How should you measure the success of your eCommerce store? Sales and revenue are important metrics for tracking the short-term performance of your marketing campaigns, but they are not enough to determine your Shopify store’s present and future success.
One of the most important metrics for any eCommerce business is customer acquisition cost - the price businesses pay for acquiring one new customer. Keep reading to learn why customer acquisition cost is very important and how to calculate it for your own online business. We will also discuss other useful metrics: customer lifetime value and Shopify profit margins.
What is an Average Customer Acquisition Cost in eCommerce?
Customer acquisition cost is the average cost of gaining a single additional customer. In the simplest form, you can calculate the customer acquisition cost or CAC by dividing all the money spent on acquiring more new customers (marketing and sales expenses) over a given period by the number of additional customers acquired during the same period.
For example, if you spent $1500 during the past month to gain new customers (including sales, marketing, salaries, and overhead costs) and acquired 100 new customers, the average customer acquisition cost for your eCommerce store would be $15.
There is a more complex, more accurate way of calculating CAC, but it involves a lot of other variables. You can use the simple method outlined above, because it is more useful than not doing these calculations at all.
Tracking this metric can give you a good idea of how sustainable and scalable your business is. Reducing customer acquisition costs is a powerful way of increasing the value of each transaction. You started a business to make money, so you need to get a better return on investment from your marketing budget.
If you track customer acquisition cost together with the average order value (AOV) or your customer lifetime value (CLV), you can understand how effective and efficient your sales and marketing campaigns are.
How to Calculate Customer Lifetime Value for Your Shopify Store
Customer lifetime value is one of the most useful metrics for eCommerce because it can accurately predict how much your Shopify customers are really worth. CLV allows you to measure the net profit you can take in over the course of your entire interaction with customers. You will be able to understand how much value they can bring to your business in the long run, and determine how much money you can afford to spend to gain new customers, which customers you should be focusing on, and how much you should spend on retaining the customers you already have.
Customer lifetime value is the total amount of money each customer might spend in your store during their lifetime.
Not all customers are created equal so first, you must segment them by factors such as recency, frequency, and monetary value (RFM). Then you should analyze each group of your customers to determine the group with the highest CLV.
- To segment your customers with RFM, you will need information about the date of the most recent purchase, the amount of purchases they have made during a certain period of time (e.g. a year), and the total amount of money your customers spend during the timeframe. Shopify store owners can find all this data in the Report Section of their Admin. If you click the line "Sales by Customer Name", you will find information about every customer.
- You should organize the information on a spreadsheet and give a scale to each variable from 1 to 3 to visualize which customer groups are more valuable. When sorting your data according to recency, frequency, and monetary value, you should assign a score of 1 to the third of your customers that are least valuable, a score of 2 to the third above that, and a score of 3 to the third of customers which is most valuable.
- Then you should add all the scores of every customer to get the total RFM Score.
- Last, you should sort the chart you have made by RFM Score and divide your customers into 3 segments with the highest, middle, and the lowest score.
- Now you can determine the value of every segment to find out which of your Shopify buyers perform the best.
Now you can calculate customer lifetime value for each of your customer segments.
To do that, you will need these variables:
- Average order value is the average amount of money every customer spends when they make purchases. You can get it by dividing the total revenue by the overall number of orders during a certain timeframe.
- Purchase frequency is the average number of orders made by every customer. You can calculate this variable by dividing the total number of orders during the timeframe by the total number of unique customers in your store.
- Customer value is the average amount of money every customer brings to your online store during a specific timeframe. You can calculate it if you multiply the average order value by the purchase frequency.
To calculate the CLV, you have to multiply the customer value by the average customer lifespan in your store.
If your store is new and you haven’t got enough data about the average lifespan length of your customers, you can take a lifespan of about 3 years for a rough estimate.
Don’t think you can find enough time to calculate and analyze these metrics using financial formulas and Excel? Take advantage of automation software that can do customer analysis for you.
Repeat Customer Insights is a Shopify app that will analyze your store’s customer and order data and provide you with customer segmenting reports based on the RFM algorithms and help you discover who your best customers are. You will also get customer purchase latency reports that will help you develop powerful marketing campaigns.
The CLV: CAC Relationship
Now that you know how to calculate customer acquisition cost for your eCommerce store and the customer lifetime value, let’s go one step further and focus on an important ratio that tells exactly how much value you get from your customers in relation to how much money you spend to acquire them. We can calculate the lifetime return on investment.
ROI = (CLV-CAC)/CAC
You will fail if the CAC of your online business is higher than your CLV. Since you spend more, on average, to get a customer than the profit they give you, you are losing money from each acquisition. Either your marketing and sales efforts are not reaching the right customers or your cost of customer acquisition is too high. In this case, you should look for more cost-effective marketing channels that attract more profitable long-term customers. The ideal ratio will depend entirely on the type of your business, but 3:1 can be considered the perfect level for a strong business model and means that your eCommerce business is thriving.
How to Calculate Profit Margins for Your Shopify Store
Keeping healthy profit margins is critical for the growth and sustainability of your eCommerce business. Profit margins indicate the profitability of your online business and are expressed as a percentage.
Small retail businesses should consider two types of profit margins:
- Gross profit margin applies to a specific product and can be calculated by subtracting the cost of goods sold from net sales, then dividing the resulting number by the net sales and multiplying by 100 to get the percentage.
- Net profit margin shows the profitability of the entire business and can be calculated by dividing the company’s net income by the total sales and then multiplying by 100 to get the percentage.
Wondering how to calculate healthy eCommerce margins for your products? Shopify store owners can use a profit margin calculator online to determine profitable selling prices for their products. Shopify profit calculator can help you develop effective pricing strategies for your online store to attract more customers, boost sales, and increase your revenue.
If you truly want to grow a profitable eCommerce business, you need to increase your customer lifetime value - this will allow you to increase your return on investment. You can do this by building loyalty and increasing the amount of repeat and loyal customers. You can use the Preferred Customer Shopify app to launch an effective loyalty program for your online store and motivate your customers to buy more products. By installing the Discount Reminder app you will be able to automatically notify your shoppers about discounts for products they are interested in and motivate them to make purchases.