Looking for ways to squeeze more profitability out of your ad strategy? Despite popular belief, staying laser-focused on your TACoS (Total Advertising Cost of Sales) isn’t the best way to get there.
To maintain growth and profitability, you need a deeper understanding of customer behavior, not just at initial purchase but across the funnel.
In this article, we’ll explain why Lifetime Value (LTV):Customer Acquisition Cost (CAC) is the golden ratio for assessing the health of your ad strategy beyond single promotions. Ready for a clearer view of your long-term profitability? Let’s dive in.
Do you know your Profit Per Session (pPS)? Watch our deep dive on Profit Per Session: The Core KPI to Grow Profitably on Amazon and learn to balance pPS with sustainable growth.
What Is LTV:CAC?
LTV:CAC is a ratio that compares Customer Lifetime Value (LTV) to the Cost of Acquiring a Customer (CAC). It can help you understand whether your advertising strategy is bringing in customers who stay loyal long-term.
The formula for LTV:CAC is simple:
Customer Lifetime Value (LTV) / Customer Acquisition Cost (CAC) = Golden Ratio
To calculate CAC, simply divide your sales and marketing costs by the total amount of new customers generated during a campaign.
However, when it comes to calculating LTV (also called CLTV or CLV), not every brand or analytics tool calculates it the same way. Depending on the structure of your business, your LTV formula may include a number of different data points, such as: Annual Recurring Revenue (ARR), Average Purchase Value (APV), Average Purchase Frequency Rate (APFR), Cost To Serve (CTS) margin, and churn.
What Is the Ideal LTV:CAC Ratio?
While there’s no one “correct” LTV to shoot for, as a general rule, a higher ratio is usually better. According to some sources, the standard benchmark ratio for eCommerce is 3:1.
If your CAC is much higher than your LTV — for example, if a customer only makes one inexpensive purchase from you — it might not be worthwhile to waste your ad dollars on acquiring that customer. But on the flipside, if a sale results in loyal repeat customers, it may be worth the initial dip in profits brought about by a high CAC.
Once you know your ideal golden ratio for attracting not just new, but new and loyal customers, you can start working to maintain that benchmark and ensure that every ad dollar is used to its full potential.
Why LTV:CAC Gives You a Clearer Picture than Just TACoS
TACoS is an Amazon metric that helps sellers measure the overall impact of their ad spend relative to their total sales revenue. Unlike ACoS, it’s used to measure the impact of multiple campaigns. (And unlike delicious tacos, it can be tough to keep down.)
TACoS looks at all the different campaigns you’re running and lets you know how well your ads are working to bring in sales. It can also give you insight into how much your organic rankings are benefitting from each successful campaign.
What TACoS can’t do, however, is give you the kind of deep, customer-centered insights that fuel long-term loyalty. That’s where the golden ratio comes in.
When it comes to measuring lasting potential for profitability, LTV:CAC can be a much more valuable metric than TACoS, because it goes beyond short-term ad ROI to help you understand how your ad spend impacts long-term shopper behavior.
Benefits of Using the Golden Ratio
Who are your ads attracting? One-off shoppers or loyal advocates? The golden ratio isn’t just a great way to understand the effort vs. impact of your advertising as it relates to shopper behavior. It can also help you monitor your overall business health.
Here are some of the benefits of using LTV:CAC to inform your ad and pricing decisions.
Amp Up Your Advertising Efficiency
The average CAC per industry varies widely, from roughly $20 to $400. Use LTV:CAC to decide if your current ad spend is justified, or if you need to redistribute your ad dollars to a lower entry point product.
Harness Your Growth Potential
A moderate-to-high LTV:CAC lets you know there’s room to increase your marketing investment without losing profitability. For mature brands, a too-low LTV:CAC can point to poor business health. For early-stage or high-growth digitally native brands, a lower ratio is tolerable when used strategically to boost future growth potential.
Improve Customer Retention
LTV:CAC lets you know what’s simply attracting new customers and what’s keeping them spending over time. It empowers you to choose an ad and pricing strategy that boosts repeat purchases and builds brand loyalty.
Choose the Right Hero Product
Your hero product is that one special item that not only drives the majority of your sales, it also represents who you are as a brand. In some industries, like beauty, a hero product can account for up to 30% of a brand’s revenue. If you want to lead with a hero product strategy, LTV:CAC can help you understand which products are your heroes. You can then use dynamic pricing to increase new-to-brand customers and boost LTV.
Boost Profitability
While other metrics help you understand the impact of an individual campaign, LTV:CAC is the only metric that breaks down the lifetime profitability of each customer relative to your ad spend. It shows you a customers’ true value to your business, so you know who to target and how.
7 Strategies to Increase LTV and Decrease CAC
To build a strong base of repeat customers without risking dwindling future sales, it’s important to strike the right balance. The overarching goal is to keep CAC down as much as possible as you increase your LTV.
Here are some ways to use LTV:CAC to determine how to delegate your ad spend.
1. Increase New-to-Brand Customers
Brands often make the mistake of forgetting to invest in reaching new-to-brand customers. Over time, this becomes a race to the bottom. As repeat purchases decline, customers churn, and there are no new customers to turn to.
One strategy to increase new-to-brand customers is to focus heavily on gateway products. These are the products you use to introduce customers to your brand with little risk or barrier to entry. Gateway products are usually lower-priced items (or even loss leaders), with sales attributed primarily to your advertising.
A gateway product can draw new-to-brand customers into your sales funnel, giving you a wider base to engage, retarget, and retain. To drive new customer sales:
- Use sponsored product ads with high volume, relevant search terms and a mix of broad and exact phrase to maximize impressions
- Focus your ad spending on your top 5 hero products
- Use sponsored ads to target competitors
- Use sponsored brand ads to maximize impressions and reach the top 5
- Use sponsored display In-Market and Custom Audience Ads
- Leverage DSP In-Market and Custom Audience Ads
- Use Shopper Insights powered by Amazon Marketing Cloud (AMC) to see how many sales come from new-to-brand customers
- Leverage top of funnel placements, new keywords, and adjacent keywords
Remember also that the perceived value of your products can make or break brand sentiment and long-term sales. For maximum ROI on your pay-per-click (PPC) campaigns, use the above ad strategies in combination with a data-driven pricing strategy for your gateway products.
2. Cross-sell Your Catalog to Existing Customers
Cross-selling is like a magic button that can drive repeat purchases, increase customer retention, and grow revenue — without increasing CAC.
First, leverage Shopper Insights — like halo rank, gateway products, etc. — in order to determine which products are best positioned for cross-selling. Once you have your target products in mind, look for ways to maximize your customer’s average order volume (AOV):
- Run sponsored brand ads displaying complementary products with the main item
- Tweak your brand store content and images to discuss related products
- Cross-sell on your own product detail pages with Sponsored Display product targeting
- Create attractively-priced Amazon bundles designed to increase AOV
- Offer quantity-based discounts and promotions to increase AOV
- Drive traffic to your brand store with Sponsored Brand Video ads
- Use Demand Side Platform (DSP) to retarget product detail page visitors and create cross-sell campaigns with “bought X but not Y”
With Shopper Insights and deeper visibility into your AMC data, it’s much easier to dial up your AOV. The right data helps take the guesswork out of knowing what it takes to fill out your customer’s cart.
3. Increase Repeat Purchases
One of the most important ways to grow your LTV while keeping CAC in balance is by driving repeat purchases.
Use Amazon Marketing Cloud (AMC) data to target repeat customers and first-time buyers with campaigns designed to keep them with you long-term:
- Use sponsored brand ads to defend your listings
- Set up Sponsored Display ads to retarget customers who purchased within a certain date range or at a certain frequency
- Target shoppers using DSP and SD ads custom audience settings based on who made recent purchases
- Price Subscribe & Save deals competitively
- Run tailored promotions to past customers (more on this in #5!)
Remember that, without repeat purchases, new-to-brand customers won’t be enough to maintain your staying power. As you build out with a new influx of first-time shoppers, don’t forget to secure your base.
4. Leverage Your Halo Products
A halo product and halo rank refer to the initial product a customer purchases, and its impact on bringing customers in for future purchases. For example, you might offer a trial set of products that then brings people back to purchase the full-size items down the road.
Sometimes it’s about status or luxury, but often it’s simply about durability. Consider the Stanley Cup that survived a car fire, or the many accounts of Carhartt workwear surviving grizzlies, wolves, and even walruses.
Having a halo product in your catalog can create critical “brand halo” to help you:
- Attract sales on products across your entire catalog (even when you aren’t actively advertising them)
- Drive repeat sales of both advertised and not-advertised products
In Trellis, your Halo Rank lets you see which products are driving the most future sales. You can use that data to drive your cross-selling ad strategy as well as your pricing strategy.
5. Utilize Brand-tailored Promotions
Amazon Promotions can increase your products’ visibility and help you target the customers most likely to create lifetime value for your brand. Through Amazon’s Brand Tailored Promotions, sellers can selectively offer exclusive discounts to specific audience types.
The available discounts range from 10-50%, and can be used on any product(s) you choose. You can tailor your promotional codes to target any of the following six audience types:
- Brand Followers: Follow your brand on Amazon.
- Repeat Customers: Bought from you more than once in the past 12 months.
- Recent Customers: Purchased from your brand most recently.
- High-Spend Customers: Spent the most in the last 12 months.
- Potential New Customers: Clicked on your brand and/or products, or added your products to their carts, but haven’t made a purchase recently.
- Cart Abandoners: Added one or more of your products to their cart in the last three months, but haven’t gone through with the purchase.
By using this tool to tailor promotions based on past purchasing behavior, you can boost repeat purchases and improve long-term customer retention.
6. Optimize Your Pricing
Discounts and promotions can increase your short-term profitability and lower your CAC, but it isn’t the best way to ensure lifetime value. Deep discounts can condition customers to wait for a sale, hurting your margins and perceived brand value.
Instead, use strategic discounts for your:
- Gateway Products
- Halo Products
- Hero Products
To optimize your pricing, use AI-powered dynamic pricing tools that support long-term profitability. With Trellis, you can adjust pricing in real-time based on factors like supply and demand, competitor pricing, customer behavior, and seasonality.
With a robust pricing algorithm, Trellis can help you understand how a price change will impact sales and profitability by factoring in a number of key elements, including landing costs, cost of goods (COGs), operating expenses, and more.
7. Use Deep Shopper Insights to Guide Your Strategy
The average shopper can take up to 7 to 14 days to make a purchase after seeing an ad — Amazon knows this, and accounts for it in ad attribution. To decrease your CAC, you need to understand your shopper’s path to purchase and which ads played a role in their conversion.
Understanding all the elements leading up to the purchasing decision helps you understand which campaigns are working and where to double down. To maximize profitability, you need insights into your entire catalog and each individual collection.
Shopper Insights from Trellis can reveal the answers to questions like:
- Can I invest in more growth while maintaining my current profitability?
- Are we acquiring new-to-brand customers?
- Once we acquire a new to brand customer, do they buy again?
- Can I afford to buy a new customer?
- What is my hero product?
- Can I afford to lose money on my hero product to gain more new business customers?
- Is my pricing strategy different for my gateway products than for the rest of my catalog?
Find Your Golden Ratio with Trellis
When you have the right insights into customer behavior, eCommerce profitability becomes a solvable problem. Pull the right levers, and you can start creating lifetime value right from the very first purchase.
To stay profitable now and in the future, use your LTV:CAC ratio to launch and maintain an effective ad strategy and a loyal, lasting customer base.
Schedule a demo to see how the right combination of ad automation and dynamic pricing can drive sustainable, profitable growth for your business.