August 9, 2021
The Relationship Between LTV and CAC on Marketplaces vs DTC Websites
This blog post was originally published by Deliverr, which is now Flexport. The content has been adjusted to fit the Flexport brand voice and tone, but all other information remains unchanged. With the merging of Deliverr’s services (DTC fulfillment, B2B distribution, and Last Mile delivery) into Flexport’s existing international freight and technology services, we’re now able to provide merchants with true end-to-end logistics solutions spanning from the factory floor to the customer’s door.
Running a successful eCommerce business is often a flurry of calculations. You have to calculate your costs, revenue, profits, ROI across different channels, and more.
Some of the more common calculations merchants run include lifetime value (LTV), and customer acquisition cost (CAC). Those two numbers are key to determining profitability, how well you can scale, and how sustainable your business model is.
In this article, we’ll talk about how your customer lifetime value affects your customer acquisition cost, and vice versa. Then we’ll discuss how those levers change depending on your sales channel.
However, before we explain the relationship between LTV and CAC when selling on marketplaces, and how that changes once you sell D2C, let's first establish the foundations.
What Is Customer Lifetime Value (LTV)?
Customer lifetime value refers to the total revenue a single customer will bring to your business until they churn.
For some companies, lifetime value is the amount of a single purchase. Think of couches and refrigerators, and other items that most customers only purchase once and have no typical brand loyalty for. These would be items that have a long shelf life, like furniture, so by the time someone needs to replace something they aren’t necessarily going to get the same brand, but will go with convenience and affordability.
For other companies, lifetime value is a multiple of various different products. Think of makeup companies that have different products, or vitamin companies that offer subscriptions. The customers of these brands likely purchase multiple different items from one store, such as mascara and lipstick, and re-purchase once they run out, such as refilling their vitamins.
In the case above, lifetime value is usually measured using a multiplier or average cart value and retention. That is to say, there will be multiple purchases down the road of different SKUs.
How To Calculate LTV
The simplest way to measure lifetime value is to first find your average cart value, average purchase frequency, and retention rate.
Find your average customer value by multiplying cart value by purchase frequency per period of time. For example, if your average cart order is $20, and purchase frequency is twice a month, your customer value per month is $40.
Then, take your customer value and multiply it by retention rate. For example, if your typical customer continues to purchase from you for six months, your customer lifetime value is $40 x 6 = $240.
What Is Customer Acquisition Cost (CAC)?
Your customer acquisition cost refers to how much you have to invest in order to acquire a customer. Most eCommerce businesses consider a customer acquired when they make their first purchase.
Some examples of customer acquisition expenses could include paid ads, sales team salaries and bonuses, the cost of creating content for search engines, any coupons or discounts given, and social media costs.
How To Calculate CAC
Typically, customer acquisition cost is calculated based on your acquisition department costs. In most companies, this team consists of the marketing and sales teams.
Take the salaries of your marketing and sales teams, and add their budgets. For example, any promos the sales team offers, and any marketing initiatives that are paid on top of the marketing team salaries (ex. ads).
Once you have your total, divide it by the number of new customers you get per month. This will give you a rough estimate of your cost per single acquisition.
What Are Marketplaces?
Now, let’s move on to your different sales channels. Marketplaces are sales channels like Amazon, eBay, Wish, and Walmart.com. They’re platforms where third-party sellers can create accounts, build their listings, and start selling.
Advantages and Disadvantages of Selling on Marketplaces
The advantage of using a marketplace is that they usually come with their own reputations and audiences, which means it can be faster to get found when selling on a marketplace. It’s also fairly quick to get started. Instead of having to build your own website, you can just create an account and set up listings, then begin selling.
However, it’s also difficult to hang on to customers when selling on a marketplace. With so much competition it’s easy for consumers to resort to price shopping or flip to a competitor, which means your lifetime value is usually limited to one purchase.
What Does dTC Selling Mean?
DTC selling refers to selling directly to consumers on your own website, such as a Shopify or Bigcommerce website. This bypasses any marketplaces or distributors, and allows your buyers to go directly to the source.
Advantages and Disadvantages of Selling DTC
The advantage of selling directly to consumers is better retention. When someone makes a purchase from your website, you have more opportunities to capture their information. For example, you can offer a coupon code for signing up for your newsletter, or ask if they’d like to sign up for your loyalty program to earn rewards.
However, especially at the start, it can be more difficult to generate traffic and bring customers to your website. Whereas marketplaces already have an established buyer base, DTC stores need to slowly work on ranking well in search results.
LTV to CAC When Selling on Marketplaces
Now it’s finally time to talk about the relationship between LTV and CAC. On marketplaces, your costs to sell are typically lower. For example, if you sell on Amazon, you don’t have to host your own website, you have access to lower fulfillment costs through FBA, and there are already 150 million shoppers on Amazon per month.
However, you also have a poor retention rate. That means you have a low customer acquisition cost, but low lifetime value. Even if it doesn’t cost much to acquire a new customer, you have to continue spending to get more.
Takeaway: Use marketplaces to introduce buyers to your brand by investing in a great post-purchase experience. This includes branded packaging, custom inserts, and quality items.
LTV to CAC When Selling DTC
When it comes to DTC, you earn a higher retention rate. You can implement retargeting to capture the customer, and reconvert them to turn them into loyal buyers. In addition to rewards programs and email lists, you can also use tools like live chat and social follow prompts to help create a connection with would-be one-time buyers, and turn them into regulars. As a bonus, when you make a sale, you don’t have to pay any marketplace fees, so you get the most profit.
However, you do tend to have to spend more in order to acquire a customer in the first place. That means DTC sellers have a higher customer acquisition cost, but high lifetime value. Even if it costs more to capture a sale, you should consider making the investment because of a longer return period.
Takeaway: Use DTC websites to acquire and retain customers. Invest in your buyer experience, since you own the entire journey from discovery to fulfillment. You can save on marketplace costs, and work on extending lifetime value.
Wrapping Up: LTV and CAC on Marketplaces vs DTC
In conclusion, selling on both marketplaces and DTC have their own unique advantages and challenges. It’s best to be present in as many channels as possible to protect your streams of revenue, but your CAC investment and LTV returns will differ based on channel.
Use marketplaces for quick sales and to introduce your brand. Use your own branded website to extend your customer-brand relationship and generate a longer LTV.
The contents of this blog are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. We do not guarantee, represent, or warrant the accuracy or reliability of any of the contents of this blog because they are based on Flexport’s current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This blog has been prepared to the best of Flexport’s knowledge and research; however, the information presented in this blog herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this blog.