Mastering metrics while running a successful Shopify Plus store is critical—but even as experienced VPs and marketing managers, direct-to-consumer (DTC) jargon can sound like another language. And it changes so often, it’s confusing to the most experienced among us.
But learning these terms, and tracking these metrics, will help you navigate the digital commerce landscape.
Get ready for a lot of acronyms—explained in detail so you can understand all the DTC metrics (told ya) crucial for running a successful business.
Customer lifetime value (LTV)
Customer lifetime value (LTV), sometimes abbreviated as CLV or CLTV, is what a customer will spend over their entire relationship with your business. Instead of focusing on individual transactions, LTV focuses on a customer's total value—including their past purchases and future predictions.
Calculating LTV is tricky. There are two different ways to approach examining LTV: historical and predictive.
Historical LTV looks at the profits from past purchases to calculate. Here’s the formula:
Average purchase value x average purchase frequency x average customer lifespan
Historical LTV can help you look at past purchasing behavior to make informed decisions about the future. But there’s no guarantee that customers will continue with the same behaviors.
Just look at Peleton users. The company saw a huge spike and decline as the pandemic-era closures came and went, and they suffered recalls and reputation damage. Calculating historical LTV won’t be of much help to their marketing team.
Predictive LTV, on the other hand, uses predictive analytics and occasionally gets help from machine learning to provide a forward-looking LTV. It leverages historical data, buying patterns, and algorithms to forecast a customer’s future actions. While there’s no specific formula, it’s a much more comprehensive and complicated process.
Customer acquisition costs (CAC)
Customer acquisition cost (CAC) measures the total cost spent to gain a new customer. Typically, this number includes your total spend on marketing and sales.
However, there’s an ongoing debate over what goes into your total marketing and sales costs.
The industry agreed-upon costs are:
- Cost of paid advertising efforts
- A portion of marketing and sales wages
- Cost of marketing and advertising tools
Here are some CAC factors that are more up for debate:
- The percentage of salaries and wages of marketing and sales teams
- Cost of long-term branding efforts
- Overhead and other fixed costs like subscriptions
Decide early on which costs you want to include and stick to it so you have an accurate benchmark to judge your efforts.
What is the LTV: CAC ratio?
The customer acquisition cost (CAC) and lifetime value (LTV) ratio measures what it costs to gain a customer compared to how much they spend with your brand over the entire relationship.
Here’s the equation:
LTV / CAC
Why does the LTV: CAC ratio matter?
Use this information to judge your overall profitability. It’ll help you gauge if a customer is spending enough money over the lifetime of the relationship to be worth the cost of acquiring them. A good benchmark to use with the LTV: CAC ratio is 3:1, which means each customer is worth three times what you paid to acquire them. In other words, you get $3 for every $1 you spend on marketing costs.
How to optimize your LTV: CAC
Monitoring your CAC: LTV ratio helps you understand your customer acquisition costs, and figure out how to lower your costs and improve your overall profitability.
Here are some tactics to help increase your LTV and lower your CAC for a better overall ratio:
Optimize your conversion funnel:
Smooth out the conversion path to make the customer journey as seamless as possible. To give you a starting point, the average conversion rate for ecommerce is 5.2%, according to Unbounce. Spend time optimizing each step to set the stage for higher acquisition results.
Choose the right channels:
Where you spend your marketing budget will impact your ratio. Focus on doing a few channels better instead of trying to be everywhere. You could be spending more money for fewer results.
Build customer loyalty:
Invest in customer loyalty programs and improve the overall customer experience to improve your LTV. Make your brand something customers are proud to stand by.
Repeat purchase rate (RPR)
Repeat purchase rate (RPR) measures how many people buy from your business again after their initial purchase. This is sometimes called repeat order rate (ROR) or reorder rate.
Here’s how you calculate RPR:
Number of repeat purchase customers / total number of customers
While RPR and repeat order rate (ROR) are often used interchangeably, they’re occasionally used to measure slightly different metrics.
With RPR, you’re only measuring how often customers come back. That means there’s no distinction between whether a customer buys something two times or twenty times.
ROR, however, is sometimes used to measure purchases that are not first-time purchases. So, if a customer makes multiple purchases in a given timeframe, each order after the initial one will be counted.
Here’s how you calculate ROR:
Repeat orders / total orders
Since both are valuable metrics, we recommend using ROR and RPR independently of each other.
Customer retention rate (CRR)
Customer retention rate (CRR) measures the number of customers you retain during a given period.
Measure CRR with this equation:
(Customers at the beginning of a period – Customer acquired during the period) / Customers at the start of the period
CRR is a critical metric for the success of your company. Getting new customers is the name of the game for many businesses, but how well you keep them will determine your longevity. It also helps you gauge customers' satisfaction with your products and services.
Revenue per session (RPS)
Revenue per session (RPS), sometimes called average revenue per session (ARPS), is the amount of money spent per session—either on your website or in your app.
This helps measure website or app conversions and tells you how it performs, what campaigns are working to bring in revenue (not just visitors), and engagement rate.
Here’s how you calculate it:
Total revenue in specific timeframe / number of website visits in specific timeframe
Gross profit per session (GPPS)
Similar to revenue per session, gross profit per session (GPPS) helps you gauge the performance of each website or app visit. GPPS measures the gross profit (revenue minus the cost of goods sold, COGS) from each user session. It helps you determine how much actual profit is generated from each session after accounting for the direct costs associated with the sold products or services.
While RPS may help you identify how well your website and marketing efforts work together, GPPS takes a wider view of the success of your ecommerce business.
Average order value (AOV)
Your average order value (AOV) measures how much a customer spends every time they make a purchase.
This critical metric helps you identify buying behaviors. You can contribute a higher AOV to customers buying more expensive products or successful upselling and cross-selling strategies.
Here’s how to measure AOV:
Total order value / number of orders
Pairing your AOV with CAC can help you determine the worth of a new customer. If you’re spending more to acquire them than they’re purchasing, then you might not be profitable. Also, take a look at your LTV for a big-picture view.
Why you should pay attention to AOV?
AOV is more than a result. It’s a lever that can be used for growth—and it might even be the secret to doubling your sales.
There are two ways to increase your AOV: selling more products per order or selling more expensive products. While inflation is already causing prices to reach a price ceiling, you can encourage customers to buy more products and services. Smart marketers are always thinking about ways to invest in a higher return.
Here are some examples you can try to raise your AOV:
- Offer bundled products
- Upsell to a more premium product
- Cross-sell products that pair well together
- Offer graduated sales (10% for orders over $50, 15% for orders over $100, etc.)
- Increase the total to qualify for free shipping
- Sell add-ons like warranties, subscription refills, or priority services
Average order frequency (AOF)
Average order frequency (AOF) measures the average number of purchases each customer makes in a given period of time. Tracking your AOF helps you identify purchase behaviors and measure customer loyalty. How frequently are customers buying? Once a month? Once a quarter? This can also help you make buying decisions and prevent over or understocking.
Here’s how to calculate AOF:
Number of orders / number of unique customers
AOF is an excellent metric for tracking orders over a long period of time, but other metrics like AOV may be more helpful for short-term insights.
What makes AOF worth your time?
AOF represents your repeat purchaser—AKA your most valuable customers. This Harvard Business School study shows that a 5% lift in customer retention rate can mean a 25% to 95% increase in your profit. Measuring your AOF will help you gauge how well your retention strategies are working (if you have them).
If you haven’t implemented any retention strategies, measuring this metric along with your overall revenue will make it clear why you need them.
To boost your AOF, focus on improving the overall customer experience and your marketing efforts. Retention is all about creating personalized experiences for your customers, and then reminding them with timely (and still personalized) marketing messages to nudge them to make a purchase.
Marketing efficiency ratio (MER)
Marketing efficiency ratio (MER), sometimes called media efficiency ratio, calculates how well a marketing campaign or your marketing efforts as a whole perform. This holistic number takes a wide view, looking at total spend and total revenue during a given period.
Calculate MER with this equation:
Total revenue / total marketing spend
The higher your MER, the better off you are. Anything 3.0 and over is generally considered good, similar to the CAC: LTV ratio. But it’s tough to benchmark in the ecommerce industry since it’s influenced by many factors. That doesn’t mean it’s not a critical internal metric.
Why MER matters
Since MER is an easy way to gauge marketing success, it’s particularly effective when used for tracking marketing campaigns over time.
It’s also helpful in forecasting and projections. If you know you have a 4.0 MER, and you’re trying to reach 10 million next year, you can calculate a starting budget of $2.5 million.
And there you have it—DTC terms decoded. Now, you can confidently navigate the world of ecommerce metrics. And remember: when in doubt, there’s probably an acronym for that.