Why RPV is the #1 Metric for eCommerce Growth [Updated 2020]
There are literally hundreds of eCommerce marketing metrics to choose from, and almost all of them measure something of value. However, at HiConversion, we believe the most important metric to achieve growth on your eCommerce website is Revenue Per Visitor (RPV) – and to better understand why, let’s first define what exactly it is.
But before we start, here are some key takeaways that we’ll also explore further in this article:
- Popular eCommerce website metrics and how they interact with each other
- Customer interaction can be either positive or negative
- Revenue Per Visitor is actually a composite index, influenced by Conversion Rate and Average Order Value
What is Revenue Per Visitor (RPV) in eCommerce?
Business leaders typically don’t pay attention to about 99% of marketing metrics. They focus more on the areas of primary concern such as revenue, margin, profit, cash flow, ROI, shareholder value – in other words, their companies’ ability to generate more profit and faster growth than their competitors.
So, why should RPV be part of that 1%?
According to Optimizely [1], “Revenue per Visitor (RPV) is a measurement of the amount of money generated each time a customer visits your website. It is calculated by dividing the total revenue by the total number of visitors to your site, and is a method of estimating the value of each additional visitor.”
RPV is one of the key financial performance metrics of your eCommerce site, and one of the primary objectives in any revenue performance optimization strategy. This composite metric combines Conversion Rate (CR) and Average Order Value (AOV) into an actionable data point. It measures the money your website makes every time a customer enters your eCommerce store.
eCommerce professionals often think that Conversion Rate or Average Order Value are the best metrics to use for revenue generation. However, RPV is poorly understood and rarely used as a metric. You may be surprised that using RPV can help increase revenue significantly on your eCommerce site.
Conversion Rate (CR) definition:
If your goal is to generate more revenue on your eCommerce site, it is logical to think that increasing the number of conversions (i.e. visitors who buy products on your site) will result in revenue growth.
In eCommerce marketing, the global Conversion Rate is the proportion of unique visitors that converted (i.e. made a purchase on the site). Micro-conversions are defined as proportions of unique visitors that performed a desirable action on the eCommerce site.
For example, a micro-conversion can be a proportion of unique visitors that selected any product on the site. They may not have made a purchase yet, but by selecting a product they moved one step further in the site’s sales funnel. Mathematically speaking, the Conversion Rate (CR) can be expressed as:
Conversion Rate = Conversions/Visits
The problem is that the measures taken to increase Conversion Rate can backfire and produce lower overall revenues.
Here is how your overall eCommerce revenue is a function of the total number of sales (CR) and Average Order Value (AOV).
Mathematically speaking, Revenue (R) is represented by the formula below:
Revenue = Conversions x Average Order Value
As shown in the picture below the amount of revenue is proportional to the area between number of Conversions and AOV.
By increasing your CR, you could negatively impact AOV and lower overall revenue:
Increases in CR might produce more visitors who will buy lower priced items, ultimately hurting overall sales.
AB Tasty, in their article on RPV [2], accurately states that “many of the metrics used in e-commerce have enormous blind spots that can lead you to make poor decisions made with accurate, but incomplete, data.”
What is Average Order Value (AOV)?
Some companies think that the key for their revenue growth is to take measures to increase the average order value (AOV). That is why product recommendation solutions are so widely in use.
Average Order Value (AOV), or as it is sometimes referred to as an ‘average ticket’, is a metric representing the value of an average order within a period of time. It is simply calculated by dividing Revenue by Number of Conversions (Orders) in a specific Period of Time, as follows:
Average Order Value = Revenue/Conversions
Similarly to an increase in conversion rate, there are no guarantees that a lift in AOV will translate into a proportional increase in revenue:
This approach may stimulate sale of higher priced items, but the number of people who will make a purchase may go down, resulting in a decrease of your overall sales.
The Best Definition of Revenue Per Visitor (RPV):
Revenue Per Visitor (RPV) is a composite metric that combines Conversion Rate and Average Order Value into a single number.
It is calculated by dividing Revenue by Number of Visitors in a specific Period of Time, as follows:
Revenue Per Visitor = Revenue/Visitors
And, because RPV represents an interaction between Conversion Rate and Average Order Value, it is the most reliable predictor of eCommerce revenue.
If we consider web visitors as the common denominator of eCommerce activity – with the demand generation (marketing) cost measured in per visitor terms – it makes logical sense to divide overall revenue by the number of visitors:
Revenue/Visitors = Conversions x Average Order Value/Visitors
Which produces the following result:
Revenue Per Visitor = Conversion Rate x Average Order Value
RPV and Optimization for Sales Growth
When optimizing eCommerce sites for revenue growth, most companies are focused on the conversion rate. They are under the impression that the AOV is a fairly stable number that moves in proportion to conversion rate:
Mathematically speaking, revenue per visit equates to a multiple between conversion rate and average order value. This proves that RPV is a composite metric that encompasses the impact of two key revenue performance related metrics: Conversion Rate and Average Order Value.
The picture above shows that +17.92 lift in conversion rate has also boost AOV and RPV which in return produced the overall revenue growth.
The real life situation is much more complicated. The interaction between CR and AOV can often be negative. One can be successful in raising CR but still lose money.
In the example below, a client got a +10.23% lift in CR which negatively impacted AOV and produced a drop in overall revenue.
To solve this optimization metric conundrum, eCommerce companies should use RPV as the primary optimization metric as a way to optimize of the basis of both metrics (CR and AOV) at the same time. The example below shows how use of the RPV metric has ensured overall revenue growth, even though AOV dropped during the time interval.
The Customer Perspective on Revenue Per Visitor
This blog post was inspired by our recent conversation with a client who wanted to optimize their eCommerce checkout funnel. They were attracted to our real-time optimization methodology, but did not understand why we recommended RPV as the primary optimization metric.
After a lengthy explanation about RPV metrics, they agreed upon the value of using RPV for optimization of the general eCommerce pages of their site, but not for the checkout funnel. Their argument was that the best metric for the checkout funnel is CR – since the products are already selected, and our optimization campaign will not be able to increase or decrease the number of products (and associated value) in the cart.
They assumed that more conversions should mean more sales.
We had to bring to their attention the fact that not all visitors select the same number of products, and that the value of the products placed in the cart can vary significantly. The optimization campaign will attempt to increase the checkout funnel throughout. If the optimization goal is to increase CR (number of purchases), then it is possible to achieve an optimal user experience that will deliver more visitors whose order value is smaller, and as result produce a lift in CR and loss in revenue.
What would a better understanding of your site’s RPV mean to you?
