With the continued rise of online sales, the costs associated with customer acquisition (CAC) on Amazon has also been increasing. Brands selling on Amazon must now put greater emphasis on prioritizing their resources and thinking about CAC strategically. It is important for Amazon sellers to stay aware of changing CAC trends and put strategies in place to keep their customer costs as low as possible while still staying competitive with the other companies on the platform.
However, it is also important to note that with so much emphasis placed on customer acquisition costs, it is easy to forget about the importance of customer retention. It is not enough simply to acquire customers – research shows that many businesses struggle to keep them with as few as 1 in 4 shoppers returning for a second purchase.
LTV refers to the lifetime value of a customer while CAC is the cost of acquiring each customer. Both are extremely important metrics for Amazon sellers to be tracking…
LTV to CAC Ratio on Amazon
Understanding the LTV to CAC ratio is an essential part of running a successful eCommerce business. It is especially important on Amazon. Sellers should be looking at this calculation before expanding and investing heavily in a product. It’s good practice to ensure that each sale generates enough revenue to cover fixed costs (including Amazon fees and COGs) and generates enough profit for future growth.
The recommended rule of thumb is that the LTV/CAC ratio should exceed 3x.
A focus on LTV/CAC can help sellers identify potential pitfalls in the scaling process and will help them build scalability strategies on strong foundations.
Current State of CAC and Why It’s Important
Compressed margins due to rising costs associated with advertising, inflation, increased competition, and supply chain costs make analyzing LTV-to-CAC ratios essential.
Without a full understanding of what each customer is worth, as well as how much you should be investing in acquiring that customer, strategic marketing efforts cannot be maximized.
Recent studies indicate that…
- The probability of selling to an existing customer is 60 – 70%, while the probability of selling to a new prospect is 5-20%.
- Existing customers are 50% more likely to try new products and spend 31% more, when compared to new customers.
Tracking CAC and LTV ensures Amazon sellers have the best foundation for decision-making, including determining how much marketing budget to allocate in order to stay afloat and maximize profits.
How to Calculate CAC and LTV on Amazon
Cost-per-click (CPC) and conversion rate are important metrics to consider when calculating the cost of acquiring new customers.
CAC = CPC / Conversion Rate
For example, with a CPC of $5 with a 20% conversion rate, the CAC would be $25.
LTV (also abbreviated as CLV) has many slightly different definitions and methods of calculation. Common ways to calculate LTV include some use of metrics such as average order value and average order frequency. Whatever calculation you use, the most important thing is to consistently use the same formula to track LTV over time. Note that all of the LTV on Amazon is for a year time period.
One formula for calculating LTV is:
LTV = Total Order Value x Average Gross Margin x Retention Period
Another LTV formula is:
LTV = (Average Purchase Value x Average Purchase Frequency Rate) x Average Customer Lifespan
At Envision Horizon we utilize our own Amazon analytics platform, myHorizons, to calculate and track a wide range of key metrics, including CAC and LTV. This data is automatically calculated and presented to you in real-time under the sales dashboard alongside other relevant stats such as average order value (AOV), Repurchase Rate, New to Brand Sales (NTB), and more.
Let myHorizons do the heavy lifting for you. Get valuable market data about your Amazon business that you can’t find anywhere else. Learn more and start your free 30 day trial today!
Decreasing CAC on Amazon
Strategies to help improve CAC on Amazon include optimizing Amazon advertising, identifying new target audiences, testing different price structures for products, merchandising differently (i.e. bundles) and evaluating the performance of campaigns to ensure maximum return on investment…
One of the most effective ways to improve CAC on Amazon is through targeted keyword optimization. Doing substantial keyword research to ensure your product is reaching the intended audience is the first step in optimizing performance. Sellers can utilize tools such as Amazon Ads to take advantage of automated rules — these will optimize bids and budget automatically, allowing for greater ROI and reduced cost per acquisition.
Sellers should also utilize split testing to determine how prospective customers are engaging with listings, and identify the copy and imagery that converts the most customers.
Improving LTV and AOV on Amazon
Many brands are developing marketing strategies that focus on both increasing customer lifetime value (LTV) and driving up average order value (AOV). In other words, there is a growing focus on solutions that target improving customer loyalty; showing past customers the value of what their brand provides in terms of acquiring, retaining and sustaining long-term relationships.
This includes leveraging methods like targeted promotions, exclusive offers, and periodic rewards, such as coupons and discounts. Engaging email marketing and social media presence can also help boost the overall customer lifetime value while simultaneously driving up average order values.
By employing these powerful promotion strategies combined with content marketing tactics, Amazon sellers can increase their repeat purchase rates, average order value, and customer lifetime value.
myHorizons February 2023 Release
The latest myHorizons release focuses on advertising and provides various new tools and features to help you gain more insight into your performance on Amazon.
Highlights:
- Customer Acquisition Cost (CAC) Data
- Advertising Recap Page
- Coupons Data
The latest myHorizons release continues to work towards our goal of making selling on Amazon less stressful and more profitable. The suite of new tools and features will give Amazon sellers a better snapshot of advertising performance, allowing for more informed decisions when it comes time to set goals or develop strategies.
Get Started with myHorizons for Free
myHorizons is the perfect Amazon brand management tool for businesses of all sizes. With myHorizons, you can easily and effectively manage your Amazon listings, discover key insights, track your progress, and more.
Now you can try myHorizons for free with our month-long free trial. myHorizons free trial pulls 60 days worth of data into the platform for your analysis, upgrade to a paid account to access all historical data. Take your business to the next level by making Amazon less stressful and more profitable. Whether you’re just starting out or you’re a seasoned pro, myHorizons will help you reach your goals. Sign up today to see the results for yourself!
