Confused About Your Target CAC? Use This Simple Method

Knowing your ideal CAC (customer acquisition cost) is one of the most powerful keys to building a sustainable and profitable business. The goal is to know exactly how much you can afford to pay to acquire a new customer.  

This gives you crystal-clear confidence in your marketing - because it means that if you are hitting the number you can scale your marketing. 

Below we share a simple yet effective method for calculating this figure. Although this method doesn’t take into account all of your future potential lifetime value from a customer (so it errs on the conservative) - it does give you a simple and clear picture of how much you have made from each customer in the last 12 months.

Step 1: Pinpoint Your Total Revenue

To start, take a look at your website's total revenue over the last 12 months. This crucial figure serves as the foundation. 

Step 2: Identify Unique Customers

Next, identify the number of unique customers you've had over the same 12-month period.

Step 3: Determine the Average Lifetime/ 12 Month Revenue Per Customer

Divide your total revenue by the number of unique customers. This is your 12-month Life-Time Value (LTV), as it is the average amount each customer has spent in a year. 

For instance, if your revenue stands at £500k and you have 1000 customers, your LTV is £500.

Remember you can improve your lifetime value if you improve Repeat Purchase Rate: Foster loyalty through exceptional customer service, personalized experiences, and targeted marketing campaigns to encourage customers to return for additional purchases.

Step 4: Calculate Your Profit Margin

Now, factor in your cost of goods sold (COGS), typically around 50%-70 for most businesses. It is crucial you take the time to do this well - don’t miss any of the costs associated with delivering your product to people - packaging, shipping, handling, taxes etc. Every cost must be considered at this stage so you have a really accurate profit margin.

In our example - at 50% your 12-month profit per customer is £250 (50% of £500).

Step 5: Decide on your ideal LTV to CAC ratio

The profit from the lifetime revenue of your customer should be equal to or greater than your CAC, otherwise you are losing money. For instance, in our example, if  you acquire customers at £50 or less, while keeping overhead costs in check, your business will remain profitable. 

Now you need to factor in cash flow, and whether you want to go for fast growth (higher CAC, lower profit margin) or more efficient, profitable growth (lower CAC, less ability to compete for ad-space). 

Armed with this data, you can confidently communicate your ideal CAC to your media buyer. 

For instance - you might tell them - if they can deliver a CAC of £250 or less, scaling the  ads becomes a viable option.

Armed with this understanding - you can now look at what key levers to pull to allow a higher CAC (at which point you can be more competitive) or a higher profit percentage.

How to Lower Your CAC

Here are the main levers you can pull in your marketing to improve your LTV to CAC ratio. 

1. Increase Average Order Value (AOV): Encourage customers to add more items to their carts or explore premium products, thereby boosting the average value of each purchase.

2. Enhance Conversion Rate: Optimize your website's user experience, streamline the checkout process, and employ persuasive marketing strategies to convert more visitors into paying customers.

3. Improve cost per click CPC (usually through better CTR on ads) 

By consistently revisiting and refining these levers, you can effectively boost your business's profitability and foster sustainable growth in the competitive eCommerce landscape.

Understanding and optimizing your Customer Acquisition Cost is crucial for the long-term success of your eCommerce business. By implementing these strategies and continually monitoring your CAC, you can pave the way for a thriving and profitable business that stands the test of time.

Don’t forget, our team are here to help accelerate your eCommerce business with Facebook, Google, TikTok and Pinterest ads and Klaviyo email marketing. 

Let’s chat about your business and goals - email us on hello@webtopia.co