Do you know what it takes to grow your business? There is an actual formula for that. Actually, there are quite a lot of formulas.
So which one is the correct one?
In this episode, you’ll learn how the right eCommerce Growth Formula can help you dramatically increase your revenue and profits.
- (00:00) – Intro
- (00:26) – The first Growth Formula and its downsides
- (01:03) – Improving the original formula with the ration between LTV and CAC
- (01:57) – Factors that affect Customer Lifetime Value and Customer Acquisition Cost
- (02:49) – Where to focus your efforts in your eCommerce
- (03:40) – How Omniconvert Reveal can help you monitor and improve your LTV:CAC Ratio
The initial eCommerce growth formula
I’ve started as an eCommerce entrepreneur back in 2007, and I’ve made this terrible mistake for 3 whole years in a row.
When I first started my activity as an eCommerce entrepreneur, I only thought that this is the right formula:
The harsh reality is that I was missing out on the most important thing: the balance between the customer lifetime value and customer acquisition cost. So how much am I spending to acquire a customer and for how long and how much will I get as an eCommerce from that customer?
That made me improve the formula. The ratio between the customer lifetime value and the customer acquisition cost is crucial because it allows you to see how much you can afford to acquire a new customer based on the predictive customer lifetime value of your former customers.
Understanding this ratio is going to help your eCommerce, not only because you’re going to improve the KPIs, but also it will help you negotiate better terms with your VC investors if you want to raise money.
The beauty of this ratio is that it captures in advance the problems that your eCommerce is going to have, while if you guide yourself only through the P&L and the cash flow, you are not going to see the future behavior of the customers that you are acquiring today.
Three factors that influence the customer lifetime value and the customer acquisition cost
However, the customer lifetime value and the customer acquisition cost are also affected by other factors.
For instance, customer lifetime value is strongly correlated with the customer experience. The good news is that you can monitor the customer experience by using the net promoter score or the customer effort score.
Another important KPI that affects the customer lifetime value is the customer retention rate. If you are unable to keep customers coming back and buy again from you, the customer lifetime value goes down.
And of course, your margin. Margin is an important factor that is affecting your customer lifetime value because it shows you how much your eCommerce keeps after it pays the cost of goods sold.
The most important metric for eCommerce
Don’t fall into the trap to adjust things like the CTR and the CPC! Don’t waste your time in Google Analytics. It’s better to look at the underlying factor which is affecting what truly matters for your eCommerce.
Customer lifetime value should be our North Star metric and customer acquisition cost should be closely monitored so that you can improve this ratio between the CLV and the customer acquisition cost.
The other part, how many customers you acquire, of course, is going to be affected by the traffic and the conversion rate. I’m not saying to not monitor those, but maybe it’s time to begin with the end in mind.
Look at the ratio between the CLV and CAC before you put more money in customer acquisition.
To monitor customer lifetime value and customer acquisition cost, you can use Omniconvert Reveal.
Of course, you could have the alternative to download the CSVs and do this manually. But that takes a lot of time and it’s kind of tedious, right?
Stay tuned for our next eCommerce Growth Tips video next week where we learn more about how your eCommerce can sell more!