
In this article we’ll look at:
- The basics
- The formula
- KPIs
- How to find your CAC
- How to find your LTV
- How to use the online retail formula
- Using the formula with your company
Like most forms of business, e-commerce will generate metrics. Understanding how you can use those to measure the effectiveness of your business is a good way to improve your development.
The correct metrics will make all the difference when trying to scale your e-commerce business or prove that it is valuable to an investor.
In this article we’ll look at some of the key acronyms and terminology that are used in e-commerce. These definitions and industry jargon help when looking at e-commerce metrics, which are usually transaction focused.
The basics.
Online retail essentially boils down to a single formula, the ratio of your:
Customer Acquisition Cost (CAC) against Customer Lifetime Value (LTV)
Basically, you want your CAC to be below the LTV.
These are just the basics of retail. You want to pay less to make your customers spend money with you. The formula only becomes difficult when you have to break it down and use the metrics in a real way to generate a healthy margin of profit.
So, let’s look at the formula, and then break it down to examine it.
The formula.
This formula isn’t just about making sure that your CAC stays below the LTV. The difference between the two numbers tells you how you should adjust the spending budget for your marketing.

As the business gets bigger, the formula becomes more important because you can’t always use rough figures. Once you know how big and quickly you want to scale, you need to know how you can increase the amount you spend on acquisitions without going into the red.
On the other end of the spectrum, you might find that the CAC is much lower than the LTV, this means that you’re probably not spending as much on your customers as you could be, and there is the potential for you to improve the service by spending a bit more.
Key Performance Indicators (KPIs).
If you want your ecommerce business to be successful these are the key performance indicators you need to look at to calculate your CAC and LTV.

How to find your CAC.
Your CAC is the total average cost that you need to both acquire and keep a customer for the business. To find your customer acquisition cost, you need to divide your cost per visit by the conversion rate.
The formula: CAC = CPV / CR

How to find your LTV.
The LTV is the total value that your customer has generated via their interactions. To find your customer lifetime value, you multiply the average order value, average frequency rate, and gross margin together.
The formula: LTV = AOV x F x GM

How to use the online retail formula.
We calculated the CAC at a cost of £3.33 for each customer, and let’s assume an LTV of £60 for each customer. If we put those numbers in, it’ll look like this:
£3.33 < £60
The CAC is less than than the LTV.
In any other situation this would be a great success, but there is one key factor to consider. The first and most important rule is to keep the CAC below the LTV, but not in the severe way we’ve done here.
A ratio like this is equivalent to nearly 1:20. While that means that technically you’re doing well, you could also afford to comfortably spend a little more and do even better.
Using the formula with your company.
You’ve gone through all of the calculations and you’ve found that your ratio is perfect, then that’s good. If not, try not to worry, because this is why we have the formula in the first place.
Now that you’ve put all the KPIs into the system and found what makes up the ratio, you’ve got the chance to pick the weakest of them and improve it. Instead of trying to make the good parts perfect, find the worst-performing parts and make them better – it’ll help in the long term.
If the problem is that the CAC is too high or the LTV is too low, then the average for the industry is roughly where you want to be. If the problem is more with the CAC, then take a look at the KPIs that you used to find them.
Maybe the problem is that your cost per visit is going to be too high or the conversation rate is going to be too low. You can pick an area to focus on quite easily with these figures so it’s worth looking at.

Talk to us about Ecommerce Digital Marketing Services.
Call us FREE from mobiles and landlines on 0800 044 3664 and speak with one of our White Label experts to request more information or schedule a meeting.
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