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11/11/2020 Luke Goldsworthy

Customer Cost and Value

Tracking metrics is crucial to the success of an eCommerce business. They provide the foundations on which decisions are made, so the more accurate the metrics are, the better those decisions will likely be.

It’s important to note in all discussions on metrics, and any statistics in general, that for results to be useful they have to be statistically significant – which is to say that the results are unlikely to have occurred at random. This is achieved through a larger sample size. For example, one customer spending $50 in a transaction is a poor indicator of future customers’ actions, but 10,000 customers spending $50 in a transaction on average is a strong indicator of how much prospective customers will spend.

There are essentially a limitless number of metrics that you can track. Still, there are some in particular that offer the best insight into your business’ current performance and best target your attention to areas you can improve to help your business grow. In this blog, we will look at Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV).

Customer Acquisition Cost

The CAC is your total marketing spend divided by your number of customers. In addition to calculating an overall figure, it can also be helpful to generate a figure by traffic source so that you can determine the efficacy of different marketing channels. 

For your business to be profitable, your CAC will need to at least be less than the CLV. Ideally, it would also be less than the average order value, meaning that you are immediately making money for each new customer. Some businesses have a high CLV, however, and can afford to lose money initially – but this is uncommon in the low-margin world of eCommerce.

You can improve your CAC by:

  • Increasing your conversion rate (See our recent post on the topic)
  • Optimising your paid advertisements
  • Focusing on low-cost marketing, such as email marketing, social media, and blogs
  • Creating a customer referral program

Customer Lifetime Value

The CLV is the total value of sales made to a single client over the duration of their relationship with your business, on average. Put simply, it is average purchase value x average purchase frequency x average customer lifespan. If your average customer makes ten purchases of $10 each per year for ten years, their CLV would be $1000. As mentioned above, knowing CLV is crucial to knowing how much you can spend on marketing and sales. 

Breaking down the analysis of the CLV can also help you differentiate segments of your customers that have a CLV significantly above the average. These “good” customers may achieve this through higher-value purchases, higher frequency purchases, and/or a longer duration of making purchases. Understanding what creates these “good” customers and who they are, can help you better target your acquisition efforts towards potential customers like them, while also helping you focus on nurturing and retaining the ones you already have.

You can improve your CLV by:

  • Focusing on customer satisfaction
  • Implementing loyalty programs
  • Investing in “good” customers
  • Upselling and cross-selling

At The Playhouse Group, we can help you set up regular analysis of core eCommerce metrics, including CAC and CLV, and develop strategies with you to improve your business performance. For this, or any other eCommerce matters, don’t hesitate to click the button below to set up an obligation-free consultation with one of our experts.

With decades of experience and as a certified Magento partner, The Playhouse Group can help your business maximise its online sales capabilities. Get in touch with our team and we can talk to you about this or any other other eCommerce questions you may have.