Are you trying to grow your e-com business by just ‘growing sales’?
Often what you need is actually not more sales, but a better understanding of where you are going with your business, how much each customer is worth to you, and what is the quickest way of getting from point A to point B.
Point A being where you are now, and point B being your (usually monetary) sales goal, enough to let you quit your job, buy a house, make a million, or whatever you’re trying to get to.
So what I mean is, each business has three clear metrics that have to be adjusted in order to turn it profitable, in subscription boxes this is a lot clearer because you have the recurring revenue aspect, but it is also relevant for straight e-com as well. This example will be for a subscription box.
- CAC – Customer Acquisition Cost
- LTV – Lifetime Value or LTGP – Lifetime Gross Profit
- Churn (or re-buy rate in e-com)
1. How much it costs you to acquire a customer
2. How much you make off of them, and
3. How long they stay subscribed/how many times they purchase
Once you have quantified these in your business then you can start to move the levers to see which is the easiest way to get to your goal.
This one is a metric that is extremely important, especially as you scale because you have to factor in marketing costs every month to keep your sales where they are. What this means is if you have 1000 subscribers and 10% churn, you need to sign up 100 new people per month in order to stay exactly where you are in terms of sales. I’ll talk more about this in a minute.
It’s also something that needs to be optimised and worked on constantly by testing audiences, ad creatives, lookalikes, retargeting and email marketing also.
Nonetheless, you need to be realistic in terms of your CAC and not be chasing fantasy numbers in order to turn a profit. Advertising has an inherent cost and for subscription boxes this can generally be anywhere from $10-$50 although $15-$30 is a good range to be in.
If you are in this range then you can try to optimise to get to the lower end of the range, if you are way above $30 then there is definitely room for improvement here, and the first place I would make a change is with your offer.
You also need to be aware that the investment in CAC is done NOW, I.E. you need to pay Facebook to sign up new customers today. While the rewards in terms of revenue and profits only comes later, as the customers pay their monthly subscription or make further purchases from your store. So it’s a big cash flow burden on the business, so the lower you can get it, the better off you will be.
How to reduce CAC? Improve your ad copy & targeting, introduce retargeting, try to improve your website conversion rate and collect emails on your site to follow up with prospects for free.
Lifetime Value or Lifetime Gross Profit is the amount of gross profit you make per box multiplied by the amount of months a customer stays subscribed. This is the most important metric in not only a subscription box, not only an e-com business, but all businesses, everywhere.
How much are your customers worth to you? If you don’t have this on the tip of your tongue then you are in big trouble. When you know this you can make decisions on what offers to run, if your ads are profitable, whether you should scale up or get back to improving your product.
If you don’t know then how do you know if anything is working? How much can you afford to pay for ads? How much will your salary be? How long can you survive before running out of money?
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If your LTV is high, you can afford to run ads, give great front end offers and even play around with pricing to try and make more money or keep people even longer. If you have a really low LTV no amount of fancy ads or growth hacks will put any money in your pocket. This is fundamental to the success of any business.
Subscription boxes are easier to calculate this, how long is a customer staying subscribed x the average profit per box. But in Shopify it’s the same, how many times are customers re-buying and what is the average profit they give you? This needs to be higher than one purchase at $10-20 profit.
To increase your LTV you can increase your profit by negotiating with suppliers for better pricing, change shipping company or innovate your supply chain to reduce costs. Second, you can introduce upsells and higher tiered pricing that customers can upgrade to. Finally, you can try and improve your service to make your customers stick around longer and not cancel their subscription so quickly. Which bring us to the final metric…
Churn is the amount of customers you lose each month, divided by the amount of customers you had at the beginning of the month. So if you have 100 subscribers on July 1st and you lose 100 by July 31st, your churn is 10%.
Churn is closely tied to LTV because the lower your churn, the longer your customers are staying and therefore the more money they are paying you.
It is also one of the biggest things sucking the life out of your business from the inside.
If your churn is high almost every other aspect of your business is out under pressure and suffers as a result. You lose customers so your revenue shrinks, your profits shrink too, so you need to replace those customers, you need to spend more money to acquire them, and even to remain at 1000 subscribers in August, you need to get 100 new customers (each of which costs you CAC) For example let’s say your CAC is $20:
100 customers at $20 CAC is $2000. So you need to SPEND $2000 from your revenue & gross profit at 1000 subscribers, in order to replace the customers you churned, all to just stay at 1000 subscribers next month. 🤯
This is why it becomes so difficult to grow. If you want to grow your business by 100 customers in August, you need to get 200 customers just to go up a net of 100 customers. This means you have to spend $4000 to grow by 100 customers. 😵
The longer you can make your customers stay, the better chance you have of turning a profit, you don’t need to replace so many customers, you also have the opportunity to make more profit from them using the cost cutting strategies and upselling I mentioned above.
Making an extra $5 profit per box is amazing if your customers are sticking around for 10 months, it’s not so effective if they are only staying for 3 months anyway.
Improve your churn by finding out the 3 biggest reasons your customers are cancelling (from your support emails or do surveys) and then solve those 3 problems. Simple, but not easy.
As you can see a lot of these metrics intertwine and moving one can affect the other, the important thing is to be aware of these pressure points in your business because if you work on THESE problems and actually find solutions, it will actually make the biggest difference in whether your e-commerce business will succeed or fail.
I hope this post was helpful, if you have any questions let me know!