The calendar has only just turned to August (it’s almost 100 degrees here in Seattle!) but the holiday season is right around the corner. Your peak selling season is fast approaching and it’s time to get geared up for the November and December rush. The best way to prepare for the busy season is to understand the metrics that matter for your store.
Learning your numbers will make you understand what it costs to acquire customers but even more importantly what you earn over the lifetime of each customer. You can then scale your marketing channels by doubling down on the areas that are the most profitable. So without further ado, let’s get started on some of the key metrics.
What are Customer Acquisition Costs?
Do you know your customer metrics down cold? As Kevin O’Leary on Shark Tank often laments, many entrepreneurs don’t know their numbers. If you are trying to run your company by feel and are afraid to dive in to statistics, you are putting your business at risk.
The first data point you need to know is your customer acquisition cost or CAC for short. For your business to flourish new customers have to come to your store and make purchases. Acquiring these new customers has an associated cost and it’s best to think about your CAC by channel:
- Paid Advertising (by source)
- Content Marketing
- Email Marketing
- Events and Conferences
I recommend using an Excel spreadsheet to calculate your numbers and pick a time period to evaluate everything (I prefer looking at yearly data to get a large enough sample size).
What is Customer Churn?
Before I founded BTown Web I was doing some freelance work for other agencies. Mark Portrait from Snapshot Group gave me a great quote that I will never forget: “10% of your customers have fired you, they just haven’t told you yet”. This is the reality with all businesses, but instead of accepting an arbitrary number as your churn rate, you need to calculate it.
Here is how you calculate customer churn: Pick a time frame to review (I like to choose a year) and then determine how many customers you had at the beginning (say 1,000) and how many you had at the end of the year. This is easy to calculate for ecommerce companies that sell monthly or yearly subscriptions. If you are like most ecommerce companies you will want to look at a longer time period for customer churn because many customers might skip a couple years between orders. I recommend looking at a 5 year period and if a customer goes the last 3 years without an order consider them dormant and churned.
Average Order Amount
This is an easy metric to calculate, take a time period (1 year is usually fine) and then sum up all your orders and divide by the number of orders and this equals your average order amount. You should calculate this every year and compare year over year numbers to see if you can find a way to increase your average order size. Work on improving your cart and checkout pages by adding related products and exit popovers and you can bump this number 10-20% with minimal effort.
For Order Frequency I like to pick a longer time interval, I think 5 years is a good time period (similar to the churn measurement). Download a list of all your customers and then determine how many times each customer orders. If you are getting an average order frequency of 2.5X or higher your doing well, many businesses I have reviewed have order frequencies in the 1.25 – 1.75X range.
Customer Lifetime Value
Now that you have determined all your baseline metrics you are ready to ascertain your customer lifetime value (CLV). The customer lifetime value, is the value you get from a customer through the lifetime of their purchases.
There are many, many ways to calculate your CLV, here is a simple one:
(Order Value x Order Frequency) – Customer Acquisition Cost = Customer Lifetime Value
The key here is the first part of the equation (Order Value x Order Frequency) must be larger than your CAC. You will also want to segment this calculation by channel to get the most useful results. Let’s assume we have been advertising by using Google Product Listing Ads for the last year, here are some sample numbers:
(Order Value $60 X Order Frequency 1.5) – $40 CAC = $50 Customer Lifetime Value
Customer Lifetime Value with Margin
To further refine your CLV calculation you may want to apply your gross margin to the formula. Here is how that would look in our sample above:
(Order Value $60 X Order Frequency 1.5 X Gross Margin 70%) – $40 CAC = $23 Customer Lifetime Value
Many people like to add gross margin into the formula to account for the overhead required to sell each product.
Sample Customer Acquisition Strategies
Now that you you know your numbers it’s time to find some new customer acquisition channels! If you happen to be looking for more sales, here are some great suggestions:
- Reach out to a supplier or partner about a co-marketing/co-branding opportunity. For example we host Shopify events in Seattle and are able to leverage the Shopify customer base to get a large group of people together. Shopify loves this as we are marketing for them and it puts us forward as an expert in our industry.
- Resend your email newsletters a 2nd and a 3rd time but just to the population of users that never opened your original email.
- Scope out websites that rank for your product phrases. Identify key acquisition targets and send them an offer to buy their site. If the site is mostly informational you can 301 redirect that site to your main site or install a store on the information site and sell through a new brand.
- Update old content and republish in a different channel. For example if you wrote a great blog post last year but never sent an email out about it, repurpose that post for your next email newsletter.
- Create an affiliate program. If you have a lot of people talking about your product, incentivize them to help sell more by giving them credit for each new sale they refer to your store.
- Answer questions on Quora. If your product vertical has a lot of questions on Quora you can create an account and respond to questions posed by others. This will put you out there as a 3rd party expert and help drive traffic to your store.
There are so many unique things you can do to drive incremental traffic and revenue to your ecommerce store. If you know your numbers and can capitalize on the channels that are the most effective for your brand you can dramatically increase sales.