Follow the right ecommerce metrics! This is undoubtedly one of the keys to growing and consolidating your online store.
Starting up an ecommerce business is not easy. Don’t know where to turn to increase your turnover? What channels to invest in? So, what can you do to find out what works and speed it up?
If there is a key to growing your ecommerce from the early stages, it is to focus on the channels that already attract your customers. There are so many ecommerce metrics that it’s easy to get lost.
That’s why we propose these 3 ecommerce metrics that will serve as your compass.
CAC (customer acquisition cost), your most important metric
Initial budgets are always tight, but that’s not a bad thing. This usually forces the founders to be creative and find really cheap and/or very effective ways to attract customers. We can’t all make a TV campaign from the beginning…
The first of the ecommerce metrics is theCustomer acquisition cost (CAC).
I mean, how much money do you have to spend to acquire a client? It’s that simple.
CAC Formula: Total costs / number of customers.
Obviously, the ideal is to spend less money on acquiring customers than you earn from them.
But understanding your CAC isn’t as simple as it sounds. We can usually calculate the figure based on our marketing efforts.
Let’s say you do Google Ads campaigns. The platform calculates your CAC immediately. But do you use a platform or a variety of methods and levers that attract customers when combined?
Most likely you have a whole collection of multi-channel marketing actions. For example:
- Google Ads to generate leads from people with a high intention to buy.
- Brand content to develop notoriety.
- Email marketing to keep your potential customers on their toes.
- Paid social campaigns to redirect website visitors.
Even if each of these levers does not necessarily require payment, all of 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 per channel
- Total CAC
? No, you should not blindly compare different channels and eliminate those that are not as cheap as 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, which have resulted in 75 customers in a month for 1.5 € per customer.
Obviously, you should remove ads from Facebook. It’s too expensive. Really? ¡NO!
Each channel brings you different customer profiles; we don’t all consume in the same way and use the same tools.
You need to know how many customers you can expect from each channel. Reducing your CAC doesn’t mean anything if you don’t get the volume of customers you need to grow your ecommerce.
Getting 1,000 customers at a time while sacrificing a slightly higher CAC is much healthier for the long-term growth of your ecommerce than reducing your CAC and not getting your acquisition strategy on track.
The fundamental reason is that advertising algorithms need a large enough weekly data signal volume to work well and identify who to target for ads to maximize conversion possibilities.
Of course, you have to think about your budget. But don’t sacrifice growth for slightly lower costs when you start, as you may not have growth at all.
Also, to further complicate the issue, someone may have first seen your product on Facebook, then gone to Google a few days later to find your brand, and finally went to your site directly to buy.
In this specific case (very classic), all your actions contribute to the acquisition of this client and therefore the costs must be added up. This is called attribution calculation and it is still a very complex issue with no perfect solution. The important thing to understand is that the attribution of a sale rarely belongs to a single action.
The LTV (lifetime value of your customers)
The second of the ecommerce metrics to consider is LTV, also known as LifeTime Value.
This is precisely the turnover you will obtain with a client during your entire business relationship with him.
Why is this metric so important? Well, if you know that your clients will bring you 500 € during their lifetime with you, then you can sacrifice 100 € to acquire them.
In fact, you’ll earn a lot more. Your initial investment will be largely profitable.
However, if your customers only allow you to deposit €150 and you spend €100 to acquire them, it is time to reduce costs or rethink your strategy, including your business model.
Depending on your type of business model, you can calculate the 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: by multiplying your subscription price by the average length of your subscription.
LTV Formula #3: calculating average historical customer spending.
The key is media and context. Don’t just look at the first point of contact for spending. Instead, keep track of your historical spending data and your LTV.
You should also try to contextualize the value of each channel; which channel attracts customers with the highest LTV?
The ROI: The king of your ecommerce
Finally, the ROI is quite intuitive once you have a good idea 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 controlling your costs.
If you know how much each customer contributes over their lifetime and divide it by the cost of acquisition, you will see how much money you have left to earn from each new customer.
However, keep in mind that your CAB is not just the CAB listed on the Facebook or Google Ads campaign management panels.
Take into account the cost of your employees and the management of your company. Every penny that comes out of your pocket contributes to your CAC.
In general, most business models are profitable if once the customer is acquired, we manage to retain them and bring them back for new purchases. Hence the need to establish effective loyalty programs.
The optimal ROI or ROAS (return on advertising expenditure) for ecommerce should be at least 3 times higher than your CAC per customer after the first few months. Some are only profitable for ROAS > 7.
The key to the growth of your ecommerce is to understand and constantly follow these three ecommerce metrics.
They can help you attract profitable customers while leaving you money to save on operating costs and investments.
When all three measures are in harmony, you will have a solid foundation for growth. After that, it’s time to accelerate what works. And thanks to these metrics, now you’ll know what to do.