Analyzing the success of an eCommerce store is essential to understand its strengths, weaknesses, and opportunities for growth.
There are many metrics that can be used to track the performance of an online store, but three of the most important metrics to focus on are MER (Marketing Efficiency Ratio), LTV:CAC (Lifetime Value to Customer Acquisition Cost), and Revenue per Visitor (RPV). In this blog post, we’ll explain what each of these metrics means, how to calculate them, and why they’re essential to monitor your eCommerce store’s success.
Marketing efficiency Ratio (MER)
The Marketing efficiency Ratio (MER) is a ratio of the revenue generated by your eCommerce store to the expenses incurred by the store. This metric provides insight into the store’s profitability and helps determine whether expenses are aligned with revenue. The formula to calculate MER is:
MER = (Total Monthly revenue) / (Total Monthly marketing expenses)
To interpret MER, you want the ratio to be more than 1, which means that the expenses incurred by the store are less than the revenue generated. An MER of 1 indicates that expenses and revenue are equal, while an MER greater than 1 indicates that revenue is greater than expenses, which is the desirable situation.
It’s worth noting that MER is different from Return on Ad Spend (ROAS), which measures the return on investment in advertising. While both metrics provide insights into profitability, ROAS only considers the return on advertising spend, whereas MER considers all expenses incurred by the store. Additionally, ROAS is expressed as a percentage, whereas MER is expressed as a ratio.
Examples of when it’s most convenient to use each metric would be:
- Use MER when you want to get a comprehensive view of your store’s profitability and determine whether expenses are aligned with revenue. This metric is useful for decision-making, such as adjusting expenses or pricing and provides a long-term view of profitability.
- Use ROAS when you want to evaluate the effectiveness of your advertising spend and determine whether the return on investment in advertising is aligned with the advertising spend. This metric is useful for decision-making, such as adjusting advertising spend or the types of advertising used, and provides a short-term view of the return on advertising investment.
Lifetime Value to Customer Acquisition Cost (LTV:CAC)
Lifetime Value to Customer Acquisition Cost (LTV:CAC) is a metric that measures the relationship between the lifetime value of a customer and the cost to acquire that customer.
This metric is essential for understanding the cost-effectiveness of customer acquisition efforts and helps determine whether the customer acquisition cost is aligned with the customer’s lifetime value. The formula to calculate LTV:CAC is: LTV:CAC = (Lifetime Value of a Customer) / (Cost to Acquire a Customer)
An LTV:CAC ratio of 3:1 is considered a healthy benchmark for eCommerce stores in general.
An LTV: CAC ratio of 3:1 is considered a healthy benchmark because it indicates that the store is acquiring customers in a profitable manner, while keeping a substantial margin on the gross marketing expenses.
However, it’s worth noting that the LTV:CAC ratio can vary greatly depending on the store’s niche, target audience, and business model, so it’s important to consider these factors when evaluating the ratio for your store.
Revenue per Visitor (RPV)
Revenue per Visitor (RPV) is a metric that measures the revenue generated by an individual user over a specific period of time.
This metric helps determine the effectiveness of your eCommerce store’s monetization efforts and provides insight into the average revenue generated by a user. The formula to calculate RPV is: RPV = (Total Revenue) / (Number of Visitors).
To interpret RPV, you want the value to be as high as possible, which means that the average revenue generated by a user is high. A high RPV indicates that the store’s monetization efforts are effective, while a low RPV indicates that monetization efforts may need to be improved.
As many startup eCommerce companies rely heavily on paid advertising to bring new users, it’s important to note the interrelationship between the CPC from your ads and the RPU.
For example, if the RPV is low, it may be necessary to lower the CPC of paid ads or find other monetization opportunities to increase the average revenue generated by a user (AKA, drive quality users to the website for less money).
On the other hand, if the RPV is high, it may be possible to push harder on paid advertising, in order to acquire new customers quickly. This would mean risking increasing the overall CPC, but as long as your RPV stays within healthy margins, that’s a good compromise to drive more acquisitions at scale.
Pro Tip: If you utilize your UTM parameters correctly, you can measure each channel’s RPV to understand the most efficient ones.
In conclusion, monitoring the Marketing Efficiency Ratio (MER), Lifetime Value to Customer Acquisition Cost (LTV: CAC), and Revenue per Visitor (RPV) are crucial metrics to analyze the health status of an eCommerce store.
By understanding the relationships between expenses, revenue, customer acquisition cost, and lifetime value, you can make informed decisions to optimize your eCommerce store’s performance.
Also, an important reminder: benchmarks are always different depending on each business model, environment, unit economics, and target market. While an MER of 2 can be great for a brand, it can be horrible for another one. The same goes for LTV:CAC and RPU.
Always make your own analysis according to your situation!