Are you keeping track of customer lifetime value and customer acquisition cost? It's high time you did. May 21, 2019 6 min read Opinions expressed by
Are you keeping track of customer lifetime value and customer acquisition cost? It’s high time you did.
May 21, 2019 6 min read
Opinions expressed by Entrepreneur contributors are their own.
In ecommerce, data is everything. When you’re new to ecommerce, your time is usually spent on binary decisions and tasks that help you get closer to launching your business: You decide what products you want to sell, who your audience is and how you’re going to reach those people. You build a website, put the right tools in place and create processes for shipping and fulfillment.
In the early days, you’ll focus on putting the building blocks in place to ensure that you can successfully launch your business. But to succeed beyond post-launch date, you’ll need to step up your game and quickly evolve from business builder to data analyst. Then, once your online store is up and running, you’ll need to make the kinds of strategic changes that help you boost revenue, reduce costs and acquire more customers.
All the while you’re doing this, there’s also that data to stay ahead of. Knowing the analytics behind every aspect of your ecommerce business will help you make informed decisions about which areas to change and which to optimize, and when. To do so successfully, start with these four metrics:
1. Customer lifetime value (LTV)
Customer lifetime value, or LTV, is one of the most important metrics to track in ecommerce, but it’s often overlooked for sexier metrics like ROAS (return on ad spend) and AOV (average order value).
LTV helps you understand how much profit you’ll earn during the average customer lifespan. Knowing the lifetime value of each customer you acquire can help with forecasting, budgeting and marketing strategy. More specifically, it can help you understand how much money you can spend acquiring customers while still remaining profitable. It can further help inform decisions and strategies relating to customer retention and order frequency. Calculating LTV isn’t overly complicated. It just requires you to know a few key data points and be able to perform some simple calculations.
Shopify does a great job of breaking down the data and equations needed for calculating LTV, but the task essentially works like this: To determine LTV, you need to identify customer value by taking your average order value and multiplying it by your purchase frequency. From there, you multiply this number (customer value) by your average customer lifespan.
If that all sounds a bit too complicated for you, the good news is, there are a handful of reporting and analytics tools out there like Compass and OrderMetrics that will calculate and report on LTV for you. HubSpot also has an LTV calculator that can make finding this number a lot easier for you.
2. Customer acquisition cost (CAC)
Another important metric to know is your customer acquisition cost, or CAC (sometimes referred to as CPA or cost per acquisition, especially in ad platforms). CAC helps you understand how much money you spend in order to acquire or convert new customers. Knowing your CAC is important because it can help you decide how much money you should be spending to acquire new customers each month.
Calculating CAC is fairly simple. Just divide the total costs associated with acquiring customers by the total number of new customers acquired over the specific time period when the money to acquire was spent. Examples of costs are paid social advertising, content creation, direct mail campaigns, etc.
Once you know your CAC, you can evaluate it with your LTV to understand how much you’re spending to acquire new customers vs. how much money you’ll make from them during their time as a customer of yours. If you run the numbers and find out you’re actually spending more than you’re forecasted to make (after you subtract your CoGS — or cost of goods sold), you’ll know you have a problem that needs to be addressed.
3. Page speed / load time
To succeed in ecommerce, you also need to pay close attention to page load time on your website. Page load time, or page speed, refers to the average number of seconds it takes for a page on your website to fully load for visitors. Because you don’t have the opportunity to meet your prospective customers in person in the same way that a traditional retail business would, your website is really your primary tool for creating the right first impression with people.
A slow website can negatively affect user experience, your ability to build trust and your likelihood to convert new visitors. It can also increase your bounce rate — the percentage of visitors who arrive on your page and leave before taking any other action. A high bounce rate can negatively impact your ability to compete in search results on Google.
When it comes to improving page speed, what might seem like microscopic changes can yield big results. Your ability (or inability) to improve page speed by milliseconds can have a tangible and sometimes significant impact on conversions.
You can measure and track page speed in Google Analytics in the Behavior section of Reports. For tips on how to improve page speed and load time, read through the ideas presented in this article from Shopify.
4. Revenue by channel
Revenue by channel is another metric you should be tracking on a regular basis to fuel business growth. Knowing where your money is making the biggest impact can help inform your decisions about future marketing and growth strategies for your business. We refer to this as profit and marketing performance. If you know, for example, that your Facebook ads are resulting in more conversions and revenue than your direct mail campaigns, you might decide to shift more of your budget over to Facebook and dial back your direct mail efforts.
To understand revenue by channel, dig into the acquisition report in Google Analytics. This report will give you access to conversion rate and revenue data by channel. You can also get revenue and marketing performance data using tools like OrderMetrics, Glew and others.
Related: Vrooom! Why Website Speed Matters.
To build a profitable, sustainable ecommerce business, pay attention to the data. Having a firm understanding of ecommerce analytics will help you optimize current initiatives, shape future strategies and make informed decisions that can drive real growth for your business. And if you need a little more help here, check out this article by Michael Ugino which guides you through an optimal setup of Google Analytics for ecommerce.
This article is from Entrepreneur.com