPIs should be your priority. As your business grows and evolves, your focus will shift from foundational metrics to those that reflect scalability and efficiency.
If you’re just starting out, your main focus should be on basic inventory management and cash flow. You’ll want to pay attention to your inventory-to-sales ratio, inventory turnover and carrying costs to make sure you’re operating efficiently.
As you grow your business, you’ll need to focus on scaling your operations and KPIs such as gross margin return on investment (GMROI) and lead time will become more relevant to make sure your supply chain is keeping pace with demand.
By the way, if you’re a newer business and you’re just getting started with inventory management, you can check out our helpful guide: How Do I Get Started With Inventory Management?
Step 4: Set SMART Goals
Once you’ve defined your business model, pinpointed your challenges and considered your growth stage, it’s time to set SMART goals for your KPIs. SMART goals are:
Specific: Clearly define what you want to achieve. For example, “Increase inventory turnover by 10% in the next quarter.”
Measurable: Ensure that the goal can be quantified with data from your KPIs.
Achievable: Set a realistic target that can be reached with your current resources.
Relevant: Ensure the goal aligns with your overall business objectives.
Time-Based: Set a deadline to reach the goal.
Setting SMART goals helps you stay focused on what’s important and measure your progress along the way.
Step 5: Avoid Vanity Metrics
Not all data points are created equal. In the world of ecommerce, it’s easy to get distracted by vanity metrics, which look impressive but don’t actually move the needle for your business. For example:
Total Inventory Value: While this metric shows the total worth of your inventory, it doesn't reflect the efficiency of how you're managing it. High inventory value can mask slow-moving stock and excess inventory, leading to potential overstocking or missed sales opportunities.
Instead of focusing on metrics that just sound good, prioritize KPIs that provide actionable insights, such as inventory turnover or sell-through rate, which directly impact profitability.
Focus on What Matters
The right KPIs allow you to make data-driven decisions that optimize your inventory, reduce costs, and drive profitability. Keep reviewing and adjusting your KPIs as your business grows, and always align them with your goals to ensure success.
How to Track Inventory KPIs Effectively
Here are some inventory KPI tracking best practices that will help you track your business metrics the right way.
Use Inventory Management Software
The foundation of effective KPI tracking is having the right inventory management software. Tools like Goflow provide real-time tracking and reporting, which helps you keep an accurate, up-to-date view of your inventory. With this software, you can:
Track stock levels in real time to avoid stockouts or overstocking.
Monitor product movement across different locations or warehouses.
Generate automated reports that focus on the most important KPIs like inventory turnover and lead time.
Using software streamlines the process of data collection and reporting, ensuring that your KPIs are based on accurate and current information. Look for a platform that integrates seamlessly with your other business systems, so you can get a complete picture of your operations.
Automate Data Collection
Manual data entry is not an option for today’s modern ecommerce seller. It’s too slow, not scalable and increases the risk of human error. Automation is essential for inventory management for any type of ecommerce business.
With the right tools, you can:
Automatically track sales and inventory movement: By syncing your ecommerce platform with your inventory system, you can update stock levels in real-time as sales are made.
Automate reordering based on preset thresholds: This ensures you always have the right amount of stock on hand and helps you avoid stockouts or overstocking.
Automation makes sure the data you’re working with is always accurate and up-to-date, so you can rely on it for important data-driven decisions.
Set KPI Benchmarks
Once you have reliable data, it’s important to set KPI benchmarks to measure your performance. Comparing your KPIs against industry standards or historical data from your business will allow you to gauge how well you’re doing and identify areas for improvement.
Industry Benchmarks: Research standard performance metrics for your niche to understand what successful businesses in your industry are achieving. For example, a typical inventory turnover ratio in ecommerce might range from 4 to 6 times per year, depending on the product category.
Historical Benchmarks: Track your KPIs over time and set your own performance benchmarks. For example, if last quarter you had an inventory turnover of 5, aim for a 6 in the next quarter.
Having these benchmarks will give you a clear sense of whether you're performing well or need to make adjustments.
Regularly Review & Adjust Strategies
Tracking your KPIs is not a one-time task; it’s an ongoing process. You need to regularly review your KPIs to ensure your strategies are working and make adjustments as needed.
Weekly Reviews: For fast-moving products, conduct weekly reviews of your KPIs like inventory turnover, sell-through rate, and stockout rates. This will help you catch potential issues early, such as items running out of stock too quickly or experiencing slower-than-expected sales.
Monthly Reviews: For long-term trends, perform monthly reviews to track metrics like inventory value, carrying costs, and order lead times. These KPIs provide insight into how your broader inventory strategies are performing, helping you adjust your approach as your business scales.
Use the insights gained from these regular reviews to refine and optimize your inventory management strategies. For example, you might:
Adjust Reordering Thresholds: If certain products are selling faster than expected, consider adjusting your reorder point to prevent stockouts.
Eliminate Slow-Moving Products: If a product has a low sell-through rate or inventory turnover, consider discounting it, removing it from your store, or sourcing a more popular alternative.
Optimize Warehouse Operations: Use insights into lead times and order fulfillment rates to streamline your warehouse processes, ensuring orders are fulfilled faster and more accurately.
By continuously refining your strategies based on KPI insights, you’ll be able to improve efficiency, reduce waste, and drive business growth.
Stay Data-Driven for Ecommerce Success
The key to success in inventory management is being proactive and staying on top of your KPIs. Regular tracking and adjustments will help you make sure you’re meeting your goals and driving the growth of your business.
Keep optimizing based on the insights your KPIs provide and you’ll be able to make smart data-driven decisions, maintain control over your inventory and maximize your profitability.
Start tracking your inventory KPIs today with Goflow to streamline operations and maximize profits. Click here to book a demo!