In the rapidly evolving world of e-commerce, small and medium-sized businesses (SMBs) face many challenges to stay competitive. One such challenge is the choice of performance metrics to track and optimize. Two critical metrics often discussed are Customer Acquisition Cost (CAC) and Return on Ad Spend (ROAS). While both are essential to understanding your business’s performance, it’s crucial to know which one deserves more focus, particularly for SMBs in the e-commerce sector.
In this blog post, we’ll dive into why small and medium-sized e-commerce companies should focus on CAC over ROAS to maximize their growth potential and maintain a healthy business model.
CAC vs. ROAS
Understanding CAC and ROAS
Before diving into the reasons for prioritizing CAC over ROAS, let’s briefly understand what these metrics represent.
- Customer Acquisition Cost (CAC): CAC is the cost associated with acquiring a new customer. It’s calculated by dividing the total marketing and sales expenses by the number of new customers acquired during a specific period.
- Return on Ad Spend (ROAS): ROAS is a measurement of the effectiveness of your advertising campaigns. It’s calculated by dividing the revenue generated by the ad campaign by the total cost of running the campaign.
Why Focus on CAC Over ROAS?
- Long-term profitability: CAC is an essential metric for assessing the long-term health of your e-commerce business. By optimizing CAC, you ensure that your business acquires customers at a sustainable cost, leading to better profitability in the long run. On the other hand, ROAS is more focused on short-term gains from ad campaigns. While it’s essential to track ROAS to measure the effectiveness of your marketing efforts, it should not be the primary focus for SMBs looking for long-term growth and sustainability.
- Customer Lifetime Value (CLTV) alignment: Focusing on CAC allows you to better align your marketing efforts with the concept of Customer Lifetime Value. CLTV is the total revenue that a customer generates for your business over their entire relationship with your brand. By optimizing CAC, you’re not just acquiring new customers, but also ensuring that the cost of acquiring them is justified by the revenue they generate over time.
- Improved budget allocation: Prioritizing CAC encourages SMBs to make data-driven decisions on allocating marketing budgets across various channels. By understanding the cost of acquiring a customer from different channels, you can allocate your budget more effectively, focusing on channels that yield lower CAC and higher CLTV.
- Better scalability: As your e-commerce business grows, the importance of CAC becomes more pronounced. When you have a clear understanding of your CAC, you can make more informed decisions about scaling your customer acquisition efforts. Focusing on CAC enables you to scale your business while maintaining a healthy balance between customer acquisition costs and the value generated by those customers.
- Encourages retention and loyalty: A focus on CAC pushes businesses to invest in customer retention strategies, as acquiring new customers is often more expensive than retaining existing ones. By developing strong customer relationships and loyalty, SMBs can reduce their CAC and increase their overall profitability.
Conclusion
While both CAC and ROAS are crucial metrics for e-commerce businesses, prioritizing CAC over ROAS offers SMBs more significant benefits for long-term growth and sustainability. Focusing on CAC ensures a healthy balance between the cost of acquiring new customers and the value they generate, promotes better budget allocation, encourages customer retention, and provides a more robust foundation for scalability.
By keeping CAC at the forefront of your marketing strategy, your small or medium-sized e-commerce business will be well-positioned for continued success in the competitive online marketplace