Key Terminologies to understand for D2C business ARPU & CAC

Key Terminologies

Published by Saloni Mehta Compiled by Neel Vora

Traditional Commerce Vs E-Commerce

Traditional business refers to previous company practices like purchasing and selling goods and services, face-to-face without the use of the internet. Traditional commerce is any type of commercial transaction or information exchange. People nowadays don’t prefer this because it takes time and requires a physical method of conducting business. A more recent idea in business practice, e-business refers to the commercial transactions or exchange of information, purchasing or selling products/services online with the use of the internet. People these days prefer this because it takes less time and doesn’t require a physical location to conduct business; everything can be done online using a laptop, smartphone, or both.

E-commerce Metrics

It’s crucial to monitor one’s performance when operating an online store to determine how well a company is performing. Metrics from e-commerce play a major role in this. Metrics are quantitative measurements that can be used to determine things like how much is typically ordered at a time, how frequently people are making purchases from your website, or even how much it costs to bring in a new customer. These metrics help brands gauge popular products, how often certain products are purchased if there are any issues in the checkout process that are keeping new customers from converting, and so much more.

Average Order Value (AOV) & Customer Acquisition Cost (CAC)  

The average order value (AOV) is the monetary value of an average customer’s order on a site.  Simply said, average order value refers to the typical amount each consumer spends while placing an order on the website. Because it offers them crucial data that can guide their pricing and marketing strategies, retail businesses increasingly see AOV as one of the most crucial indicators. Your average order value should rise, which should lead to an increase in revenue. Retailers can learn more about consumer behaviour by using the average order value as a tool. In particular, retailers are better able to modify their pricing and digital marketing strategies by giving them a clearer picture of how much money customers spend on each order.

The cost of customer acquisition (CAC) is a crucial metric to monitor. It is useful for evaluating the success of your client acquisition plan and making gradual changes to it. It provides a useful statistic for prospective investors to assess the scalability of your company. CAC is a key business metric that many businesses and investors look at. In fact, many companies end up failing due to not fully understanding their customer acquisition cost. Understanding the cost to acquire new customers is crucial to analyzing marketing return on investment. D2C type of businesses will monitor this parameter very closely to increase the valuation of the business.

Average Revenue Per User and Customer Lifetime Value

ARPU is an acronym that stands for Average Revenue Per User or Average Revenue Per Unit depending on what type of business you run. For a SaaS business, it is the average revenue extracted per user and for any other product business, it is the unit. To simplify, average revenue per user is nothing but simply the revenue or the money that a business is able to extract from an individual customer over a period of time (usually calculated for a month). For the analysis of a company’s overall revenue generation and growth at a per-unit level, ARPU is a highly helpful measure. That aids in categorizing products with high and low income.

The estimated amount a client will spend on your good or service over the course of the entire relationship is called customer lifetime value (LTV), thus the term “lifetime.” This statistic can assist you in shifting from a transaction-based perspective to one that emphasizes the long-term worth of repeat business. You may determine how much each new customer will contribute to your overall revenue and how much you can spend on customer acquisition by estimating your customers’ LTV. Because of this, it’s one of the most helpful indicators a company can use to decide where to concentrate its sales and marketing efforts in order to attract more customers.

Hence, in conclusion, it can be seen how the commerce business has changed over the years with changing in technology and everything going online. It can also be seen how these metrics are important for an e-commerce or SAAS business. All the metrics mentioned above have an impact on the business ranging from customer to revenue of the business.