It’s a commonly accepted belief that businesses should know their customers. After all, without the ability to attract and gain customers, any business wouldn’t last. Yet knowing your customer extends beyond understanding their likes or dislikes. Many e-commerce companies today are tracking important customer metrics to accurately gauge their overall profitability, save money, and maintain a competitive advantage in the marketplace. So what are these metrics, and why do they matter? Let’s break down customer acquisition cost vs. lifetime value.
Understanding Customer Acquisition Cost Vs. Lifetime Value
Customer Acquisition Cost
In measuring customer acquisition cost vs. lifetime value, it’s important to understand what each metric illustrates. Customer acquisition cost (CAC) determines the amount of money required to acquire a new customer. Customer acquisition cost factors in the variety of expenses needed to attract and convert a customer, including:
- Marketing and advertising - TV and radio advertising, social media campaigns, digital ads, billboards, marketing team salaries, etc.
- Referral fees and commissions from e-commerce platforms
- Shipping and fulfillment costs
CAC is all about the costs the business spends to gain a customer and doesn’t consider the revenue resulting from the customer’s purchases, often measuring a shorter window of time than customer lifetime value. To calculate your customer acquisition cost, simply divide the total costs incurred for a specific time period by the total customers acquired within that same period.
Customer acquisition cost is important because it gives your company valuable insight into the effectiveness of your company’s marketing and sales strategies. With CAC, you can determine if you’re spending too much money on marketing compared to the ROI you’re getting in return. As a result, you can make adjustments to ensure your marketing efforts are sustainable long-term, such as refocusing advertising strategies and adjusting budget allocations.
Customer Lifetime Value
On the other side of customer acquisition cost vs. lifetime value, customer lifetime value (LTV) is the total value the customer brings over the lifetime of their relationship with the company. Providing a long-term perspective, LTV takes into account revenue that comes from the customer’s purchases, how often they buy, their average order value, and how long the individual remains a customer. To calculate customer lifetime value, all you need to do is multiply the customer value for the year by the expected customer lifetime.
Calculating customer lifetime value is beneficial in key ways to today’s e-commerce company. Not only does it measure profitability associated with gaining and retaining customers, it also reveals which customers bring in the most value. Consequently, businesses can then cater their marketing efforts towards the types of customers that will generate the most profits.
Customer Acquisition Cost Vs. Lifetime Value: The LTV:CAC Ratio
So what do you do with these important customer metrics? In weighing customer acquisition cost vs. lifetime value, businesses will compare the costs they spend to reach customers with their actual profits, called the LTV:CAC ratio. Ultimately, this ratio is the primary measurement for the overall profitability and long-term health of your business.
To calculate LTV:CAC, you just need to divide your customer lifetime value for a given time period by the customer acquisition cost from the same time period. Ideally, the higher the ratio, the better. For example, if a company’s ratio is 1:1 or less, then they’re spending more on acquiring customers than the amount of profit they’re getting in return. However, if the ratio is 2 or 3:1, they’re getting profit that’s 2-3 times what they spend to acquire the customer.
Improving LTV:CAC with Warehousing and Fulfillment
As we’ve explored customer acquisition cost vs. lifetime value, it’s easy to see that improving customer lifetime value means better profits for your business. And one of the best ways to improve this value, as well as your overall LTV:CAC ratio, is optimizing your company’s logistics operations.
Boosting your warehousing and fulfillment capabilities leads to faster order processing and better accuracy, as well as reliable delivery, improving overall customer satisfaction. Plus, faster order fulfillment and shipping makes your company more attractive to today’s customer expectations. More efficient logistics operations also means you can manage inventory and increased order volumes seamlessly as your business grows. All of these factors lead to greater customer retention and lifetime value.
Ready to Optimize Your Logistics? Smart Warehousing Can Help
To get their warehousing and fulfillment needs done right, many e-commerce companies today are partnering with the trusted expertise of a 3PL. At Smart Warehousing, our world-class logistics solutions can reduce costs and increase customer retention, leading to better customer metrics and more profitability for your business. To learn more about how our fulfillment, warehousing, transportation, and replenishment services can help you improve your customer satisfaction and loyalty, contact us today.