Understanding the cost of acquiring a customer is an important piece of the puzzle. This metric is known as cost per acquisition (CPA) in eCommerce. This cost can distinguish between a profitable business and losing money on every scale. Moreover, cost acquisition per customer is also interrelated with another important term, customer lifetime value (CLV). While CPA helps you determine the cost of bringing a customer, CLV shows the long-term value of the customer to your business.
This blog explores the important components of CPA and CLV while sharing information about how they shape your eCommerce business and marketing strategies. From understanding the importance of CLV to calculating it, and from identifying strategies to boost CLV to considering what affects CPA, you will learn about it in this blog.
If you are trying to minimise your marketing costs or increase your customer profits over time, this guide will provide you with the knowledge to navigate the complex nature of eCommerce markets.
Understanding Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the value a customer brings to your business throughout your relationship with them. It is an important metric that helps businesses understand the total profit or revenue a customer can generate over a period in their relationship with the company.
CLV not only includes how much a customer spends in your business in one transaction, but it is also about assuming that the customer will make future purchases.
CLV helps eCommerce industries focus on long-term strategies rather than short-term goals.
The Significance of Customer Lifetime Value
Customer lifetime value is a powerful value that helps businesses shape their business strategies. It helps them see beyond individual or single transactions and focus on the long-term value that a customer brings. It is a roadmap to create a loyal customer base.
Some of the factors that enhance the significance of CLV are:
- Focus on retention: There is a famous saying that keeping an existing customer is cheaper than finding a new one. Similarly, CLV shifts your focus to customer retention, building strong and lasting relationships, and earning their loyalty.
- Smart marketing decisions: CLV helps assess your marketing strategies and budget. Businesses that know their CLV focus their resources on customers, maximising their value.
- Sustainable growth: Businesses today understand and use CLV better for long-term success. They focus on their customer’s lifetime value and not just short-term profits, which helps them create a sustainable business chain where they benefit from customer loyalty and long-term relationships.
- Customer segmentation: Customer lifetime value helps you identify the different segments of the customer base according to their profitability. This helps businesses customise their marketing strategies, products, services, etc., according to the different needs of particular segments, which ultimately brings more profit.
Calculating CLV: The Method
CLV can be understood better by understanding the components involved in it. The basic formula to calculate CLV is:
CLV = (customer value) x (customer lifespan in years)
CLV = (average purchase value x number of purchases per year) x (customer lifespan in years)
Let’s understand the components now:
- The average purchase value is the average amount that a customer spends in a single transaction. To calculate this, you have to divide the total revenue by the number of times the customer has purchased over a period.
- The number of purchases per year is how frequently a customer buys from your brand in a year. To calculate this, you must divide the total number of purchases by the number of customers.
- A customer’s lifespan in years is the average time a customer continues buying from your brand or store. To calculate this, you must divide the sum of all customer lifespans by the number of customers.
Once you have calculated all the numbers, you can multiply them to get the CLV.
Strategies for Boosting CLV
Here are some simple and common strategies that can help you boost CLV:
- Personalised marketing: You can customise the marketing techniques and messages per individual customers based on their purchase history and choices. This personalisation will help you communicate while engaging customers and increasing the chances of repeat customers and purchases.
- Customer service: Providing excellent customer service can boost customer satisfaction and loyalty to your brand. Identify the concerns and issues your customers face and try to solve them promptly while turning a one-time buyer into a loyal customer.
- Loyalty programs: Different loyalty programs and strategies, like rewards, discounts, points, exclusive offers, etc., for customers, can benefit your business as they attract customers to keep coming back.
- Quality of products and services: Ensure the products and services you provide meet customer expectations and needs. High-quality products and services will help customers stay satisfied.
- Cross-selling and upselling: You can increase your profit by encouraging customers to buy more products by recommending products related to their choices, needs, or searches. This will increase the average purchase price of the order and directly impact the CLV.
What is the Cost per Customer Acquisition?
Cost per customer acquisition measures how much you or your business spend to get new customers.
It is generally calculated by dividing the total cost of marketing and sales efforts by the number of new customers acquired during a particular period. For example,
If you have spent Rs.10,000 on marketing in a month and have 100 new customers, then your cost of acquisition per customer will be Rs.100.
Cost acquisition is important in evaluating the efficiency and effect of your marketing strategies while ensuring the efforts made are cost-effective.
It also helps to gain valuable insights into the financial aspects of your marketing. If your cost of acquisition per customer is higher than the customer’s lifetime value, then your marketing strategies are costly and need to be adjusted. But if your cost of acquisition per customer is lower than your customer’s lifetime value, then your marketing strategies are working efficiently, and you are gaining new customers at a profitable rate.
Considerations for Determining Cost per Customer Acquisition
Determining the cost per customer acquisition varies for all industries. Various factors must be considered to influence this cost:
- Marketing channels: Different marketing channels have different costs. For example, if you do social media marketing, it is cheaper than paid search or SEO marketing channels. It is important to consider and analyse the cost of acquisition per customer for each marketing channel or strategy differently to find the most cost-effective option for you.
- Customer retention: Cost acquisition per customer focuses on the cost of getting new customers, but also impacts customer retention. A higher cost per customer acquisition is justified if old customers purchase repeatedly. Balancing the acquisition cost with different retention strategies is also important while bringing in new customers to ensure they are here for the long term.
- Segmentation of customers: Not every customer is the same. Some may cost more to acquire but bring a higher customer lifetime value, whereas others will be cheaper to acquire and less profitable for the business in the long run. Segmentation of customers is important for identifying the acquisition cost for different types of customers and adjusting your marketing strategies accordingly.
- Competition: The cost of acquiring customers is influenced by the competition available in the market. Because if your competitors are spending heavily on advertising, marketing, loyalty programs, etc., you might also have to do the same to retain your customers and stay visible. Awareness of the competition and market is important, as it helps you make informed marketing decisions.
- Length of the sales cycle: The time you spend to acquire new customers impacts the cost of acquisition per customer. A long sales cycle means more follow-ups, touchpoints, efforts, etc., leading to higher costs.
Conclusion
In eCommerce, balancing the cost of acquiring customers with the value they bring to the business over the long term is important for the business’s sustainable success. This blog explores the concepts of customer lifetime value (CLV) and cost per acquisition (CPA) while highlighting how they influence businesses, marketing strategies, etc. It also discusses the importance of understanding CLV, calculation methods, strategies to boost it, considerations to determine CPA, the impact of marketing channels, etc.
The key takeaway is that understanding and adjusting CLV and CPA can help you make more informed decisions while reducing your marketing costs and increasing your long-term profit. Building long-term and strong customer relationships is the focus while keeping the acquisition cost in check.
It is now time to put these lessons into practice. Start by calculating your CLV and CPA, and use these values to refine your marketing strategies for better results.
