The Two eCommerce Metrics You Should Be Using to Measure Your Success
eCommerce success is always built on a foundation of data. The right data not only helps you to understand how you're performing, but it also guides future strategy revealing opportunities that you may never have identified on your own including new product ideas, new targeting strategies, and merchandising approaches.
If you want to win the battle for your customer's attention, though, it’s not just a matter of piling up as much information as possible—instead, you need to collect business data with a clear understanding of which metrics provide the greatest level of insight into what you’re doing right and where you can improve.
While many brands suffer from a lack of useable data, at least as many suffer from having too much. If you're in the latter group and are struggling to integrate data from Google Analytics, Shopify, Facebook, your accounting systems, and other sources, you may be a great candidate for a consolidated dashboard (we use DataBox). These tools can put everything in one place and make it easy to distribute actionable scorecards to your team.
However you choose to address the challenge, focus on the most important measures first and then "drill down" from there. In eCommerce, this all boils down to Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV). If you can acquire customers inexpensively and each generates high "lifetime value," you're going to be successful!
Understanding Customer Acquisition Cost
Spending too much to acquire your customers cuts into your net profits before you even make a sale. Inflated acquisition costs are almost always a death sentence for an eCommerce business because they prevent you from achieving trial. If you can't get scale your trial, you won't get repeat or advocacy.
Customer acquisition cost is a reflection of the success of your company’s marketing efforts, and it can forecast your ability to expand your customer base in the future. For example, if you spend $1,000 on marketing in a given month and generate 50 new customers for your business, the CAC for that month is $20 per customer.
When you evaluate customer acquisition cost, you should always break down these costs by channel to determine where you’re getting the best bang for your buck. You might find, for example, that although your Search Engine Marketing (SEM) CAC is performing well at about $10 per customer, it’s getting weighed down by an expensive or poorly performing Social Media Marketing (SMM) program which is costing nearly $30 per customer.
Then you need to get to the "why..." Is it because your creative is weak and your paid clicks aren't converting or is it because the cost per click has been driven up in your competitive category? Here's where you're going to need to dig deeper.
Your ideal CAC number will depend on a number of factors. For example, early stage businesses tend to have higher CAC numbers when they don’t have strong organic acquisition channels such as a large social media followings and strong referrals. It's harder to get people to engage with your brand when they've never seen it before. As your business develops a relationship and an active base of customers and as you get synergy across your marketing efforts, your CAC should go down.
Customer Lifetime Value (CLV)
Without CLV, it's hard to evaluate CAC. Lifetime value is simply the long-term profit you expect a single customer to generate. This includes the value of the first and future purchases. In some cases you'll see brands use revenue instead of profit in their CLVs but this will lead to overly aggressive and unprofitable marketing activities.
Look at the prior example of marketing spend, where the customers acquired through SMM cost an average of $30 each. Based on CAC alone, these are less attractive customers. But suppose these customers generate an average of $25 per month in profit at your business, and remain customers for an average of three years. That $30 upfront cost is high, but it’s leading to an average of $900 in lifetime value from each customer—far more than what the customers acquired through social media are providing.
WIth a net profit of $870 per customer, your SMM has proven itself more effective at reaching an audience of ideal customers—people who won’t just make a purchase one time, but will also continue to come back to you as loyal shoppers of your brand.
Repeat purchases are the key to the success of any eCommerce business and LTV is a better reflection of your ability to drive repeat purchases. Starbucks offers a good example of the importance of using LTV in addition to CAC: For the coffee company, a single purchase only brings in a small amount of sales, and the first sale to a new customer almost never covers the cost of acquiring that customer.
According to CAC alone, Starbucks’ marketing strategy performs poorly. But the company has done its homework and determined that a new customer offers incredible potential lifetime value to the brand: more than $14,000 in sales. Such a high LTV for new customers provides an obvious justification for heavy marketing spending by the company, even if the CAC still has room for improvement.
Even as you try to lower your customer acquisition costs, you should also be taking the long view of your customers and investing in an audience that offers higher lifetime value, and thus a higher potential for long-term company profitability.
This all may sound complicated and getting it right CAN be complicated. The alternative, though, is worse - activity without quality measures will ultimately lead to disaster. Without a doubt, some of your competitors are tracking their business with this rigor... Do you really want them to have the advantage?
The worst thing you can do is wait while your marketing investments continue to underperform. If you need help getting there faster, let us know. We have the tools and we can help!