![]() (In this formula, we’re defining a conversion as the move from visitor to customer).ĬPV = Total Marketing Costs (acquisition and retention) / Volume of VisitsĬR = Total Number of Customers / Total Number of Visitors Your CAC is the total average cost to acquire and keep a customer for your business.įind your customer acquisition cost by dividing your Cost Per Visit (CPV) by your Conversion Rate (CR). How to Find Your Customer Acquisition Cost (CAC) There are five Key Performance Indicators (KPIs) successful e-commerce companies look at to determine CAC and LTV: The process of solving this formula will change the way you look at your business, leading to a more customer-centric model for this customer-centric market. The variables you’ll need to define as you start piecing it together (Cost Per Visit, Gross Margin, Frequency, etc.) are valuable to be aware of as well. Solving this formula for your business gives you more than your CAC:LTV ratio. Deeper Reasons for the Online Retail Formula However, it would be because the target group is smaller not because they’re making more money. If Apple started selling items that only 1% of the population could afford, their average LTV would be enormous probably much higher than its CAC. You should also consider that LTV is based on the average customer. And if you aren’t spending enough, your competitors will. However, if your LTV is way higher than your CAC, it could indicate that you aren’t spending enough on your customers. ![]() Hugh Kimber | General Manager EMEA and Emerging Markets A ratio of 1:6+ is even better.“ 1:6 and up means your customer loyalty program is working brilliantly, your customer experience is near perfect, and overall you’ve honed and optimized your site just right. “The ideal CAC:LTV ratio is different for every industry, but the comfortable range is between 1:3 and 1:5. On the opposite end of that, you might find out that your CAC is too much lower than your LTV, meaning you aren’t spending enough on your customers. Once you start looking into how large and how quickly you can scale, you will want to know if, and by how much, you can increase your acquisition spending without going into the red. The larger your business grows, the more important the retail math formula becomes you won’t always be able to use rough estimates. The difference between your CAC and LTV will inform you of how you should adjust your marketing spending. The online retail formula isn’t just a matter of figuring out if your CAC is lower than your LTV. Business & Marketing Reasons for the Online Retail Formula You can have a rough idea of what you spend and what you make back without having to do the retail math, but there are tangible reasons to sit down and make this formula work for your business. Why is the Online Retail Formula Important? ![]() The tricky part is breaking the formula down, and using the insights you gain in an actionable way. First, let’s discuss why you should care about this formula, then we’ll break the formula down to examine the parts. Of course, you want to pay less for your customers than you make from them. Which makes sense that’s basic retail math. Keep your customer acquisition cost (CAC) below your customer lifetime value (LTV). The online retail math formula describes the ratio of your customer acquisition cost (CAC) to your Customer Lifetime Value (LTV). At its simplest, you want your formula to look like this: The holy grail of retail math. This article will show you how to use it. But there’s one retail math formula in particular that can best predict the success or failure of your company. As a decision maker at a digital commerce company, there’s all sorts of retail math formulas you have to do to make sure everything is running as it should be (average inventory formula, retail markup calculation, average unit retail, etc).
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