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CAC – LTV Metric That Indian Ecommerce Once Swore Is Not Applicable Now

CAC – LTV Metric That Indian Ecommerce Once Swore Is Not Applicable Now

India's ecommerce market is expected to reach $65 Bn by 2023

CLTV explains to you how much your customers are worth to you

Ecommerce business owner have to spend a considerable amount of time and funds to win a customer

Ecommerce is becoming the most accepted means of doing business in the world, especially in developing country like India.  Slowly, more consumers are choosing to buy various things online from daily groceries to very rare and expensive items. India’s ecommerce market is expected to reach $65 Bn by 2023, according to data from Edge by Ascential.

However, after witnessing the mishap of many ecommerce companies in India in the last few years, the question arises what kind of business model works best in India?

Well, the answer is not so simple.

The game of ecommerce in India is different from other Western and European countries. So let’s explore how to help retailers to improve the performance of their online stores and to help entrepreneurs to understand business’s current status and the metrics they need to check in order to make the right decision.

Measuring Ecommerce Success

The most successful ecommerce and retail businesses are crazy about metrics because these numbers help them to keep track of certain metrics which collectively together, tell a story of the success or failure. It is certain that it should be analyzed every day in order to get the most basic information about the performance and health of a business.

Do you think that ecommerce metrics can be useful in the Indian ecommerce industry? Are these not hypothetical, speculative assumptions that may not work in certain situations?

With cutting-throat-competition and less loyalty in price sensitive market, how do you define ecommerce metrics that you must track of your B2C business? There are thousands of metrics around; it’s hard to select which ones to track.

Here are the top 9 ecommerce metrics:

  • Customer lifetime value
  • Sales conversion rate
  • Average order value (AOV)
  • Cart abandonment rate
  • Product Viewed to Purchase Ratio
  • Social media conversion rate
  • Customer acquisition cost (CAC)
  • Percentage of returning customers
  • Order Fulfillment Percentage

These metrics are the data pointers that provide insightful information relevant to a certain business. Today, we will not discuss all metrics but would like to talk about particular metrics like LTV, and CAC crucial in e-commerce right now.

Define LTV And CAC

Especially when you are running an ecommerce business, the growth is measured in terms of how you’re doing and compare the progress over time. CLTV explains to you how much your customers are worth to you.

How to get customer lifetime value?

Average order value per customer x Number of repeat transactions over a set period

It is important to understand the LTV of your end-users. It will help you to measure the return on investment (ROI) of a marketing campaign.

Keeping your existing customers happy and encourage them to buy more of your products is the easiest way to attract more customers. Further, customer lifetime value (CLTV) can be divided into two types:

  • Predictive CLTV- The value is determined through a customer’s future CLTV based on past behavior
  • Historical CLTV- It is decided by a customer’s current value based on their past purchases

Red Flags In Indian Ecommerce

The Indian ecommerce market is very fragile and challenging. In today’s digital world, customers literally have hundreds of choices when it comes to buying products.

Almost every day there is a new marketplace or online shop. It is interesting to see how small players apart from Amazon, Flipkart and Paytm Mall are fighting for the same customer base. These companies have been criticized for their predatory pricing, deep discount and deals to attract customers.

The consumer buying behavior also changes under the influence of many factors like technological advancement, Internet, deals and discounts, and spending power.

In the Indian context, metrics like LTV and CAC do not work because every time to win a customer, ecommerce business owner will have to spend a considerable amount of time and funds.

On the other hand, digital business is quite mature in western markets. Customers in countries like US, Europe come back to particular vendor due to their good service and product, whereas Indian customers come back to look for more discounts and deals.

So, whether you run a traditional brick-and-mortar retail business or an ecommerce website, you need to calculate the transaction revenue of customer for each transaction and this needs to be able to set off the marketing expense for that transaction itself.

If the transaction revenue of customer is in negative, it means that you are making losses in business and attributing these losses to Predictive Customer Lifetime Value is just a way for business owners to console themselves. Whereas the harsh reality is, the same customer is not going to come back to you again if you decide not to spend again on deep discounting their next purchase as well.

So, for any businessman serving the online market, its time to better turn realistic and set off the marketing expense against the transactional revenue for a single transaction and optimise the business around that to be able to sustain your business.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.