Ecommerce Forecasting: Understanding CAC & CPA [Free Template]
Ecommerce businesses often relies heavily on paid marketing as well as other digital marketing channels. Whether you are about to launch your ecommerce business or reviewing your marketing budget, forecasting Customer Acquisition Costs (CAC) is key to make the best decisions.
Your marketing budget should always be carefully calculated to maximise profitability. Indeed, while spending too little might cost you potential customers, spending too much is not necessarily better.
In this article we explain you, step-by-step, how to forecast CAC & CPA for your ecommerce marketing budget using our free simple template in Google Sheets below.
What is Customer Acquisition Cost (CAC)?
CAC is a common metric for any ecommerce business and has been around for a long time to assess a business’ sales & marketing efficiency. In short, CAC is the sum of all your acquisition costs (sales & marketing) divided by the number of new customers you acquired over a given period.
As ecommerce businesses typically do not have any sales force to acquire their customers (not suppliers), the formula is even simpler:
The expenses can be:
- Paid ads campaigns (search, display advertising, social media)
- Offline marketing campaigns
- SEO & content marketing expenses
- Marketing team salaries
Let’s assume you are running a online clothing shop and you generated 3,000 sales from 2,400 customers over the past month. You spent the following in Sales & Marketing:
- Paid marketing campaigns: $55,000
- Content marketing expenses: $10,000
- Marketing team salaries: $20,000
Therefore, CAC is equal to $35 ($85,000 / 2,400). In other words, you spent in average $35 per customer over the past month.
Ecommerce Financial Model Template
Download an expert-built 5-year Excel financial model for your pitch deck
Ecommerce Financial Model Template
Download an expert-built 5-year Excel financial model for your pitch deck
CAC vs. Cost Per Acquisition (CPA)
When looking at ecommerce businesses, CAC and Cost per Acquisition (CPA) are 2 very different metrics:
- CAC (Customer Acquisition Cost) measures the cost to acquire a customer
- CPA (Cost Per Acquisition) measures the cost to acquire something that is not yet a customer: it can be a signup, a trial or a lead (also commonly referred to as “Cost per Lead” or CPL)
Because CAC measures the cost of converting a customer, it encompasses all types of marketing channels. In comparison, CPA can be calculated separately for each marketing channels: Facebook ads, Google Ads, Newsletter CPA, etc.
That’s why you should always use CPA to decide where you should allocate your marketing budget at the campaign level. Let’s use an example to make it clear:
Let’s assume you run a ecommerce shop and you have $10,000 to spend on marketing for the month. You acquire customers from 2 sources: Facebook Ads and content. Using your Google Analytics dashboard, your realise conversion rates are 2% for Facebook Ads and 1% for organic traffic (generated from your blog’s content).
One could argue you could spend twice as much per paid customer generated from Facebook Ads vs. organic customers (customer acquired organically i.e. thanks to your content). Indeed, conversion rate for Facebook Ads is twice as much vs. for your content.
Let’s assume your current budget is equally divided between paid ads and content: you might be overspending on content and too little in paid ads.
Therefore, when deciding where to allocate your marketing budget, dig into your different marketing channels. In other words, look at CPA instead of CAC.
How should you forecast CPA?
We have provided below a step-by-step guide on how to forecast your CPA using a simple template in Google Sheets. Click below to access the template and follow with us!
The template includes 2 examples: with and without organic acquisition. As part of this tutorial we will use the 2nd sheet: ecommerce businesses which use both paid and organic acquisition channels.
Step 1: enter your assumptions
The first thing you need to do is to fill in the assumptions related to your specific business. They are:
- Average Order Value (AOV): this can be easily found in your Google Analytics or Shopify dashboard for instance
- Units costs are the total costs you incur to source (and ship) one product to your warehouse (if you have one). Note: if you ship products directly from your supplier (e.g. dropshipping) to your consumers, use the total cost you pay your supplier.
- Payment processing fees usually are 2-3% of total revenues
- Fulfilment costs: whether you send the orders to your customers yourself, or use an outsourced provider (e.g. Amazon FBA), enter here the total cost per order.
- Conversion rate (paid): this is the conversion rate from your marketing campaigns. Note: if you have multiple channels (e.g. Facebook, Google Ads, etc), use the weighted average conversion rate from all paid campaigns. You can also easily find this number from your Google Analytics dashboard.
- Conversion rate (organic): this is the conversion rate from your organic traffic. Can be found in your Google Analytics dashboard.
- Average cost-per-click (CPC): the average CPC for all your marketing campaigns
Step 2: Calculate the number of orders
Now that we have set conversion rates and CPC, the number of orders can be calculated as follows;
Orders = orders (paid) + orders (organic)
Where:
Orders (paid) = Marketing budget / CPC x conversion rate (paid)
Orders (organic) = clicks (organic) x conversion rate (organic)
This will require you to estimate 2 things: your marketing budget and the number of clicks you generate from organic traffic. Whilst it may be easier for ecommerce startups with existing metrics (simply use your existing budget and organic clicks from Google Analytics), new businesses should use estimates instead. Don’t worry though: the template allows you to create different scenarios and see their impact on your profitability.
Ecommerce Financial Model Template
Download an expert-built 5-year Excel financial model for your pitch deck
Ecommerce Financial Model Template
Download an expert-built 5-year Excel financial model for your pitch deck
Step 3: calculate CAC and CPA using your P&L
Now that we have calculated how many orders you generate based on different marketing budgets and organic traffic assumptions, we can easily calculate CAC and CPA for your ecommerce business.
As explained earlier, whilst CAC is the sum of all your marketing expenses (paid marketing and salaries here), CPA only includes paid marketing.
CPA also only includes paid clicks: the clicks you obtained from your marketing campaigns. Indeed, as explained earlier, CPA measures the cost per acquisition of a given marketing channel. Here we calculate the CPA of your paid marketing. As such, the CPA of all marketing channels is CAC.
As you can see here, CPA remains stable at $75: whilst marketing budget increases, your conversion rate (paid) and CPC remain the same. If you would change those, we would obtain different CPA numbers.
Try out our template and play with different CPC, conversion rate and marketing budget assumptions to see for yourself!
CAC, in comparison, encompasses all your marketing expenses as well as all orders (coming from paid and organic).
Whilst CPA is typically a variable expense and, as such, stays flat, CAC can be levered: it decreases as the number of orders increase. Indeed, in our example, the salaries remain flat but orders increase: CAC therefore decreases.
What is a good CAC for your business?
The short answer is: the CAC you should aim should be the lowest so you maximise your business’ profitability. Now that we have calculated your P&L and your CAC and CPA, it is quite easy to assess what is the maximum CAC you should pay. Any number below this level is good, and lower is always better.
Calculating maximum CAC is easy: that’s the maximum you can spend in marketing so you profit is zero. To calculate it, use PC2 (Gross Profit after all fulfilment costs) and divide it by the total number of orders.
Maximum CAC = PC2 / total orders
Calculating CAC is interesting to know what’s the maximum you should spend in marketing. Yet, it does not tell you anything about how you should split this between the different marketing channels you might have.
Instead, calculate the maximum CPA for your paid marketing acquisition. To do so, divide your PC2 minus all marketing spend (excl. paid marketing) by the number of orders you generate from paid marketing. This is the maximum amount of money you can spend per order for your digital ads and other paid marketing campaigns before you start losing money.
Maximum CPA = ( PC2 – marketing salaries ) / orders (paid)
Calculating maximum CPA is especially helpful as it allows you to estimate what is the maximum cost-per-click you can spend for your marketing campaigns. Use the formula below:
Maximum CPC = Maximum CPA x conversion rate (paid)
Ecommerce Financial Model Template
Download an expert-built 5-year Excel financial model for your pitch deck
Ecommerce Financial Model Template
Download an expert-built 5-year Excel financial model for your pitch deck
More Resources
Check out our articles for free resources on ecommerce finance:
