For any eCommerce business, evaluating marketing spend effectively means understanding three critical metrics:
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- Return on Ad Spend (RoAS)
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (LTV)
These metrics help determine not only the immediate impact of your advertising dollars but also their long-term value, guiding smarter budgeting and strategic decisions. Working with a digital marketing agency can help streamline this evaluation process.
Key Metrics Defined:
Return on Ad Spend (RoAS): Definition: RoAS measures how much revenue your advertising dollars generate. It tells you the effectiveness of each dollar spent on advertising. It is crucial because it helps to identify which advertisements are working and which are not, ensuring that marketing budgets are spent effectively to maximise sales.
Customer Acquisition Cost (CAC): Definition: CAC is the cost of making a customer buy a product or service. It includes all marketing and sales costs. Keeping track of CAC is vital as it helps to ensure the cost of acquiring new customers does not exceed the value they bring to the business.
Customer Lifetime Value (LTV): Definition: LTV is the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime. Understanding LTV helps businesses invest wisely in new customer acquisition and customer retention strategies.
How These Metrics Are Calculated RoAS Calculation:
Divide the total revenue generated from ads by the total advertising spend.
Example: Ad Spend – A = $1,000 Total Sales – S = $3,000 RoAS = S / A = $3,000 / $1,000 = 3.0
What it means – For every $1 you get $3 back.
CAC Calculation:
Divide the total costs associated with acquiring new customers by the number of new customers acquired.
Example: Ad Spend – A = $1,000 New Customers – N = 100 CAC = $1000 / 100 = $10
What it means – So $10 to acquire a new customer.
ROAS with LTV Calculation:
Multiply the average order value by the average number of orders per customer. Average Order Value (AOV) Average Order Value is a metric that reflects the average amount spent each time a customer places an order.
AOV = Total Revenue / Number of Orders
Total Revenue = T is the sum of all revenue earned from sales.
Number of Orders = N is the total number of orders placed over the same period.
T = $100,000
N = 100
AOV = $100,000 / 100 = $1000
Average Orders per Customer (AOC)
The Average Orders per Customer refers to the number of orders a customer purchases from your business.
Average Order per Customer = Total Number of Orders / Total Number of Customers
Total Number of Orders = T
Number of Customers = N
T= 5000
N= 500
AOC = 5000 / 500 = 100
Customer Lifetime Value (LTV)
LTV is the total revenue a company can expect from a customer throughout their relationship.
LTV = Average Order Value (AOV) x Average Orders Per Customer (AOC)
LTV = $1000 * 10 = $10,000
Conclusion
For any eCommerce business owner, understanding ROAS, CAC, and ROAS with LTV is essential. These metrics provide insights into the immediate and long-term impacts of marketing investments. By maintaining a ROAS that multiplies the initial investment, minimising the CAC, and maximising the LTV, businesses can ensure profitable operations and sustainable growth. Regularly monitoring these metrics allows for ongoing adjustments to marketing strategies, leading to improved financial outcomes and enhanced customer relationships with a digital marketing agency.
REFERENCES
https://madgicx.com/blog/roas-vs-roi https://www.growth-hackers.net/roi-vs-roas-better-metric-online-advertising-return-investment-ad-spend/
https://www.youtube.com/watch?v=_lv0Cm9T6B0&pp=ygUgbWV0YSBhZHMgUk9BUyB2cyBST0kgY2FsY3VsYXRpb24%3D
https://www.youtube.com/watch?v=-1ORbEyjw-o&pp=ygUgbWV0YSBhZHMgUk9BUyB2cyBST0kgY2FsY3VsYXRpb24%3D
https://www.youtube.com/watch?v=p7LBxk9EmgE&pp=ygUgbWV0YSBhZHMgUk9BUyB2cyBST0kgY2FsY3VsYXRpb24%3D
https://www.youtube.com/watch?v=c89dKG9wIqY&pp=ygUgbWV0YSBhZHMgUk9BUyB2cyBST0kgY2FsY3VsYXRpb24%3D
https://www.youtube.com/watch?v=Dfbs2p9rURg&pp=ygUgbWV0YSBhZHMgUk9BUyB2cyBST0kgY2FsY3VsYXRpb24%3D
https://sarasanalytics.com/blog/roas-cac-ltv-ecommerce-kpi/