26 July, 2023
Last updated on 31 October, 2023
Written by Content Team
A Comprehensive Guide to Understanding RoAS, CAC and LTV Metrics
Discover the critical eCommerce metrics that drive success! Learn about RoAS, CAC, and LTV to optimize your advertising, customer acquisition, and lifetime value.
The popularity of shopping online has refocused attention on eCommerce as a means of corporate expansion. Many firms have used multichannel strategies to draw customers in and increase sales from any device to compete with brick-and-mortar establishments.
Evaluating metrics such as CAC, LTV, and RoAS is vital for the success of eCommerce brands. While it may be challenging to incorporate these metrics due to data complexity, their importance cannot be understated. By finding the perfect balance between CAC, LTV, and RoAS, businesses can consistently and sustainably expand their brand.
CAC, RoAS, and LTV are the three most crucial eCommerce metrics for enterprises. Read on to learn more about each and its significance.
Return on Ad Spend (RoAS) is considered the gold standard for eCommerce metrics. It measures the effectiveness of advertising by calculating the revenue generated from ad spending. For example, if you invest $1 in advertising and receive $3 in return, your RoAS is $3. While RoAS helps identify profitable sales, it is not the perfect metric on its own.
RoAS = Revenue Attributed to Ads / Total Advertising Costs.
This metric provides insights into the short-term success of marketing initiatives. However, focusing solely on RoAS may overlook the cost of acquiring new customers, which is why considering Customer Acquisition Cost (CAC) becomes important.
Customer Acquisition Cost (CAC) is the cost incurred in acquiring new customers. It helps calculate the return on investment (ROI) for advertising efforts. Understanding and minimizing CAC is crucial for both small businesses and large companies.
CAC and RoAS are interrelated metrics that evaluate the success of customer acquisition efforts. While CAC alone does not reveal average order and customer lifetime values, RoAS estimates may vary across different channels.
Calculating CAC is relatively straightforward. The formula is as follows:
CAC = Total Ad Spend / Unique New Customers (or orders).
By dividing the total advertising expenditure by the number of new customers acquired within a specific time frame, businesses can determine their CAC.
Factors to Consider in CAC Evaluation
Several factors contribute to determining whether your CAC is normal or excessive. Consider the following variables:
1. Customer Behavior: A higher CAC may be acceptable if the lifetime value of your customers is high. The frequency of purchases from customers correlates with their lifetime value. Building trust and encouraging repeat purchases can contribute to higher lifetime values.
2. Advertising Methods: Different advertising methods have varying costs and effectiveness. Categorize your marketing efforts into distinct channels, such as pay-per-click and email marketing, to determine where your investments yield the best results.
3. Website Investment: If you run an online store, invest in user-friendly website design and provide valuable information to visitors. Blogging can improve search engine visibility and increase the time visitors spend on your site, potentially leading to more conversions.
4. Word-of-Mouth and Social Media: Word-of-mouth advertising from satisfied customers can significantly reduce CAC. Implement strategies such as loyalty programs and automated email processes to foster customer loyalty. Additionally, leverage the power of social media, as it often yields a higher conversion rate from leads to customers compared to outbound marketing.
Customer Lifetime Value (LTV) refers to the average amount of money a customer is expected to spend with a company over their entire relationship. It helps determine the value a customer brings to the business and is crucial in assessing different marketing channels' profitability.
Calculating LTV involves averaging historical data on the total revenue generated from each customer. To determine which channels are lucrative, it is important to analyze LTV by channel, as different channels attract customers with varying quality and lifetime value.
The formula to calculate LTV is as follows:
LTV = Customer Value x Average Customer Lifespan.
Customer Value is calculated by multiplying the Average Order Value by the Purchase Frequency, while the Average Customer Lifespan is the average number of days between a customer's first and last order.
Recurring LTV for Subscription Brands
For subscription-based businesses, recurring LTV is a critical metric. It measures the profitability and projections of a brand, considering customer retention and their willingness to continue engaging with the brand.
The formula to calculate Recurring LTV is:
Recurring LTV = Average recurring revenue per user account x Length of the partnership (lifetime).
This metric helps evaluate the profitability of a subscription-based business and guides marketing and sales campaigns.
Although similar, Return on Ad Spend (RoAS) and LTV-based RoAS are distinct metrics. RoAS evaluates the effectiveness of advertising over a short period, typically one to three months. It provides insights into the short-term financial benefits of marketing initiatives, specific campaigns or projects, marketing channels within a limited timeframe, or the holiday shopping season.
On the other hand, LTV-based RoAS considers the long-term value of marketing efforts. It assesses the efficacy of an entire marketing channel or the efforts of an entire team over time. While LTV-based RoAS may require more complex data analysis, it is highly beneficial for eCommerce businesses when optimizing advertising budgets.
Determining which metric to prioritize depends on the nature of your business and goals. If your business relies on repeat customers, subscriptions, or long-term customer relationships, CAC becomes a fundamental metric to evaluate performance. On the other hand, if immediate sales and return on advertising investment are the primary focus, RoAS takes precedence.
In general, CAC carries more weight than RoAS if your business depends on ongoing revenue from each new customer. However, if you need immediate cash flow and cannot rely solely on future earnings, RoAS becomes the key metric. Striking the right balance between expanding the business and maintaining current profits is a constant challenge.
To effectively analyze and compare these metrics, consider GoNukkad. They can assist in calculating these metrics and help eCommerce brands optimize their strategies.
Q. What is RoAS?
A. Return on Ad Spend (RoAS) is a metric that measures the effectiveness of advertising by calculating the revenue generated from ad spending.
Q. How is CAC calculated?
A. Customer Acquisition Cost (CAC) is calculated by dividing the total advertising expenditure by the number of new customers acquired within a specific time frame.
Q. What is LTV?
A. Customer Lifetime Value (LTV) refers to the average amount of money a customer is expected to spend with a company over their entire relationship.
Q. How can Recurring LTV be calculated?
A. Recurring LTV is calculated by multiplying the average recurring revenue per user account by the length of the partnership or customer lifetime.
Q. Which metric should be prioritized for eCommerce businesses?
A. The choice between CAC and RoAS depends on the nature of the business. If the focus is on repeat customers and long-term relationships, CAC is crucial. However, if immediate sales and ROI are the priority, RoAS takes precedence.
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