It’s a pretty sweet time to be an eCommerce brand! Most consumers now shop online for most, if not all, of their needs. However, you must ensure that your business stands apart from your competition and stay ahead of the curve at all times (and on top of the latest recipes), which involves continuously adapting to stay relevant.
There are endless data and search engine optimization (SEO) tools that can be used to measure performance. But knowing what to look at and what it means can feel like you’re drowning in cake batter.
If you want your eCommerce business to continue to thrive and grow, you need to know how to measure performance. Luckily, as long as you understand your CAC to CLV ratio, measuring your performance is a piece of cake!
CLV to CAC Ratio
Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV) are ideal indicators of your business’s long-term success. These separate metrics can be combined into a single KPI (key performance indicator) known as the CAC-to-CLV ratio. This ratio is designed to monitor the relationship between what it costs for a company to attract a first-time buyer and how much that customer is likely to spend.
What Does This Ratio Mean?
Your CAC should be less than your CLV. If your ratio is equal, this means that your business is stagnant when you want your profits to be rising. If it costs you the same to acquire a customer as it is to have them utilize your business, you won’t see any economic growth.
If you have a ratio that is three to one or higher, your company is building value. This indicates that the money you’ve put into marketing, website design, and other customer acquisition techniques is drawing in the customers you want who are willing to buy what you are selling.
Don’t worry, there is a sweet spot to this ratio! Much like baking, if you experiment too much with your ratio of ingredients, you’ll impact the final outcome. You don’t want a cake that is too sugary, too dry, or undercooked – you want the perfect balance. Your CAC to CLV ratio functions in a similar way. If your ratio is too high, such as 25 to 1, you aren’t investing enough into your business to stay fresh. This can leave you vulnerable to customer loss in the highly competitive digital world.
Determining Your CLV
You can calculate your customer's lifetime value in a few different ways. One method is to use your company’s sales data. First, you will want to find your AOV (the average order value that your company has had in the past year). This is the business's total sales divided by the number of orders within a specific period.
Once you have your AOV, you’ll multiply that number by the average number of times a customer purchased that year. You’ll then multiply that result by your margin, which is the amount of money you have left after expenses.
Determining Your CAC
Your customer acquisition cost is like a recipe: It focuses on the total promotional costs divided by the number of new customers acquired during a specific amount of time. Promotional costs can include the costs of various advertisements, the effort put into making the ad, creating promotional social media, and anything similar.
How Often Should I Check My CAC to CLV Ratio?
Running an eCommerce business can be like cooking several recipes at once — there are many moving parts to focus on. While CAC to CLV ratio is essential, it doesn’t necessarily need to be monitored constantly. There are two main ways that you can benefit from checking your ratio.
- It is beneficial to give your CAC to CLV ratio a 12-month review. You can perform this review at the end of each month. This lets you see the previous year’s numbers in small increments, giving you better insight into shopping trends and what promotional tools worked best for you. Even with the larger audience that eCommerce provides, there are still trends in spending that you can use in your favor. Checking your ratio monthly lets you see these trends and helps you to better monitor your health and growth.
- Another way to keep an eye on your CAC to CLV ratio is through three-month reviews. Instead of pouring over an entire year’s worth of information, three months allows you to focus more easily on a smaller timeframe. This method allows you to see immediate trends and potentially take any problems off the burner before they start a fire. This is great for keeping an eye on seasonal trends. Depending on your type of business, your overall success can be significantly impacted by changes in weather and consumer need.
Growing Your eCommerce Business
Staying in front of your competition can be challenging in the digital world. You rely on customer acquisition to stand apart from your competition. If you want to continue to grow your business and see profit, tracking your CAC to CLV ratio can help. You want to invest in promoting your business to draw in customers, but you must also ensure that the customers you attract are spending enough to compensate for your investment. Acquisition and retainment are key to long-term eCommerce success. With a well-established ratio, you can sit back and watch the dough rise.
For help calculating your CAC to CLV ratio or creating a strategy to improve yours, contact the CakeCommerce team today to get started.