Does Your Business Earn Back It's CAC? Understanding Life Time Gross Profit and Customer Acquisition Costs in eCommerce

How Well Do You Understand Your LTGP and CAC?

Does your eCommerce business earn back it's CAC? 

If so, do you know how long it takes for that to happen? 

And if you do, how does that process differ during the holiday shopping period vs other times of the year? 

Which Category Is Your Business In?

As a Fractional CFO supporting emerging CPG and eCommerce brands, I see businesses fall into three categories with respect to the Lifetime Gross Profit (LTGP) and Customer Acquisition Cost (CAC) relationship:

1. The first is businesses that earn back their CAC on the first order. This means that the gross profit generated on first order is greater than your cost of customer acquisition. This is the best category to be in, because any repeat business you earn after this is icing on the cake and goes straight to the bottom line. Unfortunately, fewer and fewer eCommerce brands are falling into this category.
2. The second is businesses that do earn back their CAC, but not on the first order. They make a loss on the first order, and have to wait for subsequent orders in order to generate a Lifetime Gross Profit that exceeds the initial cost of customer acquisition. It's still very possible to scale businesses like this through paid customer acquisition, but a lot more thought needs to go into the financing of these businesses. The reason is that every time we acquire a new customer there is a negative cash flow and profit impact, therefore we need to figure out how to bridge the gap between this initial cash outflow and getting to the point where the customer is contributing positive profit.
3. The third type is businesses that never earn back their CAC,  even after we allow for repeat orders. These are businesses that should not be spending money on paid customer acquisition.  Doing so is literally setting money on fire. In situations like this I would typically look for potential issues around Product Market Fit (PMF), or at best we have a media buying or content problem.
   

Things Can Change Quickly

Now, the scary part is that during the Black Friday Cyber Monday holiday shopping there's a lot of things changing very quickly.  It's very easy for a business which is normally in ‘Category 1’ to slide into ‘Category 3’. As the owner of one of these businesses, if you don't have your eyes on the ball then you can very easily find yourself in a situation where you are literally burning your own cash.  

I don't want to see you do that which is why I created this free resource and guide. 

So let's have a think about some of the things that can change during the holiday shopping.

• First of all it's likely that the cost per click will increase due to an increased level of competition. This is likely to translate into a higher customer acquisition cost for your business. 
• Secondly you might be using discounts or promotions to lure customers in. Since your initial revenue is lower there's a very high likelihood that the gross profit which you generate on the first order is also lower. 
• Finally,  you may be attracting lower quality customers at this time of year.  They are likely to be customers who are more price motivated, or perhaps they are just customers who are purchasing on behalf of a family or friend as a gift. Either way, it's very likely that your BFCM cohort has weaker repeat purchase behavior than your regular customer base.  

So, we've got a) higher customer acquisition costs, b) lower profit on the first order, and c) a lower probability of repeat orders. I hope you can see how it's very easy to go from a Category 1 business to a Category 3 company in a very short amount of time.

Putting It Into Action

I encourage you to check out the video on this page for a more detailed walkthrough and a worked example. 

Once you've done that, we recommend you:
1. Click here to download the template

2. Model out what a 'normal' customer relationship looks like for your business

3. Isolate your BFCM cohort from last year, and create a version of this model that reflects their behaviour - being sure to incorporate any differences in terms of their AOV, Gross Profit, Repeat Purchase Rate or CAC. 

Once you've done these steps, you should be in a good place to have an informed conversation with your media buying team about budgets and goals for BFCM this year. 

I help CPG and eCommerce Founders build profitable businesses without the need for VC funding.  If that sounds interesting to you, feel free to get in touch!