Table of Contents
- CAC (Customer Acquisition Cost), your most important metric
- LTV (Lifetime Value of your customers)
- ROI: The king of your ecommerce
- Conclusion
CAC (Customer Acquisition Cost), your most important metric
Initial budgets are always tight, but that is not necessarily a bad thing. It generally forces founders to be creative and find truly cheap and/or highly effective ways to attract customers. Not everyone can afford a television campaign from the start…
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The first of the ecommerce metrics is CAC, standing for Customer Acquisition Cost.
In other words: how much money do you have to spend to acquire a customer? As simple as that.
CAC formula: Total costs / number of customers acquired.
Obviously, the ideal is to spend less money acquiring customers than you earn from them.
But understanding your CAC is not as straightforward as it seems. You can typically calculate the figure based on your marketing efforts.
Let’s say you run Google Ads campaigns. The platform calculates your CAC immediately. But what if you use a platform — or a variety of methods and levers that attract customers when combined?
Most likely, you have an entire collection of multi-channel marketing actions. For example:
- Google Ads to generate leads from people with high purchase intent.
- Brand content to develop awareness.
- Email marketing to keep your prospects engaged.
- Paid social campaigns to retarget website visitors.
Even if each of these levers does not necessarily require direct payment, all these methods involve costs that you must take into account in your CAC. Nothing is free.
So it is highly recommended to calculate two types of CAC:
- CAC by channel
- Total CAC
You should not blindly compare different channels and eliminate those that are not as cheap as the others.
Different channels give different exposure to your target audience. And your CAC can change over time.
Let’s say your Facebook ads attract 100 customers in a month and each one costs you €2. At the same time, you have Google Ads campaigns that have resulted in 75 customers in a month at €1.50 per customer.
Obviously, you should cut Facebook ads. It’s too expensive. Really? NO!
Each channel brings you different customer profiles; not everyone consumes the same way or uses the same tools.
You need to know how many customers you can expect from each channel. Reducing your CAC means nothing if you do not get the volume of customers you need to grow your ecommerce.
Getting 1,000 customers at once while sacrificing a slightly higher CAC is much healthier for the long-term growth of your ecommerce than reducing your CAC and not having your acquisition strategy on the right track.
The fundamental reason is that advertising algorithms need a sufficiently large volume of weekly data signals to work well and identify who to target in order to maximise conversion chances.
Of course, you have to think about your budget. But do not sacrifice growth for slightly lower costs when you are starting out, as you may end up with no growth at all.
Furthermore, to complicate things even more, someone may have seen your product for the first time on Facebook, then gone to Google a few days later to find your brand, and finally visited your site directly to make a purchase.
In this specific case (which is very common), all your actions contribute to acquiring this customer and therefore the costs must be added together. This is called attribution calculation and remains a very complex topic with no perfect solution. The important thing to understand is that the attribution of a sale rarely belongs to a single action.
LTV (Lifetime Value of your customers)
The second ecommerce metric to take into account is LTV, also known as Lifetime Value.
This is precisely the revenue you will generate from a customer over the entire duration of your business relationship with them.
Why is this metric so important? Well, if you know that your customers will bring you €500 over their lifetime with you, then you can afford to spend €100 to acquire them.
You will in fact earn much more. Your initial investment will be largely profitable.
However, if your customers only allow you to generate €150 and you spend €100 to acquire them, it is time to cut costs or rethink your strategy — or even your business model.
Depending on your type of business model, you can calculate LTV in the following ways:
LTV formula #1: Multiply the average purchase value (average basket) by the average number of purchases over a lifetime.
LTV formula #2: For SaaS: multiply your subscription price by the average subscription duration.
LTV formula #3: Calculate the average historical spending of customers.
The key lies in context. Do not just look at the first point of contact for spending. Instead, track your historical spending data and LTV.
You should also try to contextualise the value of each channel: which channel attracts customers with the highest LTV?
ROI: The king of your ecommerce
Finally, ROI is fairly intuitive once you have a good understanding of your CAC and LTV:
ROI formula: ROI = LTV / CAC
This is a high-level metric, but it is important to determine it if you want to grow at an optimal rate while keeping your costs under control.
If you know how much each customer contributes over their lifetime and divide it by the acquisition cost, you will see how much money is left for you to earn on each new customer.
However, keep in mind that your CAC is not just the CAC shown in your Facebook or Google Ads campaign management dashboards.
Take into account the cost of your employees and the management of your business. Every cent that leaves your pocket contributes to your CAC.
In general, most business models are profitable once the customer has been acquired, as long as you manage to retain them and bring them back for new purchases. Hence the need to establish effective loyalty programmes.
The optimal ROI or ROAS (Return on Ad Spend) for ecommerce should be at least 3 times greater than your CAC per customer after the first few months. Some are only profitable at ROAS > 7.
Conclusion
The key to growing your ecommerce is to understand and consistently track these three ecommerce metrics.
They can help you attract profitable customers while leaving you money to save on operational costs and investments.
When all three measures are in harmony, you will have a solid foundation for growth. After that, it is time to accelerate what is working. And thanks to these metrics, you will now know exactly what you need to do.