AOV vs CPA vs CLV: three formulas that can drive your business to success

When you run an eCommerce business, you need to monitor what you’re doing right and see how you can improve. But how do you do this?

Measuring ‘vanity metrics’ like page views, Facebook followers, and time spent on your site may be a great way to get in your manager’s good books. However, these stats don’t tell you anything about your return on investment.

As Eric Ries famously said: ‘Vanity metrics are the numbers you want to publish on TechCrunch to make your competitors feel bad.’ Nothing more.

Many eCommerce store owners shy away from calculating marketing metrics as they think it’s a complicated process that’s hard to keep on top of. However, the truth is that it’s not hard to keep on top of your stats. You just need to choose the right marketing metrics to monitor.

With this in mind, here are three fantastic formulas to try.

AOV: average order value

Average order value, or AOV, tracks the average amount spent each time a customer places an order on your eCommerce store. It’s a great way to understand your shopper’s buying habits and see if your marketing efforts are paying off.

To measure AOV, divide total revenue by the number of orders made. So if you take ￡20,000 of revenue in a month and 500 orders, your AOV would be ￡40.

Increasing average order value is an easy way to grow your revenue. You’re targeting customers that are already willing to buy from you; you’re just giving them a friendly nudge to pop more things in their shopping cart.

Some ways you can improve AOV include offering free shipping, using upselling and cross-selling, and introducing loyalty schemes.

CPA: Cost per acquisition

Cost per acquisition, or CPA, determines how much it costs to get a customer to convert on your website.

What do I mean by convert? Your customer completing a specific action, whether that’s buying a product, signing up for an account, or giving you their details in exchange for a lead magnet. Entirely up to you.

To measure CPA, you take the campaign cost used to get conversions, divided by the number of conversions acquired. So let’s say you spend ￡10,000 on a marketing campaign, and you get 1,000 conversions off the back of it. That means your CPA is ￡10.

The purpose of CPA is to see how your advertising campaigns are doing. The aim of your campaigns is for people to take action, so measuring CPA lets you see if the money you are spending is being put to good use.

If your CPA is a little higher than you might like, it’s time to take a step back and see if you can do anything to tempt your customers to convert. Look at where your customers are dropping off and see how you can keep them on track. Can you simplify the checkout process, optimise your landing pages, or improve your ad copy?

CLV: Customer lifetime value

Customer lifetime value, or CLV, measures the total revenue you can expect to bring in from a customer over the course of your relationship with them.

While AOV looks at how much a customer will spend with you per transaction, this metric looks at their long-term spend. This is a helpful way of estimating a customer’s profitability as well as their loyalty to your brand.

This metric is a bit more complicated than the others on this list. I know, I’ve saved the best til last! To measure CLV, you multiply your customer value by your average customer lifespan.

To find customer value, you multiply your AOV by the average amount of times a customer buys from you a year.

So, let’s say the average customer spends ￡255 with you a year and is a customer for five years. This means your CLV is ￡1,275.

It’s essential to ensure your CLV stays as high as possible, as it’s easier and less expensive to maintain an existing customer than to find new ones. Bear in mind that it costs five times as much to attract a new customer than it does to keep a current one happy!

You can keep that CLV on the up and up by treating your loyal customers like VIPs. Loyalty schemes, discounts on their birthday, and exclusive events will keep them coming back again and again.

Of course, providing a stellar customer experience helps too!

What is a good AOV/CPA/CLV?

I’m often asked if there is a standard benchmark to check if these metrics are on the right track. Unfortunately, it’s hard to say as many variables are in play. Benchmarks can vary depending on the products you sell, your industry, and your price point.

As a rule of thumb though, the higher your AOV and CLV, and the lower your CPA, the better!

The best company to benchmark your stats against is always your own. Take the time to regularly monitor your stats so you can see your improvement as the weeks and months progress.

Which metric should I use?

In an ideal world, all of them!

As you use AOV to calculate CLV, these two metrics go hand-in-hand. AOV is good at looking at the short-term, while CLV helps you look at the long-term success of your store.

CPA can help you determine if you’re getting the right return on investment (or return on ad spend) on your marketing campaign. You can also use it to diagnose if there are any issues getting prospective customers through your sales funnel.

As long as you’re tracking conversions through your stats package of choice, as well as store transactions, you’ll have all the information you need to measure all three metrics.

I hope this short guide has inspired you to start measuring the metrics that count. So dust off that calculator, fire up the Excel spreadsheets, and get calculating!

And, of course, if you need to boost your AOV or CLV or enhance your marketing campaigns, I’m more than happy to help.

Drop me a line, and let’s see how we can make your eCommerce store even more profitable in the year ahead.